Winner of the New Statesman SPERI Prize in Political Economy 2016

Saturday 20 August 2016

Helicopter Money: missing the point

I am tired of reading discussions of helicopter money (HM) that have the following structure:

  1. HM is like a money financed fiscal stimulus
  2. HM would threaten central bank independence
  3. So HM is a bad idea

(Admittedly here (3) is only implicit.) What these discussions never seem to ask, even when discussing (2), is why we have independent central banks (ICB) in the first place. And what they never seem to note, even in establishing (1), is that ICBs deny the possibility of a money financed fiscal stimulus (MFFS).

ICBs exist to avoid problems when politicians do macro stabilisation. But creating an ICB means that a MFFS is no longer possible. It could only happen through ICB/government cooperation, which would negate independence. But proponents of ICBs say this is no problem, because macro stabilisation can be done entirely by using changes in interest rates, so a MFFS is never going to be needed.

Then we hit the Zero Lower Bound. Unconventional monetary policy (e.g. QE) is a far more uncertain and unreliable stabilisation tool than fiscal policy. Which means ICBs cannot do the job there are required to do, and their existence prevents a MMFS.

To then say no problem, governments can do a bond financed fiscal expansion is to completely forget why ICBs were favoured in the first place. Politicians are not good at macroeconomic stabilisation. If you had any doubt about that, global austerity should be all the proof you need.

So demonstrating (1) does not, I repeat not, imply that ICBs do not need to do HM. Implying that it does is a bit like saying governments could set interest rates, so why do we need ICBs. Most macroeconomists would never dream of doing that, so why are they happy to use this argument with HM?

Which brings us to (2). Now (2) is never in my experience examined with the same rigour as (1): it seems almost that just mentioning ‘fiscal dominance’ is enough to frighten the horses. The only circumstances I can see where (2) would be true is if, following HM and a subsequent upswing, the central bank finds that it runs out of assets to sell in order to keep rates high and prevent inflation exceeding its target. One obvious solution is for the government to recapitalise the central bank.

Does that compromise central bank independence? The Bank of England does not think so. It got the government to agree to make good any losses from QE. Have people worried that this compromises the independence of the Bank of England Of course not: no one can seriously imagine a UK government ever reneging on this commitment. So why would HM be any different?

Let me put it another way. Imagine the set of all governments that would refuse a request from an ICB for recapitalisation during a boom when inflation was rising: - governments of central bank nightmares. Now imagine the set of all governments that, in a boom with inflation rising, would happily take away the independence of the central bank to prevent it raising rates. I would suggest the two sets are identical. In other words, HM does not seem to compromise independence at all.

So please, no more elaborate demonstrations that HM is equivalent to a MFFS, as if that is an argument against HM, without even noting that ICBs prevent a MFFS. No more vague references to HM threatening independence, without being precise about why that is. And please some recognition that the whole point of ICBs is not to have to rely on governments to do macro stabilisation.


  1. «ICBs exist to avoid problems when politicians do macro stabilisation. But creating an ICB means that a MFFS is no longer possible. It could only happen through ICB/government cooperation, which would negate independence.»

    But "independence" does not mean that the CB must alway opposes whatever the government does, it means in practice something completely different: that changes in the real *headline* rate of interest (nominal *headline* rate of interest minus wage inflation target) are published well in advance, so that the *government* bond market can react with a massive government bond crash if it is ever increased, and a massive government bond boom if it is decreased.

    As to "cooperation" there is the big matter of fiscal dominance: by adopting a contractionary fiscal policy a government can "force" a central bank to create a "trickle down" credit and asset price boom, and by adopting an expansionary fiscal policy governments can "force" a central bank to adopt a tight credit policy to push down wages.

    Macro stabilisation properly defined would happen only if the central bank as "philosopher kings" were in control of both fiscal and monetary policy. But of course it it possible to find those who claim that because of "ricardian equivalence" or some other delusion fiscal policy cannot work, so it does not matter that "independent" central banks don't control it.

    «And please some recognition that the whole point of ICBs is not to have to rely on governments to do macro stabilisation.»

    That is quite vague. Because it is not «macro stabilisation» that is the effective result, because governments don't get "punished" when they deviate from stability both ways; because the reaction to fiscal dominance is not at all symmetrical: the "independent" central bank will (pretend to) punish a government that adopts an expansionary wage policy, by triggering a government bond crash, but will (very happily) reward a government that has a contractionary wage policy with a huge government bond and debt and asset price boom.

