Winner of the New Statesman SPERI Prize in Political Economy 2016

Friday 1 April 2016

Helicopters are easy to fly

The debate over helicopter money seems to have got past the ‘shock, horror, people’s faith in the monetary system would collapse’ phase, and past the ‘it wouldn’t work because people wouldn’t spend the money’ phase, to the ‘what happens next’ phase. And to be fair to the critics, many proponents of helicopter money have not been clear on this issue.

The point was put very clearly yesterday in an FT Alphaville piece by Gerard MacDonell. Once the recession is over, there is likely to be too much money in the economy from the central bank’s point of view (which means, money has to be withdrawn to maintain the inflation target). We cannot say how much, but equally it would be wrong to ignore the problem. So what happens next?

I think I have been clear (at least recently) on this point. First, helicopter money as I see it is not a way to get inflation overshooting by the back door. The idea that the increase in money is ‘permanent’ is meaningless, as Eric Lonergan says. Overshooting may be a good idea, but there is no need to be devious about it. Second, the obvious way to ensure the central bank still achieves its inflation and other objectives is to recapitalise the bank if necessary. The central bank could enforce very high reserve ratios on commercial banks, but is that a desirable thing to do?

In my view helicopter money would be accompanied by a commitment by the government to recapitalise the central bank if that was needed. Yes, commitments can be broken, but only by the kind of government that would happily revoke central bank independence anyway.

The answer to what happens next is therefore easy. When it becomes clear after the recession that there is now too much money in the economy, the central bank takes it out. In other words, monetary policy acts as normal. If the central bank runs out of assets to do this, it gets recapitalised. Recapitalisation means more government debt. So we can end up in a position which is exactly equivalent to one where the distribution of money had been financed by an increase in debt in the first place: a conventional fiscal expansion.

In this world, helicopter money is (a particular type of) fiscal expansion by the back door. As Narayana Kocherlakota points out, this back door method has no purely macroeconomic advantages over the real thing. But the reason why we need a back door is obvious right now. Economists need to get real about these political constraints. Obsession with debt is not just based on ignorance, but it serves an ideological purpose which is not going to go away.

Yet even if governments were not obsessed with current levels of debt (and that is all they are obsessed by), go back to the textbooks on why monetary policy is prefered to fiscal policy as a stabilisation tool. One of the reasons you will find is that monetary policy is quick to invoke, with no institutional (aka democratic) hurdles to pass. Those who argue that helicopter money is just like fiscal policy seem to ignore this. There is also the (obvious) point that helicopter money allows what I call the consensus assignment to work (by expanding the meaning of monetary policy a little beyond interest rate changes), rather than leaving it with the rather large Achilles Heel of the zero lower bound.

Helicopter money is just another way of doing textbook demand management. What it does is move around current institutional boundaries a bit, to reflect real institutional and political constraints. There is nothing magical about the current institutional boundaries. Perhaps if you think (as Brad DeLong does) about the profits the central bank makes as a social credit that gets automatically distributed to people rather than given to an intermediary (the government), you might feel easier about it.       


  1. Form a cicuitist perspective (the state creates and spends/distributes the unit of account and taxes destroy it) the instutional arrnagement to reverse Helicopter money are clear.

    If a CB is allowed to create it then the state needs to give the CB the power to independently destroy the created money if and when inflation is an issue with the same institutional mechanisms for shaping expectations as interest rates. Many ways to do this - a targetted tax on assets - (land shares, commodities) probably being the most efficient. Indeed this may be a much better means of macro control than interest rate targetting - which should be left to the markets.

    1. While I think you can give money away at a time chosen by a central bank, doing the reverse is politically much more difficult.

  2. I think that carefully targeted PQE would be better than helicopter money.
    The sovereign currency issue is needed for two reasons, one is that private debt is too high, especially for over inflated housing, causing the ratio of private debt to incomes to become too high which causes debt deflation. Since 2008 the high street is seeing almost perpetual sales, or fallin prices. Even food shops are seeing falling profits, partly due to food banks.
    The other reason is that there is a need for well paid employment, and housing.
    Indiscriminate helicopter money may not achieve the desired effects, it may reach people who would buy more imports, which would increase the current account deficit and not create jobs, housing and clear private debt.
    One excellent idea was given by Steve Keen after the GFC (he was one of the predictors of the GFC). He said that government should create money and give it to people to pay their debts. This would destroy the money but clear the liability, leaving people with more disposable income to stimulate the economy.
    Corbyns (Richard Murphy), PQE would create the jobs and housing.
    Helicopter money is a good idea but only if it clears private debt and creates domestic jobs.

