The debate over helicopter money seems to have got past the ‘shock,
horror, people’s faith in the monetary system would collapse’
phase, and past the ‘it wouldn’t work because people wouldn’t
spend the money’ phase, to the ‘what happens next’ phase. And
to be fair to the critics, many proponents of helicopter money have
not been clear on this issue.
The point was put very clearly yesterday in an FT Alphaville piece
by Gerard MacDonell. Once the recession is over, there is likely to
be too much money in the economy from the central bank’s point of
view (which means, money has to be withdrawn to maintain the
inflation target). We cannot say how much, but equally it would be
wrong to ignore the problem. So what happens next?
I think I have been clear (at least recently) on this point. First, helicopter money as I see it is not a way to get inflation
overshooting by the back door. The idea that the increase in money is
‘permanent’ is meaningless, as Eric Lonergan says.
Overshooting may be a good idea, but there is no need to be devious
about it. Second, the obvious way to ensure the central bank still achieves its inflation and other objectives is to recapitalise the bank if necessary. The central bank could enforce very high reserve ratios on
commercial banks, but is that a desirable thing to do?
In my view helicopter money would
be accompanied by a commitment by the government to recapitalise the
central bank if that was needed. Yes, commitments can be broken, but
only by the kind of government that would happily revoke central bank
independence anyway.
The answer to what happens next is therefore easy. When it becomes
clear after the recession that there is now too much money in the
economy, the central bank takes it out. In other words, monetary
policy acts as normal. If the central bank runs out of assets to do
this, it gets recapitalised. Recapitalisation means more government
debt. So we can end up in a position which is exactly equivalent
to one where the distribution of money had been financed by an
increase in debt in the first place: a conventional fiscal expansion.
In this world, helicopter money is (a particular type of) fiscal
expansion by the back door. As Narayana Kocherlakota points
out, this back door method has no purely macroeconomic advantages
over the real thing. But the reason why we need a back door is
obvious right now. Economists need to get real about these political
constraints. Obsession with debt is not just based on ignorance, but
it serves an ideological purpose which is not going to go away.
Yet even if governments were not obsessed with current levels
of debt (and that is all they are obsessed by), go back to the
textbooks on why monetary policy is prefered to fiscal policy as a
stabilisation tool. One of the reasons you will find is that monetary
policy is quick to invoke, with no institutional (aka democratic)
hurdles to pass. Those who argue that helicopter money is just like
fiscal policy seem to ignore this. There is also the (obvious) point
that helicopter money allows what I call the consensus assignment to
work (by expanding the meaning of monetary policy a little beyond
interest rate changes), rather than leaving it with the rather large
Achilles Heel of the zero lower bound.
Helicopter money is
just another way of doing textbook demand management. What it does is
move around current institutional boundaries a bit, to reflect real
institutional and political constraints. There is nothing magical
about the current institutional boundaries. Perhaps if you think (as
Brad DeLong does) about the profits the central bank makes as a social
credit that gets automatically distributed to people rather than
given to an intermediary (the government), you might feel easier
about it.
