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.