  3. Your penultimate paragraph is a little concerning. I know you are summarising the textbook view, but you seem to implicitly accept also that it may be appropriate to circumvent democracy through central bank activity is there are 'political constraints'. I want the really important decisions to be taken by people we have elected to make them, rather than unelected 'experts'. I think we all should want that. If that leads to less than optimal outcomes, so be it. It is the job of those who disagree with current policy to convince the other side, not to craft ways to get what they want through other means.

    1. This bridge has already been crossed by allowing the central bank to change interest rates. With ICBs the important decision is to vary rates to achieve some target. All that delegation does is to make that process transparent. Delegation should always involve the achievement of democratically agreed ends by democratically agreed means. That is why I think government should determine the ICB's targets (as in the UK), not the ICB (as in US, ECB).

  4. "Helicopter Money" is just a brand name for "government spending." Like "QE for the people."

    1. yes you are right lets go back to the gold standard

  5. Excellent post. As a political supporter of Sanders and Corbyn, etc I am in complete agreement with this blogpost.

    If debt obsession wasn't a problem, we wouldn't be discussing helicopter drops. Also, raising the inflation target or NGDP path level targeting are just other ways to try to get the central bank to do its job of demand management properly.

  6. MMT-ers often suggest that instead of selling government debt, the cb pays interest on reserves at its target rate. What do you think of this?

  7. Helicopter money with government's commitment to refund/recapitalize CB destroys the definition of helicopter money.
    And that would also put back the issue of gov debt back in the spotlight.
    To be called helicopter money can not have any commitment by government.

    Undesirable to change reserve ratio?????????????
    Magic asterix is included with your question. What makes it undesirable to change reserve ratio? Is that your only defence to call something undesirable just becouse you do not know what would do?

    Changing reserve ratio has absolutly no influence on economy. Nothing, nada, none. Since loans come first and those loans after sale returning back to banking system become reserves. Loans create reserves.
    Reserve ratio has absolutly no influence on ammount of credits issued. Because loans create funds for reserves, not opposite as lonable funds theorist would presume.

  8. "One of the reasons you will find is that monetary policy is quick to invoke, with no institutional (aka democratic) hurdles to pass. Those who argue that helicopter money is just like fiscal policy seem to ignore this."


    1. Not necessarily. Auto stabilisers work in real time.

      At the moment the DWP pays out benefits at a rate set by parliament based upon rules set by parliament. If you qualify you get the benefit. In other words the quantity of spend floats, with HM Treasury funding the spending as required via the central bank and debt management office.

      Helicopter money is a form of fiscal benefit that is paid to all on an irregular basis. A sort of Universal Pension or 'winter fuel' like payment. Therefore, from a simple efficiency point of view, it should be paid, in the UK, by the Department of Work and Pensions (DWP). The DWP already has the database in place and the Universal credit structure to administer the payment. They can deal with people who are abroad, powers of attorney, and all the other nuances of paying benefits to real people.

      The DWP already operate the spend side auto-stabilisers and collect the data necessary to decide whether the spend-side auto stabilisers are doing their job and therefore they could very easily decide to pay out larger benefits to all. (Alongside the child benefit, which no longer goes to all - because it became politically untenable to do so.)

      The question then moves on to whether the DWP should make these decision 'independently' of parliament. If parliament decides to cut the level of tax credits, should the DWP be able to turn around and say no you can't because that damages effective demand? If not, why not? They are the experts - apparently. If parliament can't be trusted with money, why should it be trusted with providing social security?

      And then you move onto the question of war. If parliament can't be trusted with money, or social security, why should it be trusted in sending people to their deaths? Surely the nuclear button should be handed over to the Defence Council and the generals should decide what to do 'independently' of parliament. They are the experts - apparently.

      And so on. This is what Simon wants.

  9. Jure Jordan:

    "Changing reserve ratio has absolutly no influence on economy. Nothing, nada, none. Since loans come first and those loans after sale returning back to banking system become reserves."

    Not so. Loans create (demand) deposits, not reserves (which only the central bank can create). When banks issue new loans and thus create deposits, they need reserves not just to comply with reserve requirements (in fact, these cold even be set at zero) but also and significantly to settle payments. In modern payment systems, settlement of payments takes place in central bank money (reserves). In fact, some payment settlement systems - the so called real-time gross settlement systems (RTGS) - require lots of (costly) reserves.

    As a bank is requested by its customers/borrowers to make payments or to transfer funds to the customers of other banks, it needs to have reserves. And if it doesn't have enough reserves, it has to borrow them either from other banks or from the central bank. And this costs money. Even if they are supplied by central banks in unlimited amounts on an intraday basis, they need to be collateralized, and that's a cost for the borrowing banks. And for longer maturities, when banks borrow reserves from the central banks or from the interbank market, they do so at an interest cost.

    Reserves are needed and cost money. This matters for lending decisions.

