Winner of the New Statesman SPERI Prize in Political Economy 2016

Friday, 20 May 2016

Helicopter money and fiscal policy

Both John Kay and Joerg Bibow think additional government spending on public investment is a good idea, and that helicopter money (HM) is either a distraction (Bibow) or fiscal policy by subterfuge (Kay). They are right about public investment, but wrong about HM.

We can have endless debates about whether HM is more monetary or fiscal. While attempts to distinguish between the two can sometime clarify important points (as here from Eric Lonergan) it is ultimately pointless. HM is what it is. Arguments that attempt to use definitions to then conclude that central banks should not do HM because its fiscal are equally pointless. Any HM distribution mechanism needs to be set up in agreement with governments, and existing monetary policy has fiscal consequences which governments have no control over.

Here is where Kay and Bibow are right. At this moment in time, even if a global recession is not about to happen, public investment should increase in the US, UK and Eurozone. There is absolutely no reason why that cannot be financed by issuing government debt. Furthermore, in the event of a new recession, increasing ‘shovel ready’ public investment is an excellent countercyclical tool. Indeed there would be a good case for bringing forward public investment even if monetary policy was capable of dealing with the recession on its own, because you would be investing when labour is cheap and interest rates are low.

Where Bibow is wrong is that the existence of HM in the central bank’s armory in no way compromises the points above. HM does not stop the government doing what it wants with fiscal policy. Monetary policy adapts to whatever fiscal policy plans the government has, and it can do this because it can move faster than governments.

This goes part of the way to answering Kay, but he also suggests that HM is somehow a way of getting politicians to do fiscal stimulus by calling it something else. This seems to ignore why fiscal stimulus ended. In 2010 both Osborne and Merkel argued we had to reduce government borrowing immediately because the markets demanded it.

HM is fiscal stimulus without any immediate increase in government borrowing. It therefore avoids the constraint that Osborne and Merkel said prevented further fiscal stimulus. To put it another way, they did not say that increasing government spending or cutting taxes were bad in itself, but just that they were extremely unwise because they had to be financed by adding to government debt. HM is not financed by increasing government debt.

Many argue that these concerns about debt are manufactured, and that in reality politicians on the right pushing austerity are using these concerns as a means of achieving a smaller state: what I call here deficit deceit. HM, particularly in its democratic form, calls their bluff. If we can avoid making the recession worse by maintaining public spending, financed in part by creating money while the recession persists, how can they object to that? Politicians who wanted to use deficit deceit will not like it, but that is their problem, not ours.

There is a related point in favour of HM that both Kay and Bibow miss. Independent central banks are a means of delegating macroeconomic stabilisation. Yet that delegation is crucially incomplete, because of the lower bound for nominal interest rates. While economists have generally understood that governments can in this situation come to the rescue, politicians either didn’t get the memo, or have proved that they are indeed not to be trusted with the task. HM is a much better instrument than Quantitative Easing, so why deny central banks the instrument they require to do the job they have been asked to do.


  1. Seems Japan didn't do HM / people's QE in the 1930s if that means distributing it to the public but it did print money to fund a stimulus like Corbynomics and it worked great.

  2. Question: Very low interest rates appear to make trading condition difficult for bankers - leading to premature calls to tighten monetary policy despite no evidence of inflationary pressures. If helicopter money is available to the monetary authority to what extent is it preferable to low or negative interest rates? Would it be better for the central bank to hold interest rates >=2% and use helicopter money if looser policy is required?

  3. Maybe relevant:

  4. Nice article as usual. Just one quibble: I don’t agree that “in the event of a new recession, increasing ‘shovel ready’ public investment is an excellent countercyclical tool.” On the contrary: I see no good reason for CONCENTRATING stimulus spending on ANY area of the economy, and for the simple reason that the unemployed don’t normally consist exclusively or even mainly of people with construction / infrastructure skills.

    But that’s not to deny that we may need better infrastructure. However, building up the skills base to do that will take time.

    1. Ralph,

      So you would choose to hand the money over to people at large who probably are going to spend it on imports, reducing debt, hoarding it, as well as spending it on domestic goods. To the extent the money leaks away from expenditure on domestic goods, the drop has been "wasted". The chances are a goodly portion of it will leak away. If the aim is to bolster the domestic economy, output and employment, then the results achieved may not be up to expectations.


