UK helicopter money: a solution in search of a problem

Talk of UK helicopter money is whirring up again. I can’t really see why.

Sure, there’s a case — in extremis — for a central bank to create money and either buy and cancel government debt (effectively financing government spending through money creation) or give it directly to households if the outlook warrants such steps.

The UK outlook does not currently warrant such steps. We may be heading into a recession — certainly lots of the early indictors point that way — or into a pronounced slowdown. There certainly needs to be a macro policy response: but helicopter money is a toll you use when you have ran out of other options and the UK is far from that.

The fact that people are once again discussing helicopter money — and indeed negative rates — represents a huge failure of fiscal policy.

I’m reminded of 2012 and 2013 when the UK policy debate started discussing all kinds of unconventional monetary policy moves whilst entirely conventional fiscal policy tools apparently remained off the table.

It’s particularly annoying that the UK is having this debate (again). In the US a dysfunctional Congress makes fiscal policy harder to move. In the Eurozone an incomplete economic union coupled with ill thought through rules limits fiscal policy space. In Japan government debt is already eye wateringly high. None of this limitations apply to the UK.

Government debt compared to the size of the economy remains higher than recent experience but still manageable (and low historically speaking). Borrowing costs are at historic lows. The country has obvious needs for short term growth boosting and longer term productivity enhancing investments in transport and energy infrastructure and housing.

To rely on the Bank of England to dig the economy out of its Brexit induced hole is an abdication of responsibility.

From a macro point of view, there are three good reasons to favour old fashioned fiscal stimulus over new-fangled monetary innovation at this juncture. None of which should be taken to mean monetary policy shouldn’t be eased further — it should be and the Bank is right to be preparing a new package of easing measures for next month. The point is that the Bank can’t carry the burden alone without ending up with either helicopter money or what look to be self-defeating negative rates.

First, we don’t know the long term consequences of extreme unconventional monetary policy. We do know it is creating unusual side effects — like trillions of dollars of negatively yielding bonds or an impact on the emerging economies that may now be spilling back over onto global growth. The Bank for International Settlements has been warning of these side effects for several years. It is an institution with a reputation that goes in cycles. For years at a time it is regarded as a naysayer or a quasi-Austrian voice calling for less easing, then a crisis hits and years later policymakers start to say ”maybe the BIS had a point after all”. You don’t have to be a full Hayekian to worry that extraordinary monetary policy maybe be stacking up new problems and asset bubbles for the future.

By contrast we know how fiscal stimulus works, we know how to turn it off and we know what happens when you do. It is the safe and tested option.

Second, from the point of view of the global economy a fiscal stimulus would be preferable to a monetary-only one. This point is still controversial. It risks being discredited by too many people shouting “currency war” at every bout of monetary easing. That is indeed unfair/

But Summers and Eggertsson are surely onto something when they write:

…in the open economy, policies that are stimulative for the home economy can have very different impacts on other economies and on the choices available to other countries experiencing secular stagnation relative to what we see in normal circumstances. In general, monetary policies and those directed at competitiveness carry negative externalities, while fiscal policies and policies directed at stimulating domestic demand carry positive externalities. A key mechanism behind these results is a mechanism that is normally not front and centre because interest rate can adjust freely. A key consideration is the effect a given policy has on interest rate differentials, and thus capital flows between countries, which may exaggerate or make better the mismatch between desired savings and investment in a given country. But this mismatch is at the heart of the secular stagnation problem. Expansionary monetary policy, for example, tends to lead to lower interest rates in the country pursuing it, leading to capital outflows, worsening the saving investment imbalance of the trading partner and thus creating a negative externality. Meanwhile, fiscal policy, in contrast, tends to lead to higher real interest rates in the country pursuing it — triggering capital inflows thus reducing the desired savings investment mismatch of the trading partner. In a positive sense, the fact that fiscal policy benefits spillover across countries explains why the world has relied more on monetary policies relative to fiscal policies in the wake of the Global Crisis. In a normative sense, our findings point towards the desirability of a robust fiscal response that is coordinated across countries.

Finally, one of the most pressing (and still under discussed) issues in the global economy today is a global shortage of safe assets. Savers desire to hold some of their savings in something safe — there simply aren’t enough of those assets being supplied (and an increasing proportion of them are now owned by central banks). That puts downwards pressures on real interest rates, raises issues of financial stability, strains monetary policy and can act as a drag on global growth.

Helicopter money won’t help with the safe asset shortage — indeed it could make it worse. By contrast the UK government committing to a infrastructure spending programme funded by borrowing would actively help increase the global supply of such assets.

We may well reach a time when fiscal policy is tapped out and when every other monetary policy tool has been exhausted. But we aren’t there yet. Those calling for the Bank to ready the helicopters would be better advised to pressure the Treasury to take its role in managing demand seriously.