Like I ranted yesterday, GDP is a very poor way of measuring how certain things are getting better.  And my absolutely favourite example is how the Internet has revolutionized the ability to interact with and eavesdrop upon thinkers and teachers – whom one would previously have had to ambush in some University corridor.

An example has arrived on this blog: Canadian Professor Nick Rowe of Worthwhile Canadian Initiative (an injoke for Canadians) clarifying some thoughts on this blog about where Fiscal Policy becomes Monetary Policy. In so doing, he links to a post of his from last year where the issues are first presented and then discussed in (what is for me) bewildering detail. Some but not all of the insights can be boiled down to this comment: ‘So if there’s no danger of inflation, on the margin, go ahead and print!’.

The question, however, is what you call that.  Vimothy – another clearly very learned fellow – has been getting stuck in on this question, writing this interesting paragraph:

A helicopter drop would be a fiscal operation with no offsetting bond issuance. It would place downward pressure on the CB’s target rate (which is why, in the MMT narrative, fiscal policy is accompanied by bond issuance–its an “interest rate maintenance account” in MMT jargon), but it would ensure that everyone is disabused of the notion that government borrowing funds its spending, and it would deny the bond market its corporate welfare

All of this interests me deeply, because I am meant to occupy that vital slice between monetary experts like Nick and vimothy, and the political class that needs to choose and also sell the right policies to their suspicious electorates.   My basic intuition is: if we are deeply below our Aggregate Supply curve, boosting aggregate demand is the answer – but how can we do this?  I.e. this is where I think we are – the dotted line:

(whereas supply side miserabilists like John Redwood think we are always at the vertical bit of the supply curve). I tried in ‘Credit Where It’s Due’, with my suggestions for things like the purchase of Covered Bonds (making mortgage lending cheaper); a National Infrastructure Bank; or even the straight purchase of banking equity (which could be just handed out to the public – that last idea is the closest I come to helicopter money).  But on this question of whether printing money and leaving it out there in the real economy is Fiscal or Monetary policy, I fudged the issue, with ‘quasi-fiscal’ or (borrowed from Nick) ‘fiscal dominance’.

So. Getting to the point.  First question: If you print money, and spray it out of a helicopter (without asking for it back later) what do you doing?  If the ‘spraying’ is just enabling the government to do the same things while issuing fewer bonds (bonds being: things you have to pay back, money being: stuff they don’t need to pay back), then it seems like monetary policy.  The shape of the government’s liabilities has changed, and future expectations of the money supply and NGDP have surely changed.

But this ignores the insight of note 11 of this IMF document: that this is a transfer to the public.  Those people standing under the helicopters see their asset position improve, surely?  If they are debtors, the extent to which their future indebtedness is going to weigh on demand is surely lessened.  ‘Hey Mom! I found a thousand pounds under the hedge!  We can go on holiday after all!’, and so on.   If you are convinced by Richard Koo’s analysis of Japan, then such balance sheet effects are surely critical.  Whereas the monetarist interest on changing people’s expectations of future economic demand can seem rather secondary if you have ASSETS/LIABILITIES of <1 …

Which leads to the second question.  Suppose we agreed we were in the situation above.  We agree with Nick (and Scott Sumner, and others), that this is absurd – we have a money printing press, surely that thing can boost aggregate demand somehow?  But how do you sell that idea to the public?  ‘We’ll spray money out of helicopters’ annoys those who don’t really need the money.  It also lessens discipline, to put it mildly: we have a political class that collectively dodges questions of spending cuts – and yet here I am, saying ‘Print money, spend it’ – a classic invitation to avoid thinking about hard things.

I am genuinely very interested in your answers.


19 thoughts on “If the answer is Helicopter Money, how do you sell it?