    While banks can create deposits by lending, they do not do so at will. As James Tobin clarified, bank lending decisions are based on profitability considerations, meaning that cost conditions (including the availability of, and the charges on, reserves) are essential factors for lending decisions.

    Unless central banks decide (or are forced) to fully accommodate any demand for reserves at a given interest rate, they can always influence bank lending decisions by affecting their cost. And the central bank can in principle change cost conditions until these affect lending decisions to the point desired. Thus, while increasing the supply of reserves may not result in an increase in bank lending and deposit creation (see QE experience), making reserves more costly (or scarcer) does affect lending and deposit creation (see Volcker disinflation).

    Prof. Wren-Lewis:

    Many thanks for this post. I share your view on the pointlessness of the "permanency" of the increase in the money supply: what is permanent is the relief effect on the government budget constraint (unless of course the government is committed to recapitalizing the central bank): by allowing the government to expand its deficit without raising its debt, the government does not incur corresponding future payment obligations and therefore doesn't need to raise taxes or to issue new debt to finance the deficit.

    But there is no reason to assume that the new money supply must be permanent. As new macroeconomic conditions set in, the central bank can always withdraw money by changing policy rates or by adjusting reserves and liquidity requirements; and if it runs out of government bond holdings, it can still issue its own debt instruments).

    In addition, the government may use taxes as an anti-inflationary tool (as MMT-ers would suggest), bearing in mind however that taxation is much less flexible than any central bank instrument.

    1. Oh my, oh my.....

      Deposits become reserves. Any CD and time deposits have to go to bank reserves. Any savings deposited into banks are bank reserves. That can be lent out only to government or other banks.

      When payment by depositor is conducted by wire it is that reserves are transfered or deposits of depositors from bank to another bank.
      If banks transfer reserves to other banks when depositor makes payment to an account in another bank, then that simply says that deposits are reserves. Therefore: loans create deposits/bank reserves.

  10. "Once the recession is over, there is likely to be too much money in the economy from the central bank’s point of view (which means, money has to be withdrawn to maintain the inflation target)."


    Construct an example. An economy with no trade is ten percent below potential and ten percent unemployed, and coincidentally has a vacant territory. The ten percent all move to the vacant territory, the central bank drops ten percent there, and the people go to work. If the economy's government "spun off" the territory into a new economy, just how is that ten percent drop going to turn out to be excess?

    And if not spun off, how excess?

    Isn't such a statement just another example of saying to the market, I'll drop the dough but I'll take it back later so I won't be irresponsible (I'm still a hawk), when such irresponsibility is exactly what is needed?


  11. Just make sure what you drop will fly....

  12. Thanks for the honesty of this post, particularly in recognising that helicopter money is just fiscal expansion through a back door with no macroeconomic advantages over doing it directly. It’s all about institutions and politics but that’s where I think you are misjudging this.

    I agree that monetary policy has advantages over fiscal policy for stabilisation over the short run, as it can be implemented more quickly, but the converse is that it is less suitable for dealing with problems of secular stagnation, for which a public investment programme would be more effective. So I would see benefits in the Treasury authorising the Bank to fly helicopters at its discretion up to a limit set by the Treasury (which has ultimate responsibility whether as debt issuer or sole shareholder) but while that could be a useful tool at the stabilisation margin it does not tackle the long-term problem.

    Your frustration at current political constraints leads you astray in thinking that helicopters would be any easier than directly challenging deficit reduction. This relies on not informing the public that this is disguised fiscal expansion, and such behaviour brings technocratic elites into disrepute. There is also no getting around the politics of distribution: there is no technical answer to the question ‘should resident non-citizens receive helicopter drops?’.

    Whatever the merits of helicopters, the politics of austerity have to be confronted.

    1. "Your frustration at current political constraints leads you astray in thinking that helicopters would be any easier than directly challenging deficit reduction."

      What like saying "all government spending works by creating money, it puts downwards pressure on interest rates" :)

      "There is also no getting around the politics of distribution"

      The best way is to put money directly into the hands of the poor automatically. And the best way to do that is to guarantee a full time living wage job to anybody that wants one. Working for the public good.

      You don't need helicopters, and you don't need tax cuts at the upper end that just incentivise hoarding.

      There isn't enough work for everybody, so create some more and pay them for it.

    2. 'Jobs for all' is a great slogan. I first marched for it in the 1970s and I've just been on a steel protest. The problem is that it's just a slogan so we need to work out how to do it. That was why I went to the trouble of looking at some work Bill Mitchell had led and responding to one of your comments in one of Simon's recent posts.

      So move beyond the slogans, start thinking through HOW we could move towards providing useful jobs while managing resource constraints, which is where public investment and skills development are critical. The election of a left leadership of the Labour Party gives us a unique opportunity to develop policies that could actually be implemented, but that means getting out of the comfort zone of social media commentary into the real and messy world of practical politics and compromises.