    Because governments, and not central banks, control both fiscal policy and the levers of credit via regulation, and they can unleash debt booms, as long as the debt boom does not push up wage inflation, which they ensure by regulating access to credit only:

    * by property speculators by requiring property collateral;
    * by their funding sponsors in the finance sector.

    Of course booming credit to property owners and the the finance sector does push up income inflation for both, but that does not count. Because "wealth creators" :-).

    So central bank independence does not allow the central bank to do «macro stabilisation» because of fiscal dominance; it only allows the central bank and the government to cooperate in avoiding expansionary wage policies, and maintain contractionary wage policies and expansionary asset price policies, so that governments can use the figleaf of «central bank independence» to explain why wages have stagnated fallen for decades while asset prices have boomed for decades.

    The asymmetry in outcome is because "independent" central banks consider government bond and asset crashes as "bad" and government bond and asset booms as "good", and central bank "independence" just ties (in an inverse relationship) government wage policy to government bond and asset prices.

    If central banks were truly "independent" and their goal was truly "macro stabilisation", they would consider both bond/asset booms and crashes as "bad", and punish contractionary wage policy instead of rewarding it with a credit boom, but of course they don't. Because "financial stability" :-).

    1. Market Fiscalist20 August 2016 at 14:57

      I don't see any difference between an increase in govt spending financed by bonds that end up getting purchased by the CB and an increase in govt spending financed by helicopter money. Both have the same effect on future inflation and/or taxation requirements.

      Is the difference that increased govt spending may be more politically acceptable if financed by HM ?

    2. «they would consider both bond/asset booms and crashes as "bad", and punish contractionary wage policy instead of rewarding it with a credit boom, but of course they don't. Because "financial stability" :-).»

      That "independent" central banks have very asymmetric attitude to "stabilization" is best illustrated with a classic quote from a (previous) FOMC member:

      "What the Fed did, and I was part of that group, we frontloaded a tremendous market rally starting in march of 2009. [ ... ] Once again, we frontloaded, at the federal reserve, an enormous rally in order to accomplish a wealth effect."

      Try to imagine the same statement with "wage rises" instead of "rally": inconceivable. In other words "independent" central banks "stabilize" property markets by putting a rising floor on asset prices (and they "stabilize" wage markets by putting a ceiling on wages). J Kay in "Other people's money" also writes:

      "In the 1960s the Bank of England actively and successfully supported the development of London as a global financial services sector. During its life the Financial Services authority was under political pressure to capture business for London from New York by imposing 'lighter-touch' regulation than the Securities and Exchange Commission. Under Greenspan's chairmainship, there is little doubt where the emphasis of the policy of the policy of the Federal Reserve lay: the Fed statement of October 1987 spelled out the priorities of the reluctant regulator. To 'support the economic and the financial system' it was necessary to prevent stock prices falling. The priorities of economic policy would be dictated by the needs of the financial markets. That would still be true 25 years later."

      The problem with putting a (rising) floor on asset prices was well described by H Minsky: market participants are not stupid and arbitrage it by going into "ponzi" leveraged speculation mode.

      So publishing in advance movements in the real "headline" (cost of funds to banks) interest rate while under "fiscal dominance" in a period where fiscal policy targets lower wages means that "independent" central banks destabilize the financial markets and asset prices. The question is then whether in «macro stabilisation» that word "macro" includes only wages or asset prices too.

      Also: rereading the above, publishing in advance real "headline" interest rate targets, and sticking to them, is what is being called "independence" of central banks *from governments*, or more precisely from «Politicians» who are «are not good at macroeconomic stabilisation», that is they may be tempted to adopt policies of rising wages to "bribe" voters who are workers.

      But are central banks independent of financial traders?

      And are central banks independent of «Politicians» who are also «are not good at macroeconomic stabilisation» but because they want to "bribe" with rising asset prices the voters who are rentiers?

      My usual quotes from G Osborne and D Cameron:

      "A credible fiscal plan allows you to have a looser monetary policy than would otherwise be the case. My approach is to be fiscally conservative but monetarily active."

      Curious that the chancellor who knows well how "independent" the central bank is still write "My approach ... monetarily active".

      «Because "financial stability" :-).»

      Dark humour of course.

