Winner of the New Statesman SPERI Prize in Political Economy 2016

Thursday 5 May 2016

Can governments offset helicopter money

Nick Rowe makes a couple of simple points around my post yesterday. Let me start with the issue of whether helicopter money (HM) is ‘permanent’ or not. (Alas I cannot match Nick’s admirable brevity.)

Permanent or temporary?

Think about a really simple world, where the ratio of money to prices is always the same in the long run. In this world we have a short run recession accompanied by deflation, and nominal interest rates have hit the buffer of zero (or wherever). The inflation target is 2%, and the central bank will never let inflation go above 2%. However because interest rates have hit zero, it cannot do the reverse and prevent deflation by conventional means.

If in this world the monetary authority gives away some new money (helicopter money, or HM) to stimulate the economy, is that new money permanent or temporary? Let’s think about what happens without HM. Prices fall or stall for a while, and only when the recession ends does inflation go back to 2%. Now compare this to what would happen if the central bank does HM, and this was successful at raising inflation much more quickly to 2%. That means that the price level will in the long run be permanently higher than if the central bank had done nothing. As a result, at least some of the additional money created to end the recession quickly will be created permanently relative to the no money creation case.

So to the extent HM works, and stops deflation, it involves permanently creating some money. That permanent money creation does not mean that inflation has to be above target, but rather it stops inflation being below target.

But there is absolutely no reason to limit HM to the amount by which money will be permanently higher, because that will almost certainly be insufficient to end deflation. Money will need to overshoot its permanent long run level in the short term. [1] There is nothing wrong in temporarily creating additional money to get us out of a recession. The only issue of any interest in all this is whether unwinding any temporary money creation requires the central bank or the fiscal authorities to do anything unusual (see below)

Will the temporary money be spent?

But if you just give people additional money temporarily, will that mean it is just saved? This is a variant of the Ricardian Equivalence issue, and the real world answer is the same: all the evidence is that quite a lot of it will be spent. I would argue there are two main reasons for this: some people are credit constrained (and HM is like a bank manager that says yes), and others do not know how the money will be payed back (it could be through lower public spending).

What about governments: will they try to offset conventional (cheque in the post) HM by raising taxes, or not increase spending as a result of ‘democratic helicopter money’ (see my last post)? We need to go back to why we need HM in the first place. We need HM because governments are not undertaking the fiscal expansion through borrowing that they should do in a recession where interest rates hit their lower bound. To know how governments will respond to HM, we need to know why they will not undertake this fiscal expansion.

The real fear of too much government debt

Suppose governments have convinced themselves that any additional spending paid for by borrowing is ruled out by worries over the amount of government borrowing. Their fears about borrowing are genuine, and this fear is acting like a constraint stopping them from doing what they otherwise would like to do. So what happens if the central bank does conventional HM, or says to the government you can spend more (or cut taxes) without having to borrow in the short term. Central banks are removing the constraint that governments have (almost certainly) imagined. There is therefore no reason why governments should either try and offset conventional HM, or not spend the democratic variety.

But if HM is temporary, borrowing will have to increase at some point. It is easy to get lost in the institutional detail of the many ways this can happen, so let’s just pick one. Once the recession is over, the central bank worries that there is too much money in the system, and they do not have enough financial assets to mop it all up. They ask the government to recapitalise the central bank, which just means that the government gives the central bank some financial assets in the form of government debt. That means more government borrowing.

Will the government worry about this, and therefore try to reduce its borrowing to offset HM? I would suggest the government will almost certainly not do this. The reason is that governments have convinced themselves that the problem is not the long run position of the government’s finances, but the level of debt and the deficit right now. How do I know this? Because if the problem was the long run position of the government’s finances, they would spend now to end the recession quickly, and then cut the deficit once we were away from the interest rate lower bound. That is the obvious optimal intertemporal policy mix. The fact that they do not do this suggests some imagined short run constraint.

You can also look at what governments undertaking austerity do. They are quite happy to cut deficits through privatisation, which almost surely increases future deficits. They embark on all kinds of fiscal tricks that simply shift revenues into the short term, or shifts spending into the long term. In other words, fiscal plans operate under a short term deficit constraint, and democratic HM relaxes that constraint.

