Winner of the New Statesman SPERI Prize in Political Economy 2016

Wednesday, 4 May 2016

Ben Bernanke and Democratic Helicopter Money

The fact that no responsible government would ever literally drop money from the sky should not prevent us from exploring the logic of Friedman’s thought experiment, which was designed to show—in admittedly extreme terms—why governments should never have to give in to deflation.”

The quote above is from a post by Ben Bernanke (who, in case anyone does not know, used to be in charge of US monetary policy). I put it up front because it expresses a macroeconomic truth that no one should ever forget: persistent recessions and deflation are never inevitable, and always represent the failure of policy makers to do the right thing.

There are many useful points in his post, but I just want to talk about one: Bernanke is in fact not talking about helicopter money in its traditional sense, but what I have called elsewhere ‘democratic helicopter money’.

When most people talk about HM, they imagine some scheme whereby the central bank sends ‘everyone’ a cheque in the post, or transmits some money to each individual some other way. It is what economists would call a reverse lump sum tax, or reverse poll tax: the amount you get is independent of your income. That makes it different from a normal tax cut.

In practice the central bank could only really do this with the cooperation of governments. It would not want to take the decision about what everyone means on its own. (Do we include children or not. How do we find everyone?) But once those details had been sorted out, a system would be in place that the central bank could operate whenever it needed to.

Bernanke suggests an alternative. The central bank sets aside a sum of newly created money, and the fiscal authorities then spend it as they wish. They could decide to use all the money to build bridges or schools rather than give it to individuals. There might be two reasons for doing HM this way. First, for some reason the fiscal authorities are reluctant to spend if they have to fund it by creating more debt, so it may allow them to get around this (normally self-imposed) ‘constraint’. Second, a money financed fiscal expansion could be more expansionary than a bond financed fiscal expansion. Lets leave the second advantage to one side, as the first is sufficient in a world obsessed by government debt.

I have talked about something similar in the past (first here, but later here and here), which I have called democratic helicopter money. This label also seems appropriate for Bernanke’s scheme, because the elected government decides on the form of fiscal expansion. The difference between what I had discussed earlier under this label and Bernanke’s suggestion is that in my scheme the fiscal authorities and the central bank talk to each other before deciding on how much money to create and what it will be spent on (although the initiative always comes from the central bank, and would only happen in a recession where interest rates were at their lower bound). The reason I think talking would be preferable is simply that it helps the central bank decide how much money it needs to create. [1]

Imagine, for example, you had a fiscal authority in one country that wanted to spend the money on ‘shovel ready’ public investment projects, and an authority in another country that wanted to spend it on some temporary tax cuts for the rich. The impact of the two different stimulus policies on demand and output are very different. If the two economies were in similar conjunctural positions, then the central bank with the tax cutting fiscal authorities would want to create a lot more money than would be required in the other economy.

In some countries it is easier for central banks to talk to the fiscal authorities than in others. When it is difficult, Bernanke’s scheme may appear attractive, but it leaves the central bank somewhat in the dark about how much money it needs to create. The big advantage of the more popular conception of HM (a cheque in the post) is that the impact of any money creation is much clearer. (As it is important to end recessions quickly, waiting to see what happens is not helpful advice.)

When central banks and governments do happily talk to each other (as in the UK, for example) then my version of democratic HM becomes an option. Arguments that this makes the central bank less independent are spurious in my view. The central bank initiates the discussion, in clearly defined circumstances. They simply ask what the government would spend any newly created money on. This question should be accompanied by the central bank’s current view on what the multipliers for various fiscal options are. The government then makes a choice, and the central bank then decides how much money to create.

While democratic HM is not talked about much among economists (Bernanke excepted), I think there are good political economy reasons why it may be the form of HM that is eventually tried. As I have said, conventional HM of the cheque in the post kind almost certainly requires the involvement of government. Once governments realise what is going on, they may naturally think why set up something new when they could decide how the money is spent themselves in a more traditional manner. Democratic HM is essentially a method of doing a money financed fiscal expansion in a world of independent central banks.

