Do we need helicopter money or do we just the government to open up the coffers and spend? The debate may seem arcane, but actually it may be the most important economic issue of our time. Words uttered by Theresa May in parliament illustrate why.
When the leader of the UK’s Labour Party, Jeremy Corbyn, clashed with the UK’s Prime Minister, Theresa May in Prime Ministers question time on the subject of austerity, Mrs May said: “You call it austerity, I call it living within our means.”
The point that the ‘living within our means’ school of thought may overlook is that a fiscal stimulus can increase our means.
Take Greece as an example, it has imposed austerity in a truly massive way, but the result has been even greater debt. What really matters, when we talk about debt, is the cost of repaying it, and its size relative to income, or in the case of a country, Gross Domestic Product (GDP). Austerity led to a fall in Greek GDP, making it nigh on impossible to cut debt to GDP.
Another way to reduce the size of relative debt is to create inflation, meaning that the real value of debt decreases. In the 1970s, when UK inflation was often in double digits, it proved a most effective way of cutting debt.
These days, inflation is close to zero, less than zero in some countries, but interest rates are so low, that a government can borrow money incredibly cheaply.
So the theory is clear, if rates are so low, surely it is a no-brainer for governments such as the UK and German government to go out and borrow and then spend.
But what both Mrs Merkel and Mrs May have in common is a wariness about the idea of increasing debt.
It is often suggested that no democracy would countenance the level of borrowing required to push an economy out of depression during peace time. This may explain why economic booms often follow a war, or certainly why the massive stimulus that came with World War 2 may have ended the US Great Depression.
Ever since 2008, the developed world has stuttered forward, growing at a pace that, in the context of the last 70 years or so, is abnormally low. Fiscal stimulus may well be the answer. Indeed, it probably is. But politicians, egged on by their electorate don’t like the idea of increasing government debt, no matter how cheaply they can borrow. Oddly, they seem most relaxed about encouraging growth via private sector debt. Nowhere is this policy more obvious than in Sweden, where reducing public debt over the course of the economic cycle is a matter of law, but household debt has ballooned. It’s a strategy that Raghuram Rajan, the famous Indian economist, characterises as ‘let them eat credit’.
But it surely hasn’t worked.
The global economy needs stimulus. It has to be a worldwide thing, if the UK hits the stimulus button on its own, the result may be a surge in its current account deficit.
The world needs the UK, Japan, US and Eurozone to hit stimulus at the same time. But that requires a massive change of German heart.
Maybe what is required is a slight of hand, an illusion to get the stimulus without increasing debt and that is where helicopter money enters the debate.