The 1970s in the North Atlantic saw inflation rates that were unpleasantly high--from the perspective of bankers that had made many fixed-rate mortgages, borrowers who found initial amortization burdens very high, and voters who viewed inflation as a signal that they should throw the current group of bastards out of office, as they had failed to deliver on their promises of producing economic stability and prosperity). That, plus Ayatollah Khomeini's Iranian hostage takers and General Galtieri's Argentinian-Falklands sheep stealers, gave us the era of Reagan and Thatcher.
The Reagan-Thatcher era produced a near-consensus diagnosis that one of the key root of the problem was the central bankers who made monetary policy. Central bankers were too unwilling to send economies into recession in pursuit of price stability, because they were too responsive to politicians in office eager for an--ultimately counterproductive--short term economic sugar rush. Thus central banks ought to become independent: insulated from politicians in office, and by themselves solely responsible, without having their elbows joggled by anyone, for achieving rough price stability and something close to full employment on average. So began The Age of the Central Banker.
Came the year 1999, and those in the North Atlantic who were then discussing these issues of monetary policy institutions and procedures looked across the Pacific Ocean at Japan. Japan was then just ending its first lost decade. Some--cough Paul Krugman cough--looked at Japan's stagnant economy, ongoing deflation, and bond prices that were higher than anyone had expected to see and were kissing the zero nominal lower bound on short safe interest rates. Krugman and his spear-carriers concluded that central banks in situations like that of Japan in 1999 faced a very difficult problem--that unless they could somehow "credibly promise to be irresponsible", their policy tools lacked traction and they could not fulfill the macroeconomic stabilization responsibility that they had been exclusively assigned post-1980.
Thus central bankers needed help from the rest of the government. Unless they were seen as responsible enough for their promises to be credible and then made credible promises to be irresponsible that somehow did not disrupt their initial reputation for responsibility, then large-scale borrow-and-spend by the rest of the government was needed: "fiscal expansion is the only way out."
Ben Bernanke, in response, took on the very hazardous job of arguing that Paul Krugman was wrong. Bernanke argued that central banks could still do their stabilization policy job without gaining a reputation for responsibility to give them credibility and then using that credibility to promise to be irresponsible without, somehow, that irresponsibility undermining their credibility. Central banks could, Bernanke argued, take powerful steps to "increase nominal aggregate demand and the price level" and could do this "despite the apparent liquidity trap". His argument, Bernanke said, was "an arbitrage argument—-the most convincing type of argument in an economic context":
Money, unlike other forms of government debt, pays zero interest and has infinite maturity. The monetary authorities can issue as much money as they like. Hence, if the price level were truly independent of money issuance, then the monetary authorities could use the money they create to acquire indefinite quantities of goods and assets. This is manifestly impossible in equilibrium. Therefore money issuance must ultimately raise the price level, even if nominal interest rates are bounded at zero. This is an elementary argument, but, as we will see, it is quite corrosive of claims of monetary impotence....
[A] strategy which does not rely at all on [annoying other countries via] trade diversion is money-financed transfers to domestic households—-the real-life equivalent of that hoary thought experiment, the “helicopter drop” of newly printed money. I think most economists would agree that a large enough helicopter drop must raise the price level. Suppose it did not, so that the price level remained unchanged. Then the real wealth of the population would grow without bound, as they are flooded with gifts of money from the government—-another variant of the arbitrage argument made earlier. Surely at some point the public would attempt to convert its increased real wealth into goods and services, spending that would increase aggregate demand and prices. Conversion of the public’s money wealth into other assets would also be beneficial, if it raised the prices of other assets. The only counter-argument I can imagine is that the public might fear a future lump-sum tax... inducing them to hold rather than spend the extra balances. But the government has no incentive to take such an action in the future, and hence the public has no reason to expect it...
That is helicopter money.
We can see Krugman in 1999 as arguing that the ceding of plenary stabilization policy power to central banks and monetary policy had been a mistake: that in an age of depression economics and [liquidity traps] central bankers simply could not do the job without the unlikely and extremely difficult "credible future irresponsibility" high-wire act. Thus the hope that policy could be both apolitical and technocratic and effective (as it would be made by independent central banks) was vain. Bernanke, in response, was trying to split the economic policy atom: central banks willing to undertake money-financed transfers to domestic households could do the job, and do it without invoking the rest of the government and so getting entangled in the Romulus's sewer that is standard politics.
In so doing, Bernanke was echoing his teachers' teachers' teacher Jacob Viner's policy recommendations for how to handle the Great Depression of the 1930s. As Viner's student (and Bernanke's teachers' teacher) Milton Friedman put it:
[In] the intellectual climate at Chicago... my teachers... issued repeated pronunciamentos calling for governmental action to stem the deflation... "large and continuous deficit budgets to combat the mass unemployment and deflation of the times... Federal Reserve banks systematically pursue open-market operations with the double aim of facilitating necessary government financing and increasing the liquidity of the banking structure."... [John Maynard] Keynes had nothing to offer... us.... [From a] talk [Jacob] Viner delivered in Minneapolis on February 20, 1933, on "Balanced Deflation, Inflation, or More Depression":
It is often said that the federal government and the Federal Reserve system have practiced inflation during this depression and that no beneficial effects resulted from it. What in fact happened was that they made mild motions in the direction of inflation, which did not succeed in achieving it.... The simplest and least objectionable procedure would be for the federal government to increase its expenditures or to decrease its taxes, and to finance the resultant excess of expenditures over tax revenues either by the issue of legal tender greenbacks or by borrowing from the banks...