Using a fear of debt as a cover for shrinking the state

Suppose governments do not really believe that their own borrowing has to be reduced right now, but are using public anxiety over public debt (with phrases like the government has maxed out its credit card) as a pretext to cut public spending. Short term borrowing is not really a constraint, but governments just pretend it is to achieve the goal of a smaller state. Such a government would almost certainly use any democratic HM to cut taxes, so the distinction between conventional and democratic HM is not central. Would this government use HM as an excuse to cut spending by yet more, thereby offsetting the benefits of HM?

The great advantage a central bank has is speed. It takes time to put new fiscal plans into effect, but money can be created overnight. So if the government plans to cut spending by more as a result of HM, the central bank can just offset the demand impact of those additional spending cuts with yet more HM. If you think such a game cannot go on forever you are right, but it does not have to. Once the recession is over, monetary policy can offset the impact of spending cuts on demand using interest rates in the normal way.

In this situation, both the central bank and government are happy. The central bank, by using HM in potentially unlimited amounts, can end the recession quickly. The government that wants to use the deficit as a cover for cutting public spending has succeeded in doing so, perhaps by more than they had thought possible. That might upset you because you do not want a smaller state and resent voters being tricked into allowing it to happen, but I personally would prefer that to a prolonged recession every time. [2]

[1] Macroeconomists sometimes say that in a recession the public’s demand for money increases, or there is an excess demand for money. To a non-economist, of course, that just sounds silly.

[2] Remember that HM does not stop a benevolent government doing the right thing and enacting a fiscal stimulus. It is a fall back to stop a malevolent government crashing the economy in pursuit of an ideological goal.  


  1. As a relatively unitiated economics reader, I have a few questions:

    When the Government borrows, where does the money that it borrows originate? What institution issued it and for what purpose was it issued?

    Thanks, R.Tye.

    1. Money originates at banks.
      Government borrows from banks from their reserves. There are designated dealers, called primery dealers that practicaly have to buy whatever governement offers. They can sell it then to anyone later; to private funds, back to CB, and to other banks.
      This is how only some countries work, mostly former empires that have no debts in foreign currency, because they can force others to trade only in their currency, not in colonist currency. This is what still makes them Empires and other countries colonies. Those "former" empires are British Comonwealth, Japan and Switzerland.
      Their governments can never run out of lenders to them and never face default problem.
      Colonies, on the other hand, have to borrow from those empire country banks in foreign currency in order to trade with them and they can say enough when politics decide to. Like Greece for example.

      Bank reserves that government borrows come from government deficit spending, any deposit into bank have to go only to bank reserves and then can be lent to governments and other banks only.
      Depositors money can not be lent to private sector borrowers, only to other banks and states.

      So the question then is where the money that private borrowers get comes from? Banks create the money when they issue credit, and they have to destroy it as credit is paid back. Only interest stays as the banks' profit.

      Get it? Credit is new money (that have to be destroyed when paid back) that becomes deposit as it is spent, and then goes into bank reserves that is lent to government.

      As total amount of savings/deposit/reserves (different names for the same thing in different stages) grow constantly that is what enables government to keep borrowing more and more without ever paying it back.(this makes it that savings/deposits/reserves is the same as the government debt and with it the profit of private sectors)

      Since the money that gov borrows originate as the credit to private sector this makes it that capitalizm works only with higher credit growth then credit repayment. If new credits are smaller then destruction of old credits, liquidity in the system drains and economy goes into recession. this is called deleverage and it is why it is so dangerous and every economist knows it but they keep forgeting or afraid to explain it properly.

      This danger of deleveraging/ reduction of liquidity is why it makes it necessary for government to run deficits in order to keep liquidity on the level in recession. It is because banks/ private sectors decided to be scared of new loans. So, governments have to. Or some lucky countries can get it from trade sufficit, like Germany and China.

  2. [1] Macroeconomists sometimes say that in a recession the public’s demand for money increases, or there is an excess demand for money. To a non-economist, of course, that just sounds silly.

    In Monopoly your assets are only worth what the losers can pay!deflation is the falling prices to that mean! inflation is prices rising to meet that mean,but like oil,prices don't fall fast enough or quick enough to reach its actual value,so other sectors have to take the hit for this perversion!So the statement is true to a point,it really saying so many variable are working against demand (mainly pricing)that you can't demand what you can't afford,i believe either IEA or ASI actually called for pricing out people from using (i believe Holburn tube station)and yet these same economist don't think pricing is a problem (They advocate companies making maximum profit) in ordinary economics that stunts economies,you just can't make it up,were's the Monty Python team when you want them!