  13. Dear Prof Wren Lewis,

    Could you link to something about Brad de Long's views on central bank profits? Is there any problem with financing an infrastructure bank directly out of the central bank's profits, for example? Or rolling over the profits in boom years and disbursing them in slack years? This seems a very simple and elegant way of giving the central bank a tool it can use at the ZLB to increase demand.


  14. The problem with helicopter money is the money already created,to return value,you must do to one side of the equation as you have to the other,this is why some qe works and most doesn't,it were & how it is administered.if on the wrong side of the equation things will only get worse and even if its on the right side of the equation unless the reasons that the economy was out of balance in the first place isn't sorted,it will only be a matter of time before your back to were we are!

  15. “The idea that the increase in money is ‘permanent’ is meaningless.”

    No, it is not. When the central bank buys a bond with the money it prints, the central bank money (i.e. physical cash or reserves banks hold at the central bank), the central bank money is not permanent. The central bank can sell the asset later and destroy the bank notes. This is the scenario of QE.

    When the central bank prints money outright, without buying a bond or other asset with it, the central bank money is permanent. The central bank has no way to take it back from the private sector. Only the tax authority can, what you hint at when you speak of recapitalization.

    “When it becomes clear after the recession that there is now too much money in the economy, the central bank takes it out.”

    I take it that by “too much money”, you mean too much aggregate demand, as you write in the last paragraph “Helicopter money is just another way of doing textbook demand management”. This I agree with. What I do not agree with is how you propose to remove the money from the economy. You suggest 2 possibilities in the sentence “If the central bank runs out of assets to do this, it gets recapitalised”. The first one is selling its bond portfolio, i.e. reverse QE. This will not change aggregate demand. The private sector wants to save. It swaps £100 on a current account for a £100 bond. The private person is in no way less likely to spend money in the economy by this asset swap. Secondly, you propose that the central bank would be recapitalized. This is correct. However, then you make the strange statement that “Recapitalisation means more government debt”. Increasing government debt would be ineffective to reduce spending by the private sector. Say that an investor buys a new government bond for £100, and the government gives the £100 to the central bank for recapitalization. The private sector is not poorer by this.

    What could the government do when the economy is overheating (as would be evident from rising inflation, the lack of which is what got the whole idea of helicopter money started in the first place)? The government should run a surplus. This surplus effectively withdraws money from the economy. An alternative would be for the government to have a balanced budget, while the central bank lets its bond portfolio mature. The interest and principal payments of the government would be extracted from the economy by doing this.

    Finally, the comment by Narayana Kocherlakota that helicopter money (printing without buying assets) does not differ from QE. Evidently, this is false. The whole point of helicopter money is that the government debt does not increase by it. Those who don’t believe government debt matters are advised to revisit the debt crises of Italy, Spain and Portugal of 2011.

    I have catagorized different scenarios of how helicopter money could be implemented on my own blog. In it, I have drawn pictures of the balance sheets of the central bank, the government and the private sector. Hopefully this will help to clear up some muddled thinking. (By the way, I don't want to come across as too negative, because I applaud everybody who makes their arguments transparent for the public.)

  16. "... go back to the textbooks on why monetary policy is prefered to fiscal policy as a stabilisation tool."

    Which textbook do you suggest I look at?

  17. Wasn't there an old lady who tied herself in knots in a similar way? Something to do with a swallowed fly, and the knock-on consequences of one inept choice in response to this.

    Why, in 2007-8, when Gordon Brown was "saving the world" did nobody listen to the following:

    "Society needs a banking function, but there's no need for the present owners of the banks to not be made bankrupt. Not every bank can - net - be in debt to every other. There has to be a net position. Barclays and HSBC are probably solvent, RBS and HBOS are almost certainly insolvent. All companies have an obligation to trade while insolvent to maximise the returns to the creditors, but this will be done under administrators. The employees and the boards have an obligation to turn up if they're being paid, and if they don't they could become personally liable and thereby lose their houses, pensions and other assets. So let's wipe out the equity holders, senior debt holders, junior debt holders, debenture holders - all of them - and buy the banks for peanuts from the administrators. We'll employ some of the unemployed Lehman's staff and in the short-run the Bank of England will make the commercial paper market work so that industrial and commercial concerns can roll over any debt, and they can also provide funds to allow normal commercial activities. At the end of this process we'll have new-co banks with no legacy debts, fully capitalised and able to make loans to viable businesses. The imprudent rich will have lost their money, which is a better outcome than inflicting two decades of pain on the poor".

    Why, exactly, could we not do this, rather than take one bad medicine which then necessitates further toxins and another serious illness down the line?


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