Which brings me back to the quote at the head of this post. The straight macroeconomics of most versions of HM is clear: all the discussion is about institutional and distributional details. If it is beyond us to manage to set in place any of them before the next recession that would be a huge indictment of our collective imagination, and is probably a testament to the power of imaginary fears and taboos created in very different circumstances.

[1] A sequential set-up of the kind Bernanke suggests is also more vulnerable to cheating: the government uses the money to finance something they were going to do anyway, and in effect largely offsets the money creation by reducing its own borrowing. 


  1. What Bernanke advocates is essentially the same as what Positive Money, the New Economics Foundation and Richard Werner advocated in 2011:

  2. Is HM not a restatement of the old chicken and egg conundrum , what comes first a consumer or producer. If you are given money in form of HM you can then buy goods and services , and you would expect then more goods to then be produced to replenish these and so on.
    However would a producer of goods produce goods if they could not expect a customer to buy them, unlikely. They expect their waged workers to consume the production. The problem since the start of the 80's is that productivity growth has not gone to the producers but to the financiers who have used this to damage the productive capacity of the manufacturing sector.
    The banks since 2009 have had trillions of dollars of HM and achieved nothing for the world economy but much for the 1%. Most economic activity nowadays comes from consumer spending , infrastructure projects would take to long to start having an effect on the economy.
    Could a simple HM solution be to just put £???? into every active bank accounts those with regular deposits. The banks are already monitoring this for their high interest accounts , so it would not be impossible to do, there would be some losers but a lot more winners.
    However things are never going to return to balance until political action is taken to restore the link between productivity growth and wages growth especially in the USA, no matter how much HM you drop.

  3. There's two counterfactual conditionals involved here:

    When the central bank says "Do $1B HM now!"

    1. How would we know if fiscal policy is $1B looser than it would otherwise have been?

    2. How would we know if base money is (permanently) $1B higher than it otherwise would have been? (If it's not *permanently* higher, then the fiscal loosening will *eventually* be bond-financed.)

  4. Is it possible to create a list of multipliers for different government projects and to set that out as a menu of options for the UK?

    It would be a nice way of illustrating our current economic situation.

  5. A world where the political decision on how to spend the democratic HM is possible by the US Congress in a way that wouldn't draw a presidential veto or simply offset other borrowing is a world where HM isn't actually necessary at all. Not that the idea isn't a good one but it's clearly an attempt to get around self imposed restraints that are entirely political in nature regarding fiscal expansion. HM requires a political party (and it would be a party not a unified Congress under current circumstances) to deliberately vote for what their opponents will label as pure inflation.

  6. My disillusionment with macro economics is contained in the phrase 'the macroeconmics is clear, all the discussion is about the distributional details'. It does not take great intelligence to hit the print button. The problem is always going to be how to spend it equitably and without inflation and currency devaluation.

    The current QE policies have had huge distributional effects, driving up asset prices and enriching the 1%, making existing house owners rich (on paper) while the poor or young can look forward to higher rents.

    Also, if govt spending is the answer why is it that Brazil is not booming after all the spending for the World Cup and Olympics?

    Yours sceptically JZW

  7. Really not that huge of a difference it seems to me. I sort of like the classic Helicopter Money idea of distributing money out to everyone because I think we need a basic income, but that and "Democratic Helicopter Money" are both just ways of financing fiscal policy via money creation. The whole intricacy of what the role of the central bank vs the fiscal authorities is isn't that significant from a policy perspective, even if it ends up mattering a great deal in terms of how we can get those policies enacted.

  8. Just so I'm clear on the concept:

    If the CB wants to create $100 in new money, and the Government wants to cut taxes on the PM's father and other tax cheaters (which the CB calculates has a multiplier of 0.20, to be generous), does this mean you expect that the CB will then earmark $500 new money for this purpose?

