Brad DeLong has revived an old piece by Paul Krugman on helicopter money (HM), which is correct in one sense, but I also think completely misses the point.
Cutting to the chase, I recently attended a very august roundtable discussion on HM, and the central question was: what’s the difference between a tax rebate combined with more QE, and a money-financed cash transfer from the central bank? In simplistic economic terms, the two are equivalent.
Krugman adds, quite rightly, ‘and given that QE makes no difference now (substituting one near-zero interest asset with another), what’s the difference between a money-financed transfer and a tax cut?’
Actually, everyone who thinks about this agrees that both policies are economically almost equivalent. This is why I don’t buy the whole idea of helicopter money as the financing of renewed fiscal stimulus. Renewed fiscal stimulus would either work standalone or it wouldn’t.
Krugman, and in fact Adair Turner, respond to this apparent equivalence by focusing on the idea that the base money created could be made permanent. Hence the ideas of cancelling bonds on CBs balance sheets, commitments to being irresponsible, etc. I really don’t buy any of this, either. To summarise why: nothing is permanent. Or put another way, on receipt of a tax rebate check (or transfer payment), only economists ask, ‘is this permanent?’ The rest of the world asks ‘what shall I do with it?’.
Either way, this misses the point. Helicopter money is partly useful precisely because it addresses the institutional failure of fiscal policy, it gives central banks an effective policy tool and it maintains the important institutional division of labour between fiscal and monetary authorities (Simon Wren-Lewis is compulsory reading on this – bear in mind his preferred form of HM is a direct transfer from independent CBs). We don’t have to get into philosophical differences between bond financing v monetary financing and whether money is unique.
Here are two policies: 1) CB buys government bonds with base money; 2) CB makes perpetual loans to households at zero interest rates. The latter will have v different effects to the former. The latter is HM. It is also monetary policy. The latter may be economically equivalent to tax rebates and more QE, but it is institutionally critically different: it does not require ‘coordination’ between institutions or the subordination of one to the other; it retains all the advantages of CB decision-making and independence; and it is legal in the Eurozone (where demand stimulus most urgently needed, and fiscal policy neutered by law). If you have Krugman’s ear, whisper this to him: ‘the HM you object to is a straw man’.
JP Koning makes a very similar point to Krugman in this excellent post.