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’.

Postscript
JP Koning makes a very similar point to Krugman in this excellent post.

About The Author

Eric Lonergan is a macro fund manager, economist, and writer. His most recent book is Money (2nd ed) published by Routledge. He is also a supporter of Big Issue Invest (BII), the investment arm of The Big Issue, and is one of the initial limited partners in BII’s Social Enterprise Investment Fund LP. In a personal capacity, he makes direct investments in social enterprises. He also supports and advises The Empathy Museum.

30 Responses

  1. JKH

    Risking another trip around the block on this one:

    “… only economists ask, ‘is this permanent?’, the rest of the world asks …

    Total agree – but more because the concept of permanence in context exhibits zero analytical traction as referenced by those who embrace it, IMO

    “… it addresses the institutional failure of fiscal policy …”

    It doesn’t really address it – it’s a weak attempt at hijacking it

    “… it gives central banks an effective policy tool and it maintains the important institutional division of labour between fiscal and monetary authorities …”

    It gives them a policy tool – but not without strategic approval from the fiscal authority. This is a fundamental contradiction underlying the rationale for such a policy. As you say, fiscal policy has been a failure – yet this proposal for central bank authority requires fiscal authority approval. (There is no way a central bank can approach this without fiscal consultation.) Why would you expect this way to work in such circumstances?

    “CB makes perpetual loans to households at zero interest rates.”

    My interpretation of the rationale for perpetual loans is that it is a balance sheet “fix” to plug the negative equity position that would otherwise be created by HM. The problem with this is that a zero interest rate perpetual loan has a present value of exactly zero. There is no fix. The negative equity position remains.

    “… but it is institutionally critically different: it does not require ‘coordination’ between institutions or the subordination of one to the other …”

    This is wrong. It absolutely does require coordination and effective subordination – at the level of policy and strategy formulation. There is no way a central bank would be allowed to run with this entirely on its own.* Although CB implementation timing and responsibility may be independent in a well-designed policy authority.

    *The ECB is obviously a special case compared to, say, the Fed. But I do suspect elements of coordination/consultation would still be required at the policy level. I think you should treat the ECB as a special case in the context of HM.

    Reply
    • Eric Lonergan

      JKH – some good points, but you ignore two key considerations. Firstly, I have repeatedly argued that the legal/political/institutional structure of HM will vary by jurisdiction, at least initially. (And to be clear, I am v explicitly defining HM as transfers to the private sector from the CB, which already occurs via tiered reserves and the IOR). In the Eurozone, TLTROs to households are almost certainly legal. More so than OMT, QE, etc. In the UK, where the treasury sets the Bank’s objectives and the Bank operates independently, Simon Wren-Lewis, Mark Blyth and I have argued for fresh legislation – which the new Conservative government might well introduce. The US and Japan are different again. The second point you ignore is that institutional independence is everywhere a matter of degree – it is not binary. However, there are extremely good reasons for preserving a high degree of independence for CBs controlling base money. This policy may preserve maximum independence by giving them a tool that works.

      Reply
      • JKH

        Thanks for the response.

        “I am explicitly defining HM as transfers to the private sector from the CB, which already occurs via tiered reserves and the IOR.”

        IOR is not a net (HM) transfer to the private sector – because the fiscal authority in standard operating procedure ends up funding the marginal consolidated fiscal deficit due to paying IOR. It actually reverses out the potential for a marginal HM effect.

        E.g. in the case of the Fed, its expenses (including IOR, along with operating expenses such as staff salaries) represent the marginal consolidated deficit associated with the full cost of servicing the Treasury debt held by the Fed (because interest on the debt is paid and received internally and cancels out on a consolidated basis – that leaves the Fed expense side).

        (The profit remitted by the Fed to Treasury only represents a reduction in the size of the consolidated debt service cost – from what it would have been with market held Treasury debt. To the degree that the interest paid on Treasury debt held by the CB exceeds the profit remitted back, there is a consolidated marginal deficit that still has to be funded by Treasury.)