    2. Several errors there.

      First, I didn’t suggest “handing to the people at large”. I said stimulus should not be concentrated on any area of the economy. That means boosting public spending as well as private spending or “hand in to the people” (though clearly the decision as to what mix of public and private spending we have is a POLITICAL decision, which should thus be taken by politicians).

      Second, as to “hoarding”, that’s not a problem. Unemployment is almost by definition caused by an excess desire to hoard (Keynes’s “paradox of thrift” unemployment). The solution is to give people whatever amount they want to save or hoard, then they’ll starts spending again.

      Third, I’m baffled as what your problem is with “domestic goods”. If you mean people will increase spending on domestically produced (i.e. UK produced) goods, that raises employment, which helps solve the problem!!

    3. Hmm, it seems by this maneuver you only avoid the leak in the first iteration of the spend. As the builders of infrastructure spend their dough, they will also waste it, right?

    4. " I’m baffled as what your problem is with “domestic goods”. If you mean people will increase spending on domestically produced (i.e. UK produced) goods, that raises employment, which helps solve the problem!!"


      That's exactly what I am saying should happen.


    5. "Hmm, it seems by this maneuver you only avoid the leak in the first iteration of the spend. As the builders of infrastructure spend their dough, they will also waste it, right?"

      Fair point. Unavoidable. At least the first round is directed towards socially desirable expenditure.


  5. You keep saying 'investment' but do you really mean 'spending'?
    Just because spending is done on a public good (and one would hope that it is!) it does not magically become an investment.
    That is a classic politician's deceit.

  6. Simon, I think your writeup is incomplete.

    In normal times it seems that ‘traditional’ ways of thinking of budget deficits might operate quite neatly to encapsulate the constraints on governments trying to optimise economic management. So printing more money might get you out of a recession, but then, once a recovery gets underway, you’ve got a lot of extra money sloshing around which you need to withdraw from the system – which you’d do by taxing more and/or reducing government spending. But that’s what you’d have to do if you’d debt financed your way out of a recession – loosening fiscal policy (borrowing to run a deficit) and then tightening fiscal policy (running a surplus and repaying some or all of the debt) after the event.

    In this environment the effects of helicopter money are just like those of borrowing to spend. In this scenario, debt in debt financed government spending is simply a means for keeping a ledger of the adjustments that will be necessary to keep the goods and financial markets in equilibrium over time (I'm speaking loosely here, but hoping you get my drift.

    So the way I've been thinking about it is along these lines.

    Apart from it being useful when politicians are claiming that financial markets won't fund more borrowing (which I'm leaving out of this analysis), helicopter money is particularly for a situation in which one doesn't know if or how much you may, in the future need to withdraw the money. So in my ideal world there'd be three sources of financing government spending. Taxes, borrowing and helicopter drops, with the helicopter drops done by the central bank where they regarded it as unclear whether or not the money would need to be withdrawn subsequently, though it could be if it needed to be.

    That then raises the question of how central banks can withdraw the money they've printed and dropped onto 'the people'. They can conduct open market operations in the financial markets to drive interest rates up, but, without the agreement of the parliament, they couldn't withdraw the money directly in the economy - by taking it off the people they dropped it on. If this analysis is right - and I'm just trying to think this through myself - and would be happy for any help I can be given - wouldn't the appropriate institutional arrangements to allow helicopter money - which I favour - be some right in the central bank that dropped the money to tax it back in some way - with some taxation instrument say a broad levy on all those paying income or consumption tax which spent most of its time set at a zero rate but could, at the central bank's discretion be increased to some figure - say 1 or 2 percentage points.

    1. "So printing more money might get you out of a recession, but then, once a recovery gets underway, you’ve got a lot of extra money sloshing around which you need to withdraw from the system"

      Bullshit. All government spending works by printing money and it generates about 90% tax and 10% private saving.

      "with some taxation instrument say a broad levy on all those paying income or consumption tax"

      This is just basic income.

    2. Nicholas: I have addressed this issue in the past by simply assuming, I think reasonably, that the government would always provide the central bank with the assets they need to do enough OMOs. Then you do not need any central bank taxation.

    3. You say that there will be too much money sloshing around once the economy improves and there will be a need to reduce it.

      That statement prooves that you do not know why there is Great Recession today. This shows that you want to fight inflation in times of deflation, that you want to fight too much liquidity in times of iliquidity.
      And where is your explanation on how there will be too much money in the system? Since when do we have fixed money base? Since when did world operate on fixed money base? Ever?
      And only fixed money base can allow for this condition that you say will happen would happen.