      But there is some hope: J Kay's book however restrained as it is, demonstrates that the "establishment" has become aware that the City is trying to be the master and not the servant of the "establishment" and they don't care about consequences being traders ready to abandon ship once they have sunk (asset stripped) it. We'll see what they do about it: 1950s or 1850s or 1750s?

    3. If we keep feeding free stimulus MONEY to the rich and continue to go nowhere with bonds and stocks with the up & down affect and with the U.S.FED bailing out U.S. Banks, Foreign Banks, Governments and corporations, continuously making the same mistakes over and over again with no results at the taxpayers expense...The people of America are your spending power and your consumers, HM is the BEST OPTION !

  2. Simon, I am still unclear as to how your vision of HM would work if it was undertaken by an ICB without government cooperation. How does the ICB get the HM out into the real economy? Using the banking system is one possibility, but then the poor don't have as many bank accounts as the rich.

    I can see how how MMT could do the same job, but again only if you have a government committed to MMT. The asset problem is easily solved in MMT as follows. In a recession the government creates bonds which the ICB buys. The interest rate on these bonds, though, is set by the ICB (think of it as a separation of powers). The interest paid on these bonds by the government to the ICB is then returned in cash to the government as a profit/dividend when inflation is low, but when inflation rises the ICB pays the government its dividend in bonds. This then reverses the money creation by destroying both cash (at the ICB) and the debt (at the Treasury). This in turn forces the government to tighten spending if interest rates rise too far as it ends up being forced to buy back its own bonds.

    Another possible solution might be to implement the citizen's income to replace tax allowances, JSA, student grants and some proportion of the basic state pension. Set it initially at say £75 per week. Then give every adult citizen their own account at the ICB and use that to pay and top up the citizen's income. That way you bypass the government completely.

    The crucial point about having an ICB though, is that it needs to have policy tools that can tackle low inflation as well as high inflation. For most of the last 5 years we have had inflation close to or below zero. That is both a signal of low economic growth and a driver of it. If you are going to have an inflation target you need to be consistent about using it. Instead there is a dangerous misconception in the media and politics that ultra low inflation is good. It is not. Osborne certainly tried to make a virtue of it and it went unchallenged.

  3. I think authority is more the issue than independence.

    The central bank operates under laws, and it will have to obtain an HM authority from somewhere.

    Once that authority is delegated, the CB should have the flexibility on timing. Timing and the announcement effect (of the both the policy and its execution) provides the advantage over regular fiscal expenditures with bond financing.

    And the delegation of the authority should resolve the issue of independence. For example, withholding recapitalization is inconsistent with the sanctioning of the authority for HM in the first place. That contingency should already have been foreseen.

    I don’t know exactly what that authority delegation process should look like. It depends on the institutional framework otherwise (e.g. Fed versus ECB).

    But I just can’t see a process whereby a central bank proceeds to do this on its own without it. It is dependent on the policy authority, but independent in the the execution of it.

  4. Do you agree with the middle section of this article by McDonnell (obviously not the rest)? Is there a difference between HM and using new money for a NIB?

  5. Independent Central Bank: Missing the point
    "And please some recognition that the whole point of ICBs is not to have to rely on governments to do macro stabilisation."

    Is there such a thing as ICB? It can be independent from government (even hostile as example of Greece) or from comercial banks, but NOT from both as you pretend and presuppose.

    A CB can be independent to pursue monetary policy or not (which those with fixed exchange rate and almost automatically with debts in foreign currencies are not). I guess i will present the case for the conclusion that is the same as yours but comming from a different angle in order to avoid including neoliberal reasoning.

    Britain does not have fixed exchange rate nor large debts n foreign currency so BofE is clearly independent to pursue monetary policy, yet you want to introduce and talk about independence from government while avoiding talking about CB independence from comercial banking sector. That is a clear neoliberal bias that you are not aware of.

    You say that you know about implications of consolidated budget constraint, yet you do not want to apply it to your thinking. You said that you know about the difference on debt in foreign currencies and how it makes it different for economies in this crisis yet you do not want to apply it.
    Apply it means that you know what ICB means, and it clearly it should not be talked about in case of Britain, former British Commonwealth countries, Japan and Switzerland (those "former" empires) yet you still are thinking about it. this is your neoliberal bias that you probably are not aware of.

    Why are you conflating and confusing independence of a CB to pursue monetary policy with independence from government? And do not want to think about independence from commercial banking sector, only about independence from government (which in reality it shoud not be independent of becouse it is the part of consolidated budget constrained theory)?