        That marginal shortfall is funded either by taxes or new Treasury debt. In either case, the effect is to withdraw the reserves (and bank money) created by IOR and other Fed expenses. So the marginal “HM effect” of IOR as it impacts money is reversed out.

        Thus, there is no net helicopter money created in existing conventional or unconventional CB operations. The system operates in such a way as to disallow it and reverse out the potential for it.

        That’s why/how CB trend reserve expansion occurs by asset acquisition – not by IOR accumulation.

        “Institutional independence is everywhere a matter of degree – it is not binary.”

        I haven’t ignored it. It’s in that context I noted that a central bank mandate to implement HM would require approval from the fiscal authority. That’s not binary.

  2. Ramanan

    JKH says: “yet this proposal for central bank authority requires fiscal authority approval. (There is no way a central bank can approach this without fiscal consultation.) Why would you expect this way to work in such circumstances?”

    Eric,

    JKH has raised an important point. How do you expect the fiscal authority to agree to this when you yourself have said that they have rejected calls for fiscal expansion?

    Moreover, such calls for HM won’t be seen positively by politicians. Comes across as tricky and they’ll feel tricked and reject both. It’s better to convince politicians for plain fiscal expansion than saying things in a roundabout way.

    Reply
    • JKH

      Agree also with Ramanan’s second point

      Coming in through the basement window is not the right solution to a political lack of understanding at the front door

      The consumer (the politician) needs to be told a straight, coherent story at the front door

      Reply
      • Eric Lonergan

        JKH/Ramanan, Thanks for those comments. I think you are both ignoring two fundamental points that I have written about before. 1) Because monetary policy has fiscal effects does not make it monetary policy. All CB policies can have positive or negative implications for its net interest income and balance sheet, that does not render all monetary policy fiscal policy; This is the ‘German fallacy’: they are objecting to ECB monetary policy because its fiscal effects are letting peripheral fiscal authorities ‘off the hook’. It is a fallacy because all monetary changes have fiscal effects. 2) All the accounting and institutional transfers and arrangements you describe are entirely contingent. The case of Europe makes this crystal clear – the ECB can do helicopter drops (arguably its latest TLTRO programme is one), but it cannot obtain Treasury approval prior to any policy. Indeed, it has institutional and legal primacy over any national treasury. All of this reverts to the definition of monetary policy, I have not seen any superior definition to this abstract (and descriptively accurate) one: monetary policy involves control over base money and is directed by the central bank. Within this definition there is a very broad range of practices. But let us be clear, helicopter money, as I have precisely defined it – transfers from the CB to the private sector – is legal in all major jurisdictions, without any requirement for Treasury approval. To my knowledge no major central bank has a requirement to be ‘profitable’ (pace Switzerland …), all central banks can introduce tiered reserves, and can pay an IOR of their choosing. This gives them power to make limitless transfers to banks. As regards transfers to the non-bank private sector, there are institutional and legal idiosyncracies – the ECB seems to have the most latitude – because it can direct the lending of the banking sector, which also gives it the legal means to make transfers to households. Banks are already being subsidised by money-financed transfers from the CB in the UK, US, Japan and Europe – that this has fiscal effects (positive & negative) is substantively irrelevant, JKH. In Europe the TLTRO has opened up a set of policies which could go further than the helicopter drops I have advocated, by permitting CB-financed loans at negative interest rates. Bear in mind, that the ECB has one overriding mandate – price stability. If price stability requires that the ECB run with significantly negative net interest income and a big increase in base money, it would be legally obliged to do this.

        There is in fact a profound, and curious, institutional conservatism in your line of reasoning. Central banks’ primary role is to print money to meet inflation targets – that is a highly restricted mandate, but with potentially very broad scope in terms of the range of permissible means. In history central banks have used a huge variety of tools to do this. Also, history by no means encompasses the full range of what they should or could do.