  9. "Bernanke suggests an alternative. The central bank sets aside a sum of newly created money, and the fiscal authorities then spend it as they wish. They could decide to use all the money to build bridges or schools rather than give it to individuals. There might be two reasons for doing HM this way. First, for some reason the fiscal authorities are reluctant to spend if they have to fund it by creating more debt, so it may allow them to get around this (normally self-imposed) ‘constraint’. Second, a money financed fiscal expansion could be more expansionary than a bond financed fiscal expansion. Lets leave the second advantage to one side, as the first is sufficient in a world obsessed by government debt"

    That's basically what already happens in the UK. The BoE offers *unlimited intra-day overdrafts* and nobody operating those accounts needs to co-ordinate the balances until the end of the day. That's not "have to fund it by creating more debt." That's how it works. What you are asking is should the government issue Gilts or not? It has nothing to do with financing of spending. Perhaps the U.S. system is different or perhaps not :)

    I suspect he is talking about the so called GBC taught to the fools in economics classes. This framework is based on the accounting relationship linking the budget flows (spending, taxation and interest servicing) with relevant stocks (base money and government bonds).

    This framework has been interpreted by the mainstream macroeconommists as constituting an a priori financial constraint on government spending and by proponents of Modern Monetary Theory (MMT) as an *ex post accounting relationship* that has to be true in a stock-flow consistent macro model but which carries no particular import other than to measure the changes in stocks between periods.
    Government spending works by crediting bank accounts by typing numbers into a computer. How could Bernanke "set aside a sum of newly created money"?

    As to your other point, in countries in the EU (e.g. the UK) though there is supposed a "self-imposed constraint" from Article 123 in the tablets of stone handed down/EU constitution (although it is not enforced intraday for whatever reason):

    "1. Overdraft facilities or any other type of credit facility with the European Central Bank or with the central banks of the Member States (hereinafter referred to as "national central banks") in favour of Union institutions, bodies, offices or agencies, central governments, regional, local or other public authorities, other bodies governed by public law, or public undertakings of Member States shall be prohibited, as shall the purchase directly from them by the European Central Bank or national central banks of debt instruments.

    2. Paragraph 1 shall not apply to publicly owned credit institutions which, in the context of the supply of reserves by central banks, shall be given the same treatment by national central banks and the European Central Bank as private credit institutions."

  10. Not gonna happen Simon. "Experts" say it would be disastrous. Cos Zimbabwe. Here from August 2015:

    "A victory for Jeremy Corbyn in the next general election would put Britain on a collision course with Brussels and condemn the UK to “Zimbabwe-style ruin”, experts have warned.

    Key parts of the Labour leadership frontrunner’s plans would fall foul of EU laws intended to avoid runaway inflation, and consign the UK to a three-year legal battle with the European Court of Justice (ECJ).

    The Islington North MP has proposed a “People’s Quantitative Easing” scheme in which the Bank of England would “be given a new mandate … to invest in large-scale housing, energy, transport and digital projects”.

    Economists warned that this would have disastrous consequences. Tony Yates, a former Bank economist and now a professor at the University of Birmingham, said: “Down that road leads monetary policy ruin.
    Mark Carney, the Bank’s Governor, has said that he could “not envision any circumstance” in which an advanced economy central bank should finance government deficits.

    “The reason why one doesn’t even start on this conversation is the removal of any discipline on fiscal policy that comes from that,” he said last year.

    Mr Yates said: “That’s what Zimbabwe was doing, where they ended up paying all their bills by printing new money.” He added: “Once you’ve done that successfully, what political barriers are there to doing this again and again?”

    Mr Corbyn’s proposals would clash with Article 123 of the Lisbon Treaty, which forbids central banks from printing money to finance government spending. Lawyers warned that a lengthy fight with the EU would be a certainty, and could mean that infrastructure projects end up incomplete.

    Traditional QE was introduced by the Bank in 2009, since when it has intervened in the bond market to buy Government debt. Key to this is that the Bank buys bonds from the so-called secondary market - from private investors rather than directly from the Government.

    Buying the instruments directly from the state is illegal under Article 123 of the Lisbon Treaty."