    Britain has ICB since it got off fixed exchange rate (you can say thanks to Soros) yet you want to keep talking about it. Please get back into present, since i apreciate your knowledge and insights when it is about the present, not when you do not apply changes to reality in real time.

    So the whole point of ICB is that Britain has it since it is not on fixed exchange and it applys only on "independence" from government but not on independence from commercial banking setor which is a clear bias. A CB should not be independent from government since government writes its rules of operation and the purpose.

  6. "So please, no more elaborate demonstrations that HM is equivalent to a MFFS"

    I will reduce it to a basic logic of such action, not elaborate into comlexity.
    QE is MFFS for banks to prevent their collapse and further harm an economy. It is a stimulus from governments into private sector. True, instead of Finance Ministry BofE is doing it but it still will get onto government debt if any of assets become unrealized (worth less). Or as you call it if gov has to recapitalize CB due to losses from QE.
    In the end, QE is MFFS but for a different purpose then what HM is applied to. Whether you call it OMT or QE or HM or some other name, basic logic is "printing money" to interveene into private sector.

    Does your writing implys that you are for Corbyn's People's QE? Why it is called QE? because it uses the same process at CB, but for the different purpose.

    Btw, when are you going to realize that demand for recapitalization of CB defeats the name HM itself? HM implys that there is no government guarantee or debt with HM, yet recapitalizations means opposite. So, recapitalizing or giving guarantee to CB is destroying the HM name itself. You can not call it HM anymore, but old fashion Keynesian government stimulus by deficit.
    Then, you are left with: is HM a technocratic solution contrasting democratic solution decided by Parliament?

    QE was technocratic solution that did not work as restarting growth, only as prevention of getting worse. But, still claimed as it was for restarting growth which is why so much debate about nothing.

  7. Just for clarity, what happens to the inflation target with Helicopter Money? Is it increased, abolished, temporarily ignored or what?

    1. HM is a way of achieving (rather than undershooting) an inflation target.

    2. Every BoE fan chart I see shows the BoE achieving or (as now) exceeding its inflation target. The BoE is happy with its current monetary policy stance. Same as the Fed. What's the problem?

  8. Slightly off the precise point of this blog but related to it:
    I have read in a few blogs recently that the effects of Helicopter Money depend on whether or not notes/coins are a liability of the Central Bank (and therefore of the consolidated account of the Treasury/Central Bank). The discussions take different views on the acceptability of this assumption. I can't make-up my mind on this. Do you have a reference to an earlier blog of yours on this aspect, or, if not, would you write one suitable for dummies? Thanks.


  9. I am not sure the main point being made: is it that BoE independence precludes central governments implementing a form of HM in the future if conditions require, or what precisely?

    Most mainstream economists, including within the BoE, appear to now recognise the limitations of QE (pushing on a piece of string etc) and its adverse distributional impacts in favour of existing asset holders; and the imperative to no longer rely on private credit expansion to secure sustainable growth; it follows that targeted and managed public credit expansion must take up the slack in the future; what needs to be determined and debated is by what sustainable mechanism that expansion be managed and controlled that is politically acceptable in the broadest sense, including consistency with the BoE inflation remit.

    Would Andy Haldane object in the future to a BoE purchase of bonds issued to establish a National Housing Bank with a tightly drawn statutory remit to help secure the steady state annual 250,000 new dwelling supply the wider economy requires, or, the short term, BOE purchasing or guaranteeing bonds issued by housing associations in order to assist them to increase supply,

  10. Agree fully with your plea for sanity regarding ICB and HM. Problem is many have forgotten rationale for ICB (or will not repeat it): Keep the politicians away from stabilizing the economy)
    For an historical account of the discussion leading up to Fed independence, see this one-pager from Levy Economics Institute

    It shows that CBI was historically motivated, but not necessarily a good principle forever

  11. I had a rough time following you. Maybe I've been reading too much Bill Mitchell. Anyway, why can't the UK or any other monetary sovereign inject money into the private sector without issuing any debt? The money supply increases and, presumably, so too does demand for provisions and services. Inflation occurs when said demand overwhelms the ability to supply provisions and services. The last time that happened was when we all rode unicorns to work. In a word 'never.'

  12. To Chris Herbert,
    I think you gonna find answer here:
    What is your opinion to this information?


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