  3. In an interest rate targeting regime, the discussion of a permanent vs temporary increase in base money is irrelevant.

    The 'corridor system' that central banks operate is an "automatic sterilizer", and has been for decades their defense from 'fiscal dominance'... the level of settlement/working balances in the interbank system will be what banks need it to be, as OMO would ensure the target rate is "hit" by interbank rates... Any excesses get parked at the interest-bearing deposit facility of the central bank if banks can't find a better interbank trade...

    For aggregate demand though, it probably does make a different if part of the deficit is monetized instead of made up by issuing new debt, but I can't be that clear on why... again, monetizing a deficit will result, ceteris paribus, in a net injection into bank reserves (because the Govt.s main account with the central bank is the scope of the monetary base), but that "surplus" gets "mopped up" automatically by the central bank to the extent needed in order to keep interbank rates around the policy rate. The "mopping up" would use the very same t-bills and t-bonds that the central bank bought when it showed up at the primary market... Any loss on pricing implies a reduction in the dividends distributed at the end of the year to the Exchequer...


  4. Ah yes, of course.
    Print enough money and everyone will be rich and happy!

    1. Who said that? Only you can infer such conclussion from this SW-L post. Nobody else.

      This post says to print money and employ people to build something of value, like new road, bridge, better hositals, employ more doctors, nurses..... WHo said about printing and throwing it to people?

  5. Thanks Simon!

    BTW, I agree with you on the "Democratic" thing. There is something not quite right about central banks deciding *how* HM will be spent (as opposed to *how much* HM). But maybe one way around this is if the government specifies some sort of rule, in advance of any actual HM? "If the CB does decide to do HM, it will spend it on XYZ". And if XYZ were something that governments would not normally spend on, that would also get around the problem of my first counterfactual conditional. (Though it also raises an additional problem, in that XYX might be wasteful, like the "Disney Dads" problem of non-custodial fathers taking the kids to Disney rather than buying them coats, because buying them coats is simply giving the money to the mother rather than the kids, since the mother would have bought them coats).

  6. While reading this post all i can think of was Keynes's quote:
    "Economists set themselves too easy, too useless a task if in tempestuous seasons they can only tell us that when the storm is long past the ocean is flat again."
    Emphasis on useles.

    What? The major problem is too low inflation (according to CB) and if HM does succede then economists would run scared: "Oh no, What we should do if it works? "
    This is what this post says to me. Really worrisome.

    1)Temporary or permanent?
    Was damage from GFC temporary? What would level of money be today if there GFC never happened?
    Do you see why this question is useless now?

    2)Will the temporary money be spent?
    Oh my, is there, anywhere in the world, that governent can control market as to know such answer? Any spending is not questioned in this context. Why now?

    3) the real fear of too much gov debt?

    Whaaaat? Where? In Greece? not even there. I can not find a single politician that has shown the REAL fear of too much debt. There is no such thing in the world. The real fear is only in everyday people that beleived lieying politicians.
    Especialy politicians in countries of "former" empires that know that such talk is for colonies that have to trade in empire's currencies. Well, you might say that they forgot about double speak and what for was intended, but i do not believe it. Most economists did forget that there is two world theories. One for Colonies and one for "former" empires which trade only in their own currency.

    Only REAL fear is of those politicians to help reduce inequality which HM would do. Their financiers would imediately remove them from list for campaign funds.

    That part contains total fantasy about how government decide on spending. Where in the world exist such proactive gov.? I can not find it. Such fantasy about proactive government reducing budgets due to concerns of debt does not exist.
    Anyone who had any administrative dealing can tell about inertia that such decisions are under.
    EVERY budget decision is shaped by long term obligations and its usualy just a copy of old one with added increase with "predicted" growth. Any changes have really small impacts due to the size of budget.

    That is why Keynes said that about economists.

  7. Inflation is due to the *flow* of money, not the stock.

    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. But let's not that little fact stop the fantasy.)

    So there is absolutely no need for the central bank to be involved at all in the decision as to who gets fiscal support. The structure to make the decision already exists in other parts of government. The job of a bank is as it always should be - to accept instructions for payment and process them promptly, ensuring that the entire system clears efficiently and that target interest rates are met.

  8. As Bernanke says in a recent blog post about helicopter drops:

    "However, under certain extreme circumstances—sharply deficient aggregate demand, exhausted monetary policy, and unwillingness of the legislature to use debt-financed fiscal policies—such programs may be the best available alternative. It would be premature to rule them out."