  1. The same way you normally get someone to change their mind about something. First you repeat their argument back to them, to show that you understand why they think what they do, and appreciate it, then you explain why, nevertheless, it’s wrong. So:

    First you explain why helicopter money is normally such a very bad idea, because it will only cause inflation. You take the Zimbabwean bull by the horns, and look it square in the face (umm, mixed metaphors?). This is something the MMTers are always afraid to do (they freak out when you mention Zimbabwe), and that’s because (in my opinion) they lack a theory of the Phillips Curve.

    Second you explain why the current times are not normal; why adding heat when you would otherwise be cold is different from adding more heat when you are already too hot. (Only get a better metaphor).

  2. And check out the Australian cheques. Very early in the financial crisis, the Aussie govt mailed out cheques to everyone. Looks to me like a helicopter drop. And Australia did very well compared to other countries. Did the cheques check the recession? Dunno. Maybe.

  3. And, you are right that traditional monetarist analysis ignores those balance sheet effects. And they are probably important. But I think a deeper “monetarist” analysis can take them on board and better explain *why* they are important.

    Recessions (general gluts of goods) are always a monetary exchange phenomenon. If we could do barter, we wouldn’t have them. In recessions, some people have a deficiency of the medium of exchange, so are forced to resort to direct barter (which is horrendously inefficient, of course), or else stay unemployed. The helicopter (Aussie cheques) flies over *everyone*, and so must fly over those people who have a deficiency of medium of exchange. Standard Open Market Operations (etc.) cannot do this. They only offer the medium of exchange to those who don’t need it.

    (Notice that “money” (medium of exchange) and “wealth” are not the same thing. I can have loads of very valuable assets, but if I have no money, and if the people around me are in the same boat, we are screwed. Because we can’t buy and sell those valuable assets (except by barter, which doesn’t work). Think of an unemployed person with very valuable human capital.)

    1. I see what you mean, though I think some of the extremists in that camp (we always think Tim Congdon on this side of the Atlantic) have in my view given the position a bad name, by seeming to imply that all recessions are always about there not being enough liquidity, regardless of animal spirits, balance sheets, scary headlines, etc.

      I still lack the tools for telling whether it is a ‘bad expectations’ crisis or a ‘not enough liquidity’ one – but I found that Bank of England surveys during the crunch suggested the former took over from the latter – ‘I could get a loan if I wanted one, but who wants one?’.

  4. Maybe the good Professor did not remember the Albertan ‘Social Credit’ initiative of the 30s which ran into Canadian federal opposition and foundered, leaving the state owned conventional bank Alberta Treasury Branches behind as a reminder.

    Social Credit was a policy creation of a british engineer, Colonel C H Douglas, who correctly identified that purchasing power continuously drains out of economies, and advocated that Treasuries should distribute credit as necessary via local Treasury branches. His A + B Theorem’ analysis is pretty obscure, but no more so than econometrics, and his technocratic and top down engineering approach has never been implemented.

    Since my experience is purely empirical – based on 25 years of practical experience of market regulation and development, and particularly the effect of the internet on market architecture – I realise that this means I am not a ‘serious person’.

    But IMHO the logic of the Internet is dis-intermediation, and there is no reason at all why UK Treasury Branches should not create the necessary public credit required for the circulation of goods and services and the creation of productive assets in public or private ownership. No deposits are needed for this credit creation and ‘credit clearing’ function, and the beauty of it for banks operating as service providers is atht the only capital they will need is that necessary to cover operating costs.

    Such a system – which would be a transitional step as the networked economy develops further – would require an accountable Monetary Authority to oversee the system and set parameters for banking service providers. But there is no need for a central bank, and indeed teh absence of one has done Hong Kong no harm.

    Such Public Treasury Credit would be interest-free, but there would be a service charge to cover
    costs, and a payment made to the Treasury in respect of the implicit public guarantee. In addition to covering costs, banks could also be rewarded on a performance basis in relation to the relative absence of defaults.

    Once productive assets are complete they would then be refinanced by investors, and this is where the need for deposits/investments comes in. This refinancing enables the Treasury credit to be retired and recycled.