  3. JKH

    To take a simple Fed model, assume:

    Bond interest revenue = 10
    Expenses including IOR = 9
    Profit = 1 (remitted to Treasury)

    Then, after remittance of profit of 1, the Treasury budget includes net expenses in connection with the bonds held by the Fed of 9:
    10 – 1 = 9

    Those expenses of 9 must be covered by funding of 9 – either taxes or new bonds

    And the balance sheet effect is that what would have been an “HM” injection of bank reserves (and bank money) of 9 is reversed out by the reserve (and money) draining effect of taxes and bonds

    Reply
    • JKH

      An ECB version arrives at a similar result in a different way

      Assume for simplicity that a “normal” ECB model (i.e. ex-crisis) looks like this:
      Interest revenue from the private sector = 10
      Expenses including IOR = 9
      Profit = 1 (paid proportionately to sovereign capital key holders)

      Then, after remittance of profit of 1, sovereign budgets collectively include revenue of 10 and expenses of 9 for a net surplus of 1 – the same as ECB profit

      In this case, what would have been an “HM” injection of bank reserves (and bank money) of 9 is (more than) reversed out by the reserve (and money) draining effect of interest revenue on assets

      This again, like the Fed model, is standard balance sheet management for the central bank

      In both cases, reserve expansion does not result from IOR accumulation
      It results from conventional and non-conventional asset acquisition

      Reply
      • Eric Lonergan

        JKH – I not believe that this is the case, and perhaps more importantly it does not need to be the case. If the ECB wants to, it can pay an IOR on required reserves at whatever level it wants and finance this with reserve growth. It can request a capital increase from member states, but I do not believe that it is compelled to do so. Also, I do not believe that accounting ‘losses’ by the ECB generated in this way have mechanical fiscal implications. Certainly, they have no need to. So it is entirely within the ECB’s scope to create reserves without purchasing assets. It is also entirely within its scope to make losses which have no direct implications for member states formal budgetary positions. All of the features you describe are contingent institutional arrangements which do not change the fundamental difference in character between the money-creating ability of the central bank and debt-financed fiscal policy.

      • JKH

        An increase in the amount of IOR paid to banks directly reduces the level of ECB profit remitted to Eurozone members according to their capital keys, and therefore directly increases their fiscal budget deficits (or reduces their fiscal budget surpluses). That’s real. It’s an expense (and a redirected cash flow).

  4. Jamie

    I’m not an economist. However, discussions on helicopter money are always frustrating as they are never specific about how the policy would work. If you want buy-in to such a policy, you need to convince other people, and that required specifics.

    There are two related questions: why would an elected government agree to helicopter money; and through what specific mechanisms would the policy be implemented? These questions are related.

    One implementation option would be for the central bank to distribute newly created money directly to the general population. That seems to have been the spirit behind the original helicopter money thought experiment. However, the central bank does not have a register of the population, so that falls at the first hurdle. Such a register would take years and cost billions to set up, and would be open to fraudulent behaviour similar to any other government system which hands out money. As helicopter money is a once in a generation policy, the register would inevitably be out of date when it was needed. It’s not clear why any government would sanction the development of such a register.

    Another option would be for the central bank to give the money to commercial banks and for them to allocate the money to their existing customers. However, this would be unfair. Some people have accounts with many banks while other people have no bank account at all. For political reasons, it’s not clear why any government would sanction this option.

    That leaves us with options where the money is distributed via the government’s existing infrastructure i.e. via the tax and benefits systems or via direct government spending. The central bank would give newly created money to the government which would then distribute it as it thought appropriate. That is at least a practical proposition.

    However, this leaves open the question of whether the government agrees with the central bank’s view that helicopter money is required.

    If the government does not agree, it is not clear why it would allow its infrastructure to be used to distribute the money. And who would decide to whom the money would be distributed? And what if such a decision contradicted other government policy?