    He understands that monetary policy can be "exhausted" in the sense that more policy is *politically* blocked and unconventional policy isn't working well. He faced pressure to taper QE even more prematurely than they did. During his tenure he constantly asked for help from fiscal authorities.

    SWL had a Bernanke quote from yesterday that monetary policy is never out of ammunition and there is no reason to suffer from lengthy recessions.

    Bernanke recognizes that there may be circumstances where helicopter money is the best policy available and the central bank won't offset it, b/c it desires more aggregate demand and yet its monetary policy is "exhausted."

    That is, they can't simply do more QE, because it isn't working well and they're being blocked politically.

  9. It’s good to see the HM discussion move onto the practicalities of doing this. Bernanke’s post was useful in trying to tackle issues such as interest on reserves or raising the question of how the CBO would treat a ‘democratic HM’ programme.

    Bernanke argues that an MFFP would require “close coordination of the legislature and the central bank” while you position HM as “a fall back to stop a malevolent government crashing the economy in pursuit of an ideological goal”. Bernanke’s stance is more convincing. HM cannot oblige a government either to increase spending or to cut taxes as it could simply decide to pay down debt. If it were sufficiently determined it could even offset the effects of HM given directly to people, e.g. by increasing consumption taxes.

    HM in whatever form would certainly shift the debate but those opposed to expansion would then raise the risks of inflation in place of the risks of debt. Proposing HM does not remove the need to win the political battle against austerity.

  10. After thinking a bit i found proactive governments that used HM to prevent deleveraging and GFC with it in their countries.
    1) Bush did use HM (maybe bond finaced, not sure)to give every taxpayer with $600. Did it prevent recession? No, it did not, only delyed it since it was small amount and many spent it for loan payment and extended default for few months.
    2) Australia did spend HM to prevent deleverage and fall in house prices succesfuly.
    3)UK also spend HM to prevent fall in housing.

    4)Lincoln spent HM called Greenback to fight a war and to unify US under single currency. Before that every state had its own dollar currency, and even before 1851 every bank issued its own currency.

    5) Hitler spent HM to employ every German in two years when before he took power there was 30% unemployment in Germany.
    Hitler used different name Mark to print and pay for projects, firms could replace that HM Marks for regular Mark at special banks to pay their workers.

    Roosewelt did not use HM to employ people but he used state owned developement banks to print money by issuing loans for state projects. This is a slower way then what Hitler did. Hitler did print new money while FDR did it trough developement banks.
    FDR did use HM by using developement banks and capitalizing them with US bonds, Those banks then printed credits to pay for projets that still exist today. Those loans were never repaid, after 30 years with those loans on the books state closed those banks and erased debts. Only Fanie Mae, Freadie Mac and one more bank were left and sold to private because they were too succesful and dependable to be closed.
    Even Eisenhower used state developement bank to build Highway system and close it after 30 years.

    Since banks print new money when issuing loans, and destroy it as the loan is payed back, FDR used developement banks with State bond as base capital to finace any project that they can think of. 30 years later with those debts still on the books, those banks were closed and debts erased.

    On the trail of this issue of credit printing i have an idea called PILL (payment in lieu of loans) that uses the fact that money is destroyed as loans are payed back and offered it to Yanis Varoufakis as the solution to colony money issue. Print PILLs and distribute it to every citizen that can be used only for repayment of debt, only banks can accept it. This way those debt-free people can open line of credit and repay it with PILLs only while keeping the real euros and spend it.
    Banks destroy PILLs soon after they receive them as payment.

    PILL is the combination of all above examples of HM used in history but making it stealthy. It mostly relys on how Hitler did it, but with some contraints; it relys on private sector decisions mostly on what it is spent. State can always use developement banks capitalized with state bonds in order to pay for projects as the best solution.

  11. I think the government can issue money into the private economy as long as inflation is quiescent. Without borrowing a dime.

  12. Helicopter Money is a Friedman idea, which applies when we are in a depression, That is the state we are in at present. We have been bouncing along the trough of a depression for too many years now.

    In reality, as money issued through the Bank of England is issued through private banks as debt, and has created a mountain that is totally unsustainable, we should stop thinking about the whys and wherefores, and concentrate on government spending where and when it is needed. As government policy, the idea the government must borrow its own money is utterly absurd.

    We didn't ask where Gordon Brown found £375 billion when he bailed out the banks.

  13. Much more articulate than I was up above, here's Borio:


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