Several weeks ago, I attended a talk by Lord Adair Turner, who is currently chair of the Institute for New Economic Thinking, a think-tank co-founded by George Soros following the financial crisis. Its primary aim is to promote and pursue innovative economic ideas in the 21st century. One of these is monetary finance, otherwise known as helicopter money: when Lord Turner outlined this concept at his talk, there was quite evidently some scepticism among attendees. How on Earth, many wondered, could a system in which an independent monetary authority finances government be considered prudent policy? Such a system could not only be regarded as non-credible and unethical but also unconstitutional and illegal, without the appropriate frameworks in place. Ultimately, the past five years have taught us that the current monetary policy tools are mostly ineffective in a zero- interest rate, low inflation and low growth environment: a radical new approach is needed to ensure the effectiveness of the monetary transmission mechanism, and helicopter money could be a route to achieve this.
Helicopter money is by new means a new concept, far from it. In fact, it was first put forward by the renowned economist Milton Friedman in his 1969 paper, “The Optimum Quantity of Money.” The direct transfer of printed money was Friedman’s solution to disinflationary and deflationary threats in an economy, and was developed later by Ben Bernanke with the idea of “monetary-financed tax cuts”: however, this hybrid of fiscal and monetary policy has never been attempted in a major economy before, and there are certainly a few valid reasons for this. When policy-makers and academics consider an economy in which government deficits are financed by a central bank printing money, they are likely to envision Germany of the 1920s or Zimbabwe of the past decade, both of which suffered severe hyperinflation. The threat to central bank independence (a central pillar of modern monetary policy) from helicopter money is a very real one and is often the reason it is considered a “taboo” subject.
This issue, among other potential pitfalls, must first be addressed before a credible argument is presented. Firstly, central bank independence: any policy would have to place restrictions on the portion of public deficits which could be financed by a monetary authority, but further than this, there must be controls to prevent unnecessary financing when the economy is healthy. Quantifying the required amount of monetary finance across different scenarios is a difficult (but important) task, and would help prevent government manipulation of business cycles. Secondly, there is the problem of coordination: fiscal and monetary policy have, in recent years, pursued wildly different paths. For the former, austerity and spending cutbacks have dominated the agenda, especially in the UK and the Eurozone, while expansionary policies (initially interest rate cuts, and then QE) have characterised the latter. An illustration of this discordant relationship was the US fiscal cliff crisis in 2013, in which attempts to prevent exceeding the debt ceiling led to public spending cuts; these arguably hampered the efforts of the Fed to reflate the economy. I’m not suggesting governments and central banks should directly work together to design policies, but central banks (notably the ECB and Bank of England) would need a broader mandate than inflation rate targeting for helicopter money to work efficiently. In essence, this is coordination, rather than cooperation, of policy.
Some commentators have argued that monetary finance doesn’t offer anything that isn’t already available to governments. The government could issue bonds to either private investors or the central bank: the latter of these is a cheap form of finance, as all profits made by the central bank from holding the bonds are remitted to the government. The assertion is that in either this case or monetary finance, the monetary authority pays the same in interest from the increase in deposits: However, this assumes that, under a monetary finance scenario, the additional money created is stored in bank accounts. This is highly unlikely, given that the funds from monetary finance are directed at the real economy, while those used for asset purchasing programmes largely remain within the financial economy: the Bank of England estimates that the £375bn of QE led to a boost in spending of only £23bn- £28bn in GDP (or 6.5-7% of the total amount).
QE programmes involved the large-scale purchase of financial assets in markets. Primarily these asset purchases have been targeted at government bonds, but commercial debt and ETFs have also been bought by central banks. While QE has brought some stimulus to financial markets, the benefits for the real economy have been transitory and potentially dangerous, artificially inflating the values of certain assets. While instability across economies can be attributed to a much broader range of factors, monetary authorities must recognise that their current policies are insufficient for developed economies to return to pre-crisis growth in wages and living standards. Thankfully, senior figures have begun to recognise this: Mario Draghi, governor of the ECB, described helicopter money as a “very interesting concept”, but the ECB is prohibited from financing member states. Could this be circumvented by directly financing citizens of these states in some form? Possibly, but this would require much debate around how it would be implemented in practice.
Monetary finance is neither an ideological or political argument: it is a rational one. Whatever methods policy-makers choose in an attempt to boost ailing economies, the stakes are higher than ever, if they are to prevent developed nations from falling back into recession over the next few years. Is monetary finance too good to be true? Only time will tell.