Thus the idea had a long, and one would have thought an impeccable right-wing pedigree. Helicopter money--printing up money, and either giving it directly to households, or giving it to the rest of government and having it buy things directly with it without changing the trajectory of interest-bearing debt and so getting it into the hands of households--would allow us to preserve our current institutional order, keep macroeconomic stabilization policy on a technocratic basis, avoid burdening future generations with the task of amortizing interest-bearing debt that comes with expansionary fiscal policy in its standard form, and still effectively nudge total economy-wide spending to the sweet spot where there is neither deflationary excess supply of or inflationary excess demand for currently-produced goods and services. What's the downside? And if Milton Friedman was for it, who on the political and policy right could possibly be against it? And why?
Well, those of us who have been following the extremely sharp Adair Turner's lead on this issue have been trying to figure that out for quite a while now. And, I confess, we do not seem to be having much success.
Simon Wren-Lewis finds critics of helicopter money to be painfully and irritatingly eager to miss the point:
I am tired of reading discussions of helicopter money (HM)... [like:] 1. HM is like a money financed fiscal stimulus. 2. HM would threaten central bank independence. 3. So HM is a bad idea.... These discussions never seem to ask... why we have independent central banks (ICB).... 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....
Now [for] (2)... it seems almost that just mentioning ‘fiscal dominance’ is enough to frighten the horses.... Imagine the set of all governments that would refuse a request from an ICB for recapitalisation during a boom when inflation was rising--[the] 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.... 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...
And Adair Turner makes the point that the problems of institution design needed to avoid excessive money printing and distribution via Helicopter Money when the economy is at the zero lower bound and in a liquidity trap are no different in kind than the problems of institution design--problems successfully solved--of eliminating the bias toward excessively-low interest rates and excessively-large open market operations on the money stock that were diagnosed in the 1970s:
Money-financed fiscal deficits--more popularly labelled “helicopter money”--seems one of the few policy options left.... The important question is political: can we design rules and responsibilities that ensure monetary finance is only used in appropriate circumstances and quantities?... [Will,] once the taboo against monetary finance is broken, governments... print money to support favoured political constituencies, or to overstimulate the economy ahead of elections?... This risk could be controlled... [by] the design of rules and responsibilities that can convince people monetary finance will only be used in appropriately moderate quantities.... It is precisely because central banks have warned for decades that monetary finance is so dangerous that it must be prohibited, that any mention of it now evokes lurid analogies about “central bankers throwing money out of windows”. But if we can shift from a total ban to tightly defined discipline, people receiving newly created money will spend enough of it to give us a useful addition to the policy toolkit...
Some criticize helicopter money on the grounds that what we really need is old-fashioned expansionary fiscal policy: simple borrow-and-spend. But in the political world in which we live, we saw Paul Ryan from his U.S. House of Representatives Speakership, George Osborne from his British Exchequer Chancellorship, and Angela Merkel from her German Chancellorship all insist that expansionary fiscal policy would be fine if government debt were low but was impossible because of the risks of adding to the interest-bearing government debt now that the debt was relatively high. If you want expansionary fiscal policy, but acknowledge that the political lift is sisyphean in today's environment, helicopter money is not a substitute but is instead the answer: it allows higher government purchases without adding to the interest-bearing government debt or the amount the government has to pay back in amortization at all. So that objection remains a mystery to me.
The argument that just as we trust our technocratic central banks to set interest rates, so we can trust our technocratic central banks to mail out helicopter-money checks out of their past seigniorage earnings of the appropriate magnitude to households every quarter seems to me to be completely convincing. Yet others find it not so:
[A] large public-debt burden is dangerous precisely because of its potential to spur inflation, through the monetization of the debt. In this context, introducing MFFP--a policy that is even more likely to destabilize prices--seems dangerous. Japan has made this mistake before. In 1931... Finance Minister Korekiyo Takahashi used debt-financed fiscal expansion to bring about a domestic economic revival.... Takahashi... [attempted] to rein in spending... in 1934 he attempted to do just that. His focus on reducing military expenditure, however, attracted strong opposition from army officers, who assassinated Takahashi in 1936. His successor allowed the military budget to swell, funded by newly created money. This stimulated rapid inflation...
To this, I have only one response: a focus on preserving central bank independence seems seriously misdirected and largely beside the point when your root problem is that junior army officers are assassinating your cabinet members.