    A helicopter drop of public credit would not necessarily increase consumption much, since most people would probably use it to pay down debt, and having done that, maybe even to save/invest. The problem we currently have is not so much income inequality as wealth inequality, and until that is addressed the system will remain mired in Zombie mode at best and depression/insurrection at worst, depending on whether Keynesian or Voodoo/Austrian monetarist policies are adopted.

  5. Giles:

    The question is more than one of mere semantics and word play for the gallery (i.e. the polis). Because the “helicopter drop” is just a metaphor, it matters for the actual policy enacted how we interpret that metaphor. If you think that a helicopter drop is monetary policy, you might well end up thinking that if we do lots of QE the magic of the equation of exchange will take us to higher nominal income after we’ve “helicoptered” in enough money. But there is no helicopter.

    1. Yes, and I agree that this is a “helicopter drop” (and a good idea), but it’s also obviously fiscal, raising the income of the private sector rather than monetary, raising its indetnedness.

    2. Hey, that is really flattering!

      I should be even more careful what I write. Seriously, I find reading the writings of people who are thinking aloud/trying to teach themselves, most useful.

  6. “‘So if there’s no danger of inflation, on the margin, go ahead and print!’.”

    And if there is no danger of water in the lungs impeding oxygen supply fill your lungs with it. Technically true but useless.

      1. I would have thought that, by his own lights, that is what Rowe is doing.

        I on the other hand do not believe that there are any circumstances where printing money does not cause inflation. It may sometimes take longer than at others, sometimes it may feed through to increased imports & thus a currency fall & sometimes it may even produce some short term growth which partly off sets but if you print more money you get inflation. Or perhaps you can point to a historical counter example?

      2. we’ve tripled the monetary base, and the price outcome is piddling.

        Japan did masses of QE and the price index has continued falling.

        Glad to have helped you out (for further insights: bear in mind that money is about demand as well as supply)

  7. Giles
    May I repeat on your excellent blog that the PSBR is where monetary and fiscal policy meet?
    Fund the PSBR through bank lending to the public sector and you get a fiscal and monetary stimulus. Done side by side with a grand communications campaign and you would both change expectations to the positive and provide liquidity – reversing the process that began surely around 2007.
    You do not need a helicopter or a van – you pay someone to do a valuable piece of work with a cheque drawn on the Government’s account at the Bank of England. That they are confident in their employment and the employment of their neighbours builds confidence in them as consumers, employers, entrepreneurs and investors. The money so created replaces that which has been destroyed.
    Last September there was time for an economist or two to recruit a political leader to this approach and, then, time for that leader to launch a campaign: the National Programme for Reconstruction etc. around capacity enhancing physical and social capital projects – energy, communications, transport, housing, training – that could have transformed this country.
    It is now too late. All three senior parties and combinations of the three are headed for fiscal consolidation to varying degrees and will have both a mandate for their policy and a scarcely breakable political bond with that policy for the foreseeable future.
    So, to answer your question, you can’t sell it at this stage of the political cycle. The bed has been made. Economists as well as politicians have failed the public.
    Were money supply figures published to day?

  8. Thanks for this link, Giles.
    Off topic: The photograph of Arthur Wellard in that piece is one taken at Alf Gover’s indoor school in Clapham I should think in about 1962.
    My father took me there during the Christmas holidays around those years. The first time I was put in a net with this old codger who could hardly get his arm over.
    “And what was the use of that?” I stupidly complained to my father after the net. “He can’t even bowl.”
    “That is Arthur Wellard, who bowled for England,” replied my exasperated Dad.

    But back on topic you still avoid saying why you don’t advocate bank lending to the public sector as a way of providing both the fiscal and monetary stimulus that’s needed.


    1. Yes – I have yet to get my head round it. I suspect a good reason to be careful is that with a great need to reform banking, structurally, a large bank-government balance might complicate matters in political economy terms.

      This year, I might even bowl a proper cricket ball, in the nets, at someone. Life begins at 37….

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