    If the government does agree, it can already fund more spending by issuing bonds and agreeing, in advance, that the central bank will buy these bonds and hold them indefinitely. In other words, it can use existing policy routes. It seems like the only practical implementation of helicopter money would be in a situation where it was not required.

    Even if my arguments are wrong, you need to spell out in detail the specifics of any implementation. Who triggers the need for helicopter money? Under what specific circumstances? Who else is involved in both the policy making and the implementation? Does anyone have a veto? What discretion does each party have in determining the recipients of the money? What distribution mechanisms are used? Etc.

    I can see that more fiscal stimulus might be beneficial. However, that is the role of the elected government. Helicopter money seems to me like a way to get round the elected government while still requiring its compliance in the implementation of the policy.

    Reply
    • Eric Lonergan

      Thanks for the question Jamie. A couple of quick key points. Governments should want CBs to do helicopter drops, if it helps the CB meet its mandate. The practical issues you describe are not trivial, but might also be easier to deal with than you suggest. For example, the ECB could use the commercial banks to implement its policy (which it already dos with its directed lending programme – the TLTRO). Say, for example, it wants to pass on a €300 perpetual, zero-interest loan, to every adult Eurozone citizen, it could pay the banks an admin fee to administer this. Banks are already dealing with anti-money laundering regulations etc. In fact, this suggests that it may be most likely that we see helicopter drops via a subsidised lending programme in Europe. For example, if the ECB offered loans to households for up to 20-years at interest rates of -2%.

      Reply
  5. Ramanan

    Eric,

    “There is in fact a profound, and curious, institutional conservatism in your line of reasoning. Central banks’ primary role is to print money to meet inflation targets – that is a highly restricted mandate, but with potentially very broad scope in terms of the range of permissible means.”

    I don’t see how that is conservative. I mean I see this HM thing as an obfuscation to really convincing that fiscal policy works.

    The central bank’s primary goal is not really meet inflation targets. It’s primary goal is about the payments system, regulation and lately financial stability, acting as the lender of the last resort. Monetary policy does impact demand management but even fiscal policy is for demand management. And the latter has stronger effects than monetary policy. I don’t know why you want to hijack it from fiscal policy and put it in the hands of central banks.

    Reply
    • Eric Lonergan

      The conservatism is your acceptance of existing central bank practice as somehow cast in stone – it’s an accident of history. You’re attachment to arbitrary definitions of fiscal and monetary policy is distinctly in the conservative tradition of institutional purpose. I struggle to see what other basis it has. (JKH?).

      Reply
    • Eric Lonergan

      Ramanan, you too must define monetary and fiscal policy before we proceed – as you are bandying the phrases around with relative flippancy – and yet it appears to be the heart of the matter. You also cannot nominate the institutional goals of central banks on the fly. I repeat, what you assert as given is institutionally contingent, and in the case of Europe flatly incorrect: the ECB’s overriding legal mandate is price stability.

      I hope you can take this on the chin. Your comments are always pertinent and thought-provoking, although we regularly disagree!

      Reply
      • Ramanan

        No dear, I am not the one bandying.

        To be clear, I think the HM proposers obfuscate the matter and prevent public officials to understand the matter. It plays on the bias. Public official will end up thinking fiscal policy is neutral.

        It’s a huge disgrace for the economics profession that it used to think that fiscal policy is impotent. Only after the crisis have economists realised their errors.

        Friedman didn’t know how money works and needed helicopters to explain … yet confusedly and to prove that money is neutral and fiscal policy is neutral and all that. It’s funny to use his language in explaining this. As I said, it plays on the bias of public officials, leaving them thinking it’s not the expenditure which is boosting aggregate demand, but the way of financing.

        About defining things. I don’t know how to argue about it. I use the language of national accounts and you don’t even think money is a liability and so on. So how do I proceed?