      The Great recession is caused by delevarage(forced by banks), which means that people paid off (or defaulted on) loans. Since paying off loans means destroying money just as opposite of issuing loans that create money.
      Simply, deleverage means destroying more money then is being created by new loans, hence illiquidity that HM could solve.
      HM would simply allow people to pay old debts which is then destroyed. Capiche???? HM would be DESTROYED AS PEOPLE PAY OFF THEIR OLD DEBTS.

      And now you say that there would be too much money once economy improves and want to create more automatic mechanisms to force iliquidity again.
      Do you understand that such problems were disscused long time ago and experience dissmised it many time? But it keeps rising up like zombies, because economists are not allowed to discuss banking, money and debt.

      Again, you are forgeting that credit creates money and paying off loans is destroying money-deleverage. Money is debt. Debt is money. Please, Stop creating more mechanisms for easier falls into recessions, which is what your proposition would do.
      We need opposite, we need more automatic stabilisers that last 30 years has seen destruction of them. Automatic stabilizers like social safety nets; good pensions, good health plans, and good unemployment benefits. Basicaly, we need more of a good Basic income Guarantee coupled with Job Guarantee.
      What you ask for is opposite of that and on the trail of neoliberalism.

    4. The biggest problem with debt financed stimulus is that once economy improves, government still have to have a high spending in form of interest income. Even tough primary deficit is 0, state have to spend on interest which is income to many thus still stimulating the economy when it doesn't need it.
      And then CB raises interest rate in order to calm down economy and with it raises interest income which is more stimulating to economy. Instead of calming the economy, higher intereste rates contributes to the more heat.

      This says that interest rates can be effective between 3% and 20% (arbitrary) when outside of that range, monetary policy becomes countercyclical.

      Down range is 3% because comercial banks do not offer official interest rate to the economy. Lower then that and only states can have it for deficit spending and also servicing OLD DEBTS.

      Conclusion is that it is the debt financing that is more distortionary to economy then HM which is why we have high rent seeking and collapse of economies due to capital earning more then the work is earning. Hence r>g from Piketty.

    5. Jure, please stick to what I've said and what I've said it about, not to what you think what I've said means about what I think about things I've not mentioned.

    6. But Simon,

      If the money is injected as HM and then mopped up with OMOs that produces its effect by increasing interest rates - rather than withdrawing cash from the economy. I appreciate in an economic model these things have an equivalence, but this is in an environment in which we don't really know the relationships between the various variables. So it seems to me that if the money was withdrawn in the way it was injected, it's likely to create fewer unintended imbalances between monetary and fiscal policy.

  7. Market Fiscalist20 May 2016 at 07:28

    Assume a recession caused by inadequate AD where monetary policy is deemed not to work. The govt needs to spend $1T to end the recession. It can either just print up the $1T and spend it, or borrow $1T of idle savings and spend it.

    Assume that either actions will end the recession. A year later AD has returned to normal. To avoid inflation the govt could tax back the $1T. (If it had issued bonds it will have to buy them back , if not it will just destroy the $1T.) In either case things are exactly how they were before the recession and the long term effects on government debt are zero (other things equal)

    However if after the recession has ended the govt decides not to tax back the money then to avoid inflation it will have to sell more bonds to the public. The net result will more-or-less lead to the same run up in govt debt (once the recession is over) in either case. The main difference will be timing of the bond sales.

    So I conclude that what should concern the public is not HM v non-HM financed spending (assuming that both work equally well) during the recession but how the govt will reverse out the additional spending in the future.

    1. Market Fiscalist21 May 2016 at 08:55

      So I would support the HM proposal as long as the CB is given the mandate to tax the money back when the recession is done. If not, and the idea is that the CB uses purely monetary policy once the recession is over, then all that HM has achieved is that bond sales have been pushed into the future and will be done by the monetary rather than the fiscal authority

    2. I make exactly this point in earlier posts. To the extent that HM has to be retrieved (and not all of it would be), then this can be done by the government giving the CB assets which the central bank can use to do OMOs in the normal way. In that case this part of HM reverts to conventional deficit financing. No need for the CB to tax anyone.

    3. Market Fiscalist22 May 2016 at 07:12

      May I ask a clarifying question ?

      Are you saying that if the govt sells bonds direct to the public this would represent an increase in levels of government debt, but if they give the same number of bonds to the CB who sell them via OMO, then this does not represent an increase in levels of government debt?