Distributing largesse financed by the central bank would have dangerous systemic consequences.... It would create perverse incentives.... Policymakers would be tempted to resort to helicopter money whenever growth was not as strong as they would like, instead of implementing difficult structural reforms that address the underlying causes of weak economic performance.... Actors’ risk perception would thus be distorted, and the role of risk premiums would be diminished.... The depletion of valuation reserves and the risk of negative equity... could undermine the credibility of central banks and thus of currencies.... It seems clear that helicopter drops should, at least for now, remain firmly in the realm of academic debate...
To this I have two responses:
The argument sounds scarily like arguments made in the 1920s for the gold standard, and for the toleration of mass unemployment. The argument was that any abandonment of a fixed-parity peg to gold would send policy on a confidence-destroying inflationary spiral. Why? Because designing institutions to manage a fiat currency was an impossible task. Now that we have designed--perhaps overdesigned--instutitions that can successfully target a low inflation rate, we see the same arguments that told us our current monetary policy institutions were impossible deployed again. This seems grossly shortsighted. And, as Adair Turner pointed out, it was not the inflation of the early 1920s but the deflation of the early 1930s in Germany that swung the plurality of the German electorate to the side of Adolf Hitler and his Nazi Party. Whatever the costs of excessive inflation via institutional failure, in the twentieth century the costs of excessive deflation via institutional failure appear to have been far worse.
I have to note the mirage of "structural reform"--the claim that instead of aiming at full employment one should aim at reforming government policies toward subsidies and rents in order to bring prices in line with social values, to encourage the migration of labor out of subsidized low social-value uses into more productive industries. Every month seems to bring me a new working paper bearing evidence that "structural reform" in a low-pressure economy is likely to be a disaster. Only when macroeconomic balance is successfully attained will "structural reform" see the migration of labor to capital to higher social value expanding sectors, rather than into the zero social value sector of unemployment and the scrap heap.
Right now the modal projection by participants in the Federal Reserve's Open Market Committee meetings is that the U.S. Treasury Bill rate will top out at 3%/year this business cycle, and it would be a brave meeting participant who would be confident that we would get there--if we would get there--with high probability before 2020. That does not provide enough room for the Federal Reserve to loosen policy by even the average amount of loosening seen in post-World War II recessions. Odds are standard open market operation-based interest rate tools will not be able to do the macroeconomic policy stabilization job when the next adverse shock hits the economy. If we do not now start planning for how to implement helicopter money when that shock comes, what will our plan be?
: https://mainlymacro.blogspot.com/2016/05/helicopter-money-and-fiscal-policy.html (Simon Wren-Lewis: Helicopter Money and Fiscal Policy (May 20, 2016).)
- Helicopter Money?
- Fiscal Policy?
After Bernanke and Turner made a case for helicopter money, the centrist establishment has rushed to condemn it as wrongheaded and/or unworkable. But in a world in which expansionary fiscal policy is a sin because one must never allow the interest-bearing debt to rise, why?
- Stephanie Flanders: The Hurdles to ‘Helicopter Money’ Are Shrinking
- Willem Buiter: EU and China Ought to Use Helicopter Money
- Ben Bernanke: What Tools Does the Fed Have Left? Part 3: Helicopter Money
- Neil Irwin: Helicopter Money: Why Some Economists Are Talking About Dropping Money From the Sky
- Paul Krugman (2013): Helicopters Don't Help: Talk of "helicopter money" distracts attention from the policies that would work: expansionary fiscal policy and régime change to a higher future price level target...
- Adair Turner: Helicopters on a Leash
- Adair Turner (2015): The Case for Monetary Finance—An Essentially Political Issue
- Michael Heise: The Case Against Helicopter Money: "Helicopter money" would remove pressure for much-needed structural reforms...
- Koichi Hamada: Money from Heaven?: Once the government starts monetizing debt, it cannot stop: remember how Korekiyo Takahashi was assassinated in the 1930s when he tried to stop?...
- Simon Wren-Lewis: Helicopter Money and Fiscal Policy
- Brad DeLong: Must-Read: A piece from Paul Krugman three years ago that I put aside to think about because I didn't really understand what argument he was trying to make.
- Alan Blinder (2000): Monetary Policy at the Zero Lower Bound: Balancing the Risks
- JMCB (2000): Journal of Money, Credit and Banking: Monetary Policy in a Low-Inflation Environment
- Eric Lonergan: Helicopter Money Is Different: "There are some genuine policy innovations and some old policies in new clothes..."
- Eric Lonergan: A Brief Reply to Paul Krugman on Policy Equivalence: "Helicopter money is partly useful precisely because it addresses the institutional failure of fiscal policy..."
Adair Turner, seeking supporters for his advocacy of helicopter money, recruits as authority number one Ben Bernanke. That's great! He then recruits as authority number two... me. That's not so great. There ought to be somebody of more weight and reputation--and intelligence--on the pro-helicopter money side. I wish I could do something to boost my reputation overnight (my weight is already more than high enough, thank you very much). But I can't. So all I can do is to try to become more intelligent, and think smarter thoughts about helicopter money.
Start with the observation that our current division of responsibility for macroeconomic stabilization between finance ministries on the one hand and central banks on the other is a historical accident.
Laurence Seidman (2014): Stimulus without Debt