    Hahahahaha! Hysterical. Perhaps you can convince Tony and your fellow "experts" to do a u-turn.

    In reality what needs to happen is:

    1. Get out of the EU.

    2. Corbyn's economic team are magically convinced to adopt an MMT viewpoint starting with a certain Wren-Lewis. This stuff is explained to the Shadow Chancellor.

    Will that happen Simon :)

    1. Treaties can be changed! particularly if it can be proved to be damaging and protectionist!
      And many of the economist you talk of are the ones who advocate profiteering,tax evasion/avoidance/havens and inequality to be GOOD!
      The fact everything they do they wreck the economy,only works to the advantage that maybe article 123 of the Lisbon treaty needs changing,if economies are ever going to recover!
      It probably won't happen,but not to challenge it,certainly means it will never happen!

    2. "Treaties can be changed!"

      "There can be no democratic choice against the European treaties"

      Originial quote in french: Il ne peut y avoir de choix démocratique contre les traités européens…
      Jean-Claude Juncker, 'Greece: The dangerous game' (1 February 2015), from a french newspaper Le Figaro Jean-Claude Juncker : «Pas question de supprimer la dette grecque» (28 January 2015)

    3. Recent story:

      "Prime Ministers must stop listening so much to their voters and instead act as “full time Europeans”, according to Jean-Claude Juncker.

      Elected leaders are making life “difficult” because they spend too much time thinking about what they can get out of EU and kowtowing to public opinion, rather than working on “historic” projects such as the Euro, he said.

      The president of the European Commission ridiculed British leaders for acting on "national reflexes" and telling voters they had successfully defended the country's national interest in post-summit press conferences, rather than "speaking over Europe in the proper way".

      He said: “I remember the highly exciting period when we were preparing the Maastricht treaty, and step by step we were moving in the direction of the single currency… It was a shared sentiment of foreign ministers and Prime Ministers that we were in charge of a big piece of history. This has totally gone.”"

  11. "Second, a money financed fiscal expansion could be more expansionary than a bond financed fiscal expansion."

    Oh my, o my. Everything so good but again this claim that amount in bank reserves can affect economy. Again that same loanable fund theory or competition for funds.
    Those learned beliefs (hard priors) are really hard to get rid of, aren't they.

    You should think of bond financing as the roblem of continuing stimulus once the need for it is gone. Interest income from bonds keeps additional spending up even tough economy might overheat, and then interest rate goes up to cool down economy but growing bond interest income is keeping it overheated.
    It is why monetary policy doesn't work above certain rate, say 20, and bellow 3%.
    Monetary policy can work in high rates only by inducng recession, or even depression.

    Please learn how your hard priors of loanable funds theory are with you, still.

  12. Is HM effective if it is simply used to retire debt by a government obsessed with the debt level?

  13. I would like to see you address Nick Rowe's point. Unless, there is a commitment to higher inflation, probably much higher inflation, the government expenditure will end up financed with debt, not money. That is probably not bad, but it puts the lie to money finance. Indeed, I think Nick may understate the point when he emphasizes that it is "eventually" debt. I think it would be debt as soon as it were spent, as the funds would go immediately into interest-bearing excess reserves. Not that there is anything wrong with that. The bond market can easily handle a standard fiscal expansion, even if you fib and call it something else.

    What is the problem money finance is meant to solve again? If the problem is benighted politicians who don't get the Keynesian argument, I hardly think adding monetary mumbo jumbo into the mix would help.

  14. Democratic HM is simply a natural, necessary progression toward functional finance as put forward by Abba Lerner.

    It provides not only a descriptive analysis of how money and the economy work but also resolves normalising actions over the long term.

  15. industriaditat10 May 2016 at 10:55

    Why all the smoke and mirrors?
    If the elected government decides what the economy needs is more spending but without bond issuance (perhaps having taken whatever advice from whatever 'experts' it sees fit to consult - or not) it should then simply INSTRUCT the central bank to push the buttons to authorise the money.
    It shouldn't need a green light from the central bank.
    Who's in charge here? The elected or the unelected?


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