      If not, and both count as govt debt, then I'm still not seeing how HM has any benefits long term in regard to govt debt beyond that part of HM that is a permanent increase in the money supply.

  8. "If we can avoid making the recession worse by maintaining public spending, financed in part by creating money while the recession persists, how can they object to that? Politicians who wanted to use deficit deceit will not like it, but that is their problem, not ours."

    Couldn't they just say "something, something, inflation, something, Weimar, Zimbabwe"? If they can make use of the deficit deceit, then why not the hyperinflation hoax? By the way, how do you think "mediamacro" will view HM (not a rhetorical question)?

    1. They probably would, except that they have not in the case of QE. Actually I think that mediamacro would not worry about HM, because it is done by the central bank which it assumes is responsible.

  9. Why do you call this helicopter money? That implies randomness. It appears what you really mean is direct investment into the productive private sector in order to build out public works, such as infrastructure. Without selling any bonds into the private sector and, therefore, without incurring unnecessary compound interest costs. This kind of liquidity injection should be used until we reach full employment. Incurring compound interest to use your own money is just plain dumb, in my opinion.

    1. You're late to the party. It's called Helicopter Money because that's the visual Milton Friedman used in the original thought experiment..."what would happen if the Fed literally overflew the US and dropped money out of helicopters." Now that the idea of direct monetary-financed spending is being seriously considered its proponents (like Wren-Lewis) are offering more realistic treatments of it. But the name remains...

  10. "While economists have generally understood that governments can in this situation come to the rescue, politicians either didn’t get the memo, or have proved that they are indeed not to be trusted with the task."

    Looks like you have gone crazy mad with power lust. Economists like you don’t want an “expert led democracy” at all. You want a society led by Platonic philosopher kings, with economists being those very folk.

    You are not virtuous enough Simon. I'm sorry but someone has to say it.

    For example 5% permanent unemployment ("NAIRU") recommended on a large scale, national, regional and global, is a huge number of people either not working or underemployed, which is economically inefficient, politically explosive, and socially unnecessary where resources are available to employ them. In other words a total dick move.

  11. The Fed has an asset purchase program. Perhaps they'd be interested in buying a few bridges -- with a contract to upgrade and maintain them of course :)

  12. "HM is a much better instrument than Quantitative Easing, so why deny central banks the instrument they require to do the job they have been asked to do."

    Personally I have no problem with HM. The issue for me is leaving it with CBs to execute. HM should be implemented as part of a designed fiscal programme of expenditure. Do the CBs have the necessary resources to do this? I don't think so.


    1. The government does designed fiscal programmes. HM only happens when governments mess up, which alas they do.

    2. Simon,

      Why would CBs necessarily do any better than governments?


  13. Very effective comment. Perhaps you might interested in these contributions of already a while ago, including on the issue of central bank-government cooperation

    1. They are well worth reading for anyone interested in HM.

  14. " why deny central banks the instrument they require to do the job they have been asked to do."


    Helicopter money will be fiscal spending which needs democratic oversight.

    Should not have anything to do with the Central Bank (although they should of course be consulted on how best to put it into operation).

    So if

    (a) Central Banks have run out of ammunition, and cannot justify any more Quantitative Easing, or

    (b) democracies are fed up that only bond investors and traders benefit directly from QE

    governments should decide to introduce helicopter money with the appropriate distribution decided upon by parliament.

    Further, if it really is just a matter of moving money to the masses who have a greater propensity to consume than save, perhaps a switch from taxing wages (National Insurance) to wealth tax is an appropriate substitute for helicopter money.

    1. If governments never messed up, we would not need HM. But they do. You cannot ignore this.

  15. Now that you completely agree that deficits do not matter or that they can easily be circumvented by HM, there i aproblem of deficit deceiters as you want to call them.

    Isn't it much better to educate population to recognise deficit deceiters and never vote for them?
    Why are those deficit deceiters voted into power anyway?
    Isn't that the proof that mainstream economics completely and utterly failed to educate populations about reality?

    And you SW-L bellong to mainstream academics.
    Education, education, education.
    You guys completely failed at educating population about reality of macro. Mostly by using complicated math and false theories to describe economics. And then using metaphors that do not paralell to real world as an ecscuse to make it easier.

    Not to mention that you are forbiden from talking about money in economics. Forbiden from discusing money, debt and banks and HM as part of it in your courses which is why you fail at educating comprehensively your students about the real world. You probably did educate them properly about imaginary world of economics that never existed nor will ever.

