Some thoughts on helicopter money

Prompted by a post by Duncan, which it would make sense to read first. Duncan argues that recent attention given to so-called ‘helicopter money’, in which central banks create money to give to either citizens or government, is unwarranted. Here I explain why I’m interested in the policy.

I would suggest that the Bank of England’s policy arsenal should be expanded to include helicopter drops (i.e. of money into citizens’ bank accounts) and overt monetary financing of either public debt or specific forms of public expenditure. Further, I think it’s an important policy which the left should positively advocate.

The best reason for this is fundamentally political, rather than economic. That is, the fear of populist governments creating hyper-inflationary environments has become deeply rooted in our collective political psyche over the past four decades. The consequence of that has been too-hawkish fiscal policy, and reliance on central banks to provide stimulus through monetary easing, effectively to compensate for an irrational obsession with a deficit.

Giving central banks such a capacity combats that political phenomenon in two ways. First, it allows money to be put toward, for example, infrastructure or innovation investment, without triggering a fear about generating debts “that our children will have to pay back”, analogies to household finances, etc. I have read that the appearance of a difference is essentially illusory, because the money created ends up on deposit in the central bank, and then attracts interest at an equivalent rate. I can’t honestly say I understand this argument (since surely the Bank creates the money to pay that interest ex nihilo, rather than it becoming an obligation on government?), or know if it’s right, but whether or not it’s true, my point in this case is more presentational.

Second, and more substantively, central banks are widely understood to be independent of populist pressures, and rather guided by independent assessments of data, theory, models etc. Thus, a decision by the central bank to create £5 billion for investment purposes is likely to generate less political suspicion — and even economic turmoil — than the same decision by a Labour government.

Imagine if such a provision had been in place before 2010. It would have made it so much more difficult (if not impossible) to understimulate the economy through austerity, because the Bank would have been able to take up the slack through helicopter money/OMF. It’s thus an institutional safeguard that the left should welcome, against the “deficit deceit”, and pseudo-economic arguments being used to shrink the state.

Third, although Duncan is right to say that the consequences of unconventional monetary policy have been unpredictable, the examples he gives are specific to QE itself, and the consequences of helicopter money/OMF by contrast ought to be macroeconomicly equivalent to fiscal policy (at least as far as funding state expenditure goes), as another commentor has said. And as Ambrose Evans-Pritchard has argued, surely it’s better that the Bank have the opportunity to use this sort of policy outside a drastic crisis in order to be able to evaluate its impact on a relatively minor scale before it is called upon to use it in extremis.

Fourth, we have a situation where decisions about a “long and variable” impact policy are taken on a monthly and independent basis to target inflation, but decisions about the sort of policy which has a fairly well-defined impact are taken yearly, under political pressure, and to target growth and social objectives. Put like that, the division seems to make little sense. It was an understandable response to the political economy of the 1970s, but we can legitimately question whether it makes the same sense today.

This is all the more true because one of the impacts of this peculiar division has been that political pressure has dampened public spending, leading to the general decline in interest rates during the “great moderation”, which in turn stoked private debt-based economies on both sides of the Atlantic. As well as fuelling rapid and socially destructive real estate inflation, the margins of the debt economy sparked the 2007 crisis, which was as deep as it was partly because of high private debt. Meanwhile, public investment was too low, as frequent surveys of the state of public infrastructure in the US show. So considered in the long view, the consequences of this division of roles look rather mixed. The great majority of private borrowing is not used for investment, but consumption and real estate, particularly residential real estate. (So when the central bank wants to take inflationary action, it is hampered not only by the zero lower bound but must also, presumably, be mindful of the negative externalities, if you will, of lower rates — more private debt, more expensive housing, etc.)

Introducing the helicopter money/overt monetary financing capacity would allow central banks to act independently to directly increase investment and stimulate the economy, but without fuelling private debt and real estate inflation, both of which can have deleterious consequences, as we’ve seen. In order to allow this, a national investment bank could be established in order to generate a pipeline of projects ready to fund (they could each have pre-evaluated spending schedules to help the Bank evaluate potential inflationary impact).

Currently QE is the most important form of unconventional monetary policy to have been legitimised since 2007, but it is also, among several options, the one most likely to entrench or exacerbate wealth or income inequalities.

Obviously all this would make the management of national economies much more technocratic and less political. And sure, there’s a huge debate there. But at the moment I think it would be the left who would gain.

Fifth, I think it’s telling that the most common response to talk of helicopter money amounts to “it’s not necessary” — for example, the governor of the Bank of Japan in a Radio Four programme on negative interest rates broadcast earlier in the week — rather than “it’s actually a bad idea.” But why be so afraid of it? The Australian government used what amounts to a helicopter drop just after the global financial crisis hit, making two rounds of payments directly into citizens’ bank accounts in 2008 and 2009 — including AU$900 for every person earning under $100,000 per year at a total cost of $42 billion — and the sky didn’t fall in. As a form of stimulus it seems clearly more egalitarian than QE, and probably more predictable too. Why not give central banks the ability to test and evaluate that proposition?

It’s often said that fiscal policy should take up the slack. But saying governments should stimulate fiscally doesn’t get us out of a situation in which they don’t for structural and/or extremely persistent political reasons. In fact, in a subsequent post, published after I started writing this, Duncan makes a similar point. This sort of policy seems a natural antidote to that.

Adair Turner’s recent book Between Debt and the Devil is all about this. I highly recommend it.

Caveat: I’m an interested amateur with an undergraduate degree, not a professional economist. (Minor edits, mostly for grammar and structure, made since publication.)