Helicopter money or not helicopter money. It may be the most important economic debate of our time, but it is coming, it’s just a matter of when.
Helicopter money is so named after the late Milton Friedman, in his-life time the high priest of monetary economics, once said that in the event of a re-run of the 1930s Great Depression, if all else failed the central bank could always scatter money across the land from a helicopter.
Friedman made his famous pronouncement in the 1960s, 30 or so years later, a certain Ben Bernanke, before he made it to the exulted heights of chairman of the Fed, said there are theoretical circumstances in which Friedman’s helicopter drop makes sense.
The question is, are those circumstances with us now? To that I would say the answer is probably, but they will most certainly be upon us in a decade or two from now.
So strictly speaking, in this age of electronic money, pure helicopter money is when the central bank creates money and pays it into the bank account of every man, women and child in this country – assuming all these people have bank accounts.
Others say a helicopter drop could be used to credit the government with money. So instead of scattering the money, it is dropped into the government’s own bank account. It could then use this created money to fund spending on infrastructure, or maybe tax credits. I am not so sure that this is true helicopter money, not in the sense envisioned by Friedman.
An advantage to a central bank printing money to fund a government stimulus is that it feels more politically acceptable, easier to sell to the electorate, than government borrowing. Indeed, the very idea of government borrowing in a recession feels intuitively wrong to many people. It’s a tough concept to get across, even if economic theory says such as idea makes sense.
Economists don’t help by disagreeing with each other, and by letting their academic judgement be clouded by ideology. The public have this perception that economists sit on the left wing of the political divide, in reality some economists hold views so far to the right, that they make Attila the Hun seem like one of those touchy-feely types.
Some economists disagree with idea of fiscal stimulus because they say that if a government borrows more, people will expect taxes to go up in the future and thus will save more in anticipation of this, thus nullifying the benefit of the rise in spending. Such an argument seems totally ignorant of the reality, and indeed irrationality, of human nature.
But if the fiscal stimulus is funded by money printing, what’s the problem?
There seem to be several.
Some economists argue that there is no difference between helicopter money and certain other options, for example governments borrowing at zero interest, or central banks, which are a de facto part of government, buying government debt via quantitative easing. They are wrong for two reasons.
Firstly, when the central bank goes in for quantitative easing (QE), it does so on the understanding it will be temporary. QE may make the cost of government borrowing zero, but it is still debt and will have to be paid back one day. Helicopter money is a permanent injection of money. It is the difference between me offering to give you £1,000 – helicopter money – and lending you £1,000 at zero interest for a few years.
The second reason why economists who say QE funded spending and helicopter money are much the same thing are wrong is psychology. Debt is an unpleasant word, when Theresa May talks about living within our means not being the same thing as austerity she is unintentionally illustrating this point.
Other economists disagree with helicopter money as they say it will lead to hyperinflation. Well that depends. Right now deflation not hyperinflation is the problem. The trick is to get the balance right. This is where pure helicopter money, involving the central bank crediting households’ bank accounts, scores over the central bank funding public investment. Pure helicopter money can be turned off at very short notice if there are hints that inflation may pick up too fast. Helicopter money funding infrastructure investment can’t be turned on and off, otherwise we risk seeing lots of unfinished roads, or railway lines. You can’t stop start infrastructure investment.
Other economists say that helicopter money will be ineffective, that once interest rates go up, all that money created by central banks and sitting in household bank accounts will become a millstone around the neck of commercial banks.
Maybe, but it is hard to get your head around some economists saying helicopter money will lead to hyperinflation others that it will be ineffective. They can’t both be right, and there is a sense that their disagreement has its routes in an ideological aversion to any form of manipulation of the economy.
Theresa May says that her government is going to delay the point when it’s posts a surplus, but not call it off altogether. And in saying that, she limits the extent of fiscal policy no matter how cheap debt is. Helicopter money offers a kind of best of both worlds, stimulus without increasing debt. That feels psychologically more palatable, no matter how cheap debt is.
But now I want you to think forward 15, 20 or 25 years and assume new technologies such as nanotechnology, smart dust, robotics, the internet of things, machine learning, stem cell research, gene editing, quantum computing, 3D and 4D printing and AI have created the potential of living in an age of plenty, but have so disrupted the labour market that demand crashes and we suffer permanent economic depression. In such circumstances, helicopter money may provide the only solution. That is why I say it is inevitable one day.