    That is why when i use MMT and street lingue when talking about economics to ordinary people i get amasing responses and many say that they finaly understood the economics.

    1. When 196 economists write a letter about Brexit which the rest of the media ignores, how do you expect economists to educate anyone?

    2. Do you warn your students about that?
      All students come into economics with some prelearned micro knowledge, and it takes a lot of effort to disabuse them of it.
      True that relentles media propaganda over many years have more influence about economis then 4 years in chool when you do not even know what for are you learning that.
      But, gain, do you keep warning your own students about how wrong that media propaganda is?

      I would, if i was a teaching proffesor, give 5 min to every start of class to talk about how media is cheating them. Make them remember, for good.

      Every my conversation about economics is beggining with telling them that mainstream is not allowed to discus economics with money, debt and banks included and that is explanation of why my friends have it wrong when they start spouting neoliberal nonsense.

      Yes, it is mostly about media not so much about academics but academics make it so difficult to understand economics so it works what i say to my friends.

      BTW, i would recomend this from David Graeber that covers my initial comment;

    3. Then HM was invented when the state did not know what to do.

      This is still a simple model that can complicate when population is not fixed. Even creating multiple firms is about important interaction where one firm can save and mooch off of another firm's spending to raising profits while others are going bancrupt. Allocation of spending between firms is important point about crative destruction that drives improvement in technology, all of it driven by reallocation of capital between firms. Then how invstment drives one firm while lack of investments collapses the other. Then how invstment drives wages in one firm while othe firm languishes.

      Simplifiyng the real world on this example opens a comprehension to all students. Unlike comlicated and unreal models that economists use which then leads to false conclusions.

      I offer you this example to use in your every day tesching. And it should help with many other academics that you can argue with.

      I have a plan to use it for a book on economics for real people. So that they can not be cheated by deficit deceivers and to recognise whom they are voting for.

  16. Thank you for being clear enough to describe HM as financing. People often get their shorts in a knot by not separating the spending and its financing.

    On the spending side of it, a crucial advantage is that because it delivers funds directly to customers, it in a sense "feeds" capital assets with the revenue necessary to keep managers maintaining these assets instead of abandoning them as is usual. Enough HM could even keep ROIs attractive enough for managers to invest in new capital assets.

    Thus HM could be the best tool to aid main street business owners and managers of real capital. If only they knew.

  17. Sorry for the conclusory tone here, but just falling in step with you know it alls. I guess I am "garbage", as Delong would say.

    There is no resolution to the "calibration" problem that does not involve explicit reneging by the central bank or a hidden tax increases on the banking system and thus an implicit reneging on the promise of the fiscal expansion to be money financed. If you want to tax banks to give a tax break to the general public, then fine. But it is not helicopter money.

    Indeed, helicopter money is a non-solution to a non-existing problem, just as those who point out deficit deceit argue. But if Paul Ryan won't go for an infrastructure program, it is pretty laughable to claim that he will go for it if linked to monetary mumbo jumbo.

    Speaking as a run of the mill standard liberal Keynesian who likes infrastructure spending and is perfectly ok with more public debt, this is one of the dumbest ideas I have seen circulated, particularly by the technocratic left. We rely on you guys to do better. I would drop it and focus on something more relevant.

    1. I would turn this around. It is dumb to design institutions that only work when governments do the right thing. HM is better than QE, so why stop CBs from doing it?

    2. " HM is better than QE, so why stop CBs from doing it?"

      What kind of argument is that?


  18. Prof. Wren-Lewis: thanks very much for your kind words.

    Market Fiscalist: as discussed by Adair Turner, there are actually two modalities for government bonds to be sold to the central bank via OMO and not to be counted as debt.

    The first modality is by having the government issue interest bearing debt and the central bank commit to buying and holding it in perpetuity, rolling it over when it reaches maturity. In this case, the government would face a debt interest servicing cost, but the central bank would make an exactly matching profit from the difference between the interest rate it receives on its debt and the zero cost of its money liabilities, and would return this profit to the government.

    The second way is by having the central bank buy government securities which are explicitly non-interest bearing and never redeemable.

    In terms of the fundamentals of money creation and government finance, the choice between these two modalities would make no difference, while they might have different legal and accounting implications.

    However, both modalities would have identical implications for central bank capital.

  19. Seigniorage: The Honest Government's Guide to the Revenue from the Creation of Money


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