Fiscal policy: a brief reply to Duncan Weldon

Duncan Weldon has written a very perceptive blog, arguing that helicopter money is ‘a solution in search of a problem’ – what we really need is effective fiscal policy. In one sense, Duncan is spot on. A smart fiscal policy could almost certainly raise global aggregate demand. There is no financing constraint on governments when interest rates are near-zero, and bond yields out to thirty years and beyond are at negative or zero real yields.

Where I diverge from Duncan is over the role of helicopter drops. Simon Wren-Lewis has addressed the division of labour between fiscal policy and helicopter money very articulately: helicopter money is not a substitute for fiscal policy, nor should it be about financing government expenditure. No – we need helicopter drops to strengthen the armoury of central banks, to whom we have delegated the counter-cyclical heavy-lifting.

Confusion arises because there are two meanings usually attached to helicopter money. One meaning, which focuses on ‘permanent’ financing of fiscal policy is indeed a complete distraction – governments in the developed world face no financing constraints.[1]

There is another deeper – and obvious – problem. The challenge facing fiscal stimulus is not financing, but that it doesn’t happen. Most of the developed world can’t agree how it do it politically. In the area of the world most in need of higher aggregate demand – the Eurozone – it’s illegal. Even Larry Summers has given up on infrastructure spending as a practical counter-cyclical stimulus. We really don’t want to have to wait for agreement on building airport terminals or high speed rail links to bring down unemployment. If that is our fate, depression beckons.

Now don’t get me wrong. We should have effective fiscal policy. We should be doing lots of spending on infrastructure and human capital. But so far, that appears a pipe dream. The political and institutional reality means that the only effective counter-cyclical agents are central banks. Perhaps, the new Conservative government or a reinvigorated Abe will prove otherwise – but I wouldn’t count on it.

My view of helicopter money directly descends from Milton Friedman. This is the second, distinct, sense in which the term is used – transfers from the central bank to the private sector financed by base money creation. Duncan like many others doesn’t emphasis this distinction. Central banks need to own the timing and quantity of any stimulus because they have distinct institutional credibility and status, and greater efficacy in decision-making.

Now frankly I don’t care if we choose to define this as ‘fiscal’. I think this is inaccurate. Friedman provides the example of money-financed transfers as evidence that monetary policy always has potency. But this is semantics.

If you insist on thinking of all money-financed transfers as ‘fiscal’, at least accept the institutional distinction. Central banks are not treasuries. They make huge decisions after a single conference call. Their actions take immediate effect, can be calibrated, repeated and reversed. They have access to finance without needing access to markets – via the printing press. This is also why they are independent (and why Otmar Issing has a point).

What central banks – and our economies – need are more effective tools than the overnight interest rate. Fortunately, we have these tools. The debate about helicopter money needs to move on. The financing of fiscal policy is a distraction. The problem with fiscal policy is the apparent paralysis of the relevant authorities.

What we need to recognise is that for Europe to exit its near-depression we need more aggressive transfers from the ECB direct to the private sector. Ditto if we want to raise spending in Japan, or if there is a negative demand shock in the rest of the world.

Finally, a word on the ‘demand for safe assets’ which Duncan alludes to. There are many problems with this. Firstly, asset pricing is hugely behavioural – demand is created by prices rising, and vice versa. ‘Safety’ in this context is a completely misnomer. But as a policy prescription, the idea that we should issue more safe assets is circular – a sustained and robust recovery will cause a collapse in demand for ‘safe’ assets – which is precisely what we want.

Duncan’s further reflections on the disappearance of ‘deficit bias’.

[1]The Ricardian story is more about irrelevance than equivalence.

About The Author

Eric Lonergan is a macro hedge fund manager, economist, and writer. His most recent book is Supercharge Me, co-authored with Corinne Sawers. He is also author of the international bestseller, Angrynomics, co-written with Mark Blyth, and published by Agenda. It was listed on the Financial Times must reads for Summer 2020. Prior to Angrynomics, he has written Money (2nd ed) published by Routledge. He has written for Foreign AffairsThe Financial Times, and The Economist. He also advises governments and policymakers. He first advocated expanding the tools of central banks to including cash transfers to households in the Financial Times in 2002. In December 2008, he advocated the policy as the most efficient way out of recession post-financial crisis, contributing to a growing debate over the need for ‘helicopter money’.

7 Responses

  1. Brad culkin

    Minsky said a functional definition of a Ponzi is a financial entity that can only meet short term liabilities by selling assets. A Minsky instability occurs when banks lend to price speculators against speculative assets as collateral. Banks lend, price climbs, banks lend more, price climbs more, etc. we are in the end phase of such a cycle and our economy is populated with many Ponzi actors. So the stage is set for a debt deflationary cascade of forced asset sales by ponzi agents. This the CBs understand. Any move that dents asset prices is a trip wire to such a selling cascade. Hence CBs support asset prices. Helicopter money addresses the lack of aggregate demand. It does not directly save the Ponzi cohort, in fact as you say it reduces demand for selected assets. We have wars because in war saving the Ponzi cohort is viewed as treason.

  2. Habeas Corpus

    Very pleasing to see someone allude to the large behavioural element in asset pricing, as well as comsumer demand. Partly why the focus on official policy rate cuts to near zero or negative levels is so much spent effort (as your last article mentioned with Japan’s example).
    Couldnt agree more on the need for the ECB to be far more aggresive on the terms of their TLTRO programme, the current tranche-II is far too timid. That said I still carry a somewhat dim view of the Eurozone’s prospects with its fiscal and political deficit, not to mention the actions of supranationals. c.f. The Independent Evaluation Office of the IMF’s July 8 report (

  3. BillP

    Isn’t part of the demand for ‘safe’ assets likely to stay in place even in the case of a robust recovery as it’s partly driven by regulatory requirements (or pressure) to hold specific types of assets?

    (I apologise for asking this with such a delay – but I’ve become such a fan of the blog, I’ve gone back and starting reading all posts since its start!)

    • Eric Lonergan

      Hi Bill,

      Very fair point. My thinking is that there is not just regulatory demand. A lot of the demand is voluntary private sector demand due to the recession-insurance properties of bonds. The further we depart from the recession the lower demand will be.


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