        The best way is for plain fiscal expansion to work and politicians to see “oh wow this works” rather than obfuscate things.

        As far as conservatism is concerned, no … not advocating it here. But neoliberalism is not the solution. I do think the central bank decisions belong to the ministry of finance.

        HM just makes it look like economists are right, politicians are wrong. It’s a clever attempt to disguise the fact that economists were wrong. Politicians are wrong because economists deceived them.

      • Eric Lonergan

        Punchy, Ramanan … I’m struggling to find a sentence I agree with … so perhaps we should move on! Always good to have a lively exchange.

  6. JKH

    Eric,

    We have different ways of interpreting the world. But it’s not necessary to come up with implicitly condescending responses like “what you’ve ignored” and “what you’ve overlooked”. In fact, I haven’t overlooked anything of importance that has anything to do with any point you’ve made. And I could say a lot more about the subject than I have. It’s a different view, that’s all.

    I agree that Koning’s post is excellent – and I agree with it.

    Reply
    • Eric Lonergan

      Let me put it another way – I think the constraints on debt issuance are different to those on money-finance, which undermines JP & Krugman’s assumption that the two are ‘equivalent’, even if in certain specific conditions they look very similar. As an institutional arrangement there are good reasons why we want governments to finance their activities with bonds, and central banks to control the supply of base money. As long as money is money – there is no real limit to its issuance. When it stops being money there is a limit – but that is a theoretical distraction. The distinction between bond-finance and money-finance is real, and I think JP and Krugman oddly overlook this (particularly as JP’s site is called ‘Moneyness’). Agree that it is excellent however!

      Reply
      • JKH

        “The distinction between bond-finance and money-finance is real”

        I agree that the distinction is real (although the fiscal implications in terms of the general level of interest expense are comparable).

        “As long as money is money – there is no real limit to its issuance”

        I mean a categorical limit rather than a brute operational limit – in the same general category for example as is the case of a central bank not creating reserves by buying shipments of cocaine (as opposed to acquiring financial assets of acceptable credit quality).

  7. If not now, when?

    […] Be that as it may, Koo is in good company. There is a surprisingly widespread view that helicopter drops are ineffective or, more precisely, no more effective than other more conventional policies such as central bank asset purchases or “quantitative easing”. Brad DeLong, in his usefully public musings about what to think, highlights Paul Krugman’s critique of helicopter money as well as Eric Lonergan’s recent response. […]

    Reply
  8. If not now, when? - Unheard Expressions

    […] Be that as it may, Koo is in good company. There is a surprisingly widespread view that helicopter drops are ineffective or, more precisely, no more effective than other more conventional policies such as central bank asset purchases or “quantitative easing”. Brad DeLong, in his usefully public musings about what to think, highlights Paul Krugman’s critique of helicopter money as well as Eric Lonergan’s recent response. […]

    Reply
  9. JKH

    http://www.theguardian.com/politics/2016/aug/03/a-post-brexit-economic-policy-reset-for-the-uk-is-essential

    “Treasury and the Bank should co-operate to directly stimulate aggregate demand in the real economy. A fiscal stimulus financed by central bank money creation … while it is a job for the Treasury to set up the framework for these policies to be deployed, it would remain a decision for the monetary policy committee as to the timing and size of any future stimulus.”

    This in my view is a responsible and disciplined approach to the specific issue. And it’s a good representation of what it means for HM to be proposed as operating within an overarching fiscal policy framework. Treasury is responsible for high level fiscal policy formulation, and the central bank is responsible for implementation through coordinated monetary financing. The interactive responsibility framework is very different from that of QE because fiscal is dominant.

    Reply
    • JKH

      And they obviously don’t get into the detail of the resulting central bank balance sheet.

      But you can bet Treasury would have quite a say in what that would look like too.

      Reply
      • Eric Lonergan

        That’s why the Eurozone institutional structure may be preferable – never thought I’d say that! Then again, it is designed to have monetary primacy.

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