I have been thinking a lot about helicopters lately. Mostly this is down to the regular reminders to Santy not to forget to bring a helicopter, with doors that open and close and a winch to rescue boats.. Partially its down to the increasing debate that is taking place on helicopter money, which is not something you give to Fisher Price…
Helicopter money is a concept originating with Friedman, but in fact going back to the Keynesian bottles in mines idea. Keynes noted the fiscal stimulus that would come from the state burying money in disused mines while Friedman mused on the effects if the central bank could simply drop money from helicopters. A good reasonably non technical discussion on helicopter money is here. In both cases output increases.
So what’s the problem? The usual case given is that massive increases in the money supply will, inevitably, cause inflation. However, that is conceptually and empirically flawed.
Empirically we have seen a massive expansion of the monetary base over the last decade. Since 2008 the Fed has increased by six times its balance sheet, from 800b to 4.4tr. The Eurosystem increased its size threefold at max, although it is now shrinking (tight money in a depression – what could possibly go wrong…). In both cases inflation has not been affected, in fact there has been a tendency for inflation to fall. The same story can be told for the UK and for Japan. Although there are complex reasons for the decline in inflation pressures – commodity price deflation, domestic demand collapses, deleveraging etc – the empirical evidence is strong that so far there has been no runaway inflation. Central Bank money printing or easing has not fed hyperinflation. To the chagrain of the modern macrotheorists whose models are as mathematically elegant as they are profoundly divorced from reality, this stuff was discussed in some detail back in the 20’s and 30’s but was lost from memory.
Two views arise on why this is the case, not necessarily in conflict. Krugman, who has been more right on more things in this crisis than most, has developed more and more worked through examples of this being a classical trap, where at the zero lower interest bound monetary policy becomes ineffective. Richard Koo agrees but places more weight on the lack of desire by the private sector to borrow. In both cases the only solution is somehow to induce demand. Monetary policy alone is ineffective. This argument is pretty watertight and when you add a broken banking system to the mix it becomes almost unassailable. Other arguments, such as that creation of money without corresponding assets will result in a central bank that is bankrupt display a lack of knowledge of how central banks operate (they are not normal corporations…)
Lets look at the Eurozone. Given that we have a transmission system that is spindled, folded and mutilated, a private sector (both corporate and household) that either wishes not to borrow nor can borrow due to deleveraging requirements, a government sector that has bound itself to massive deleveraging, a money base that is shrinking, and deflation looming, what can we expect in the short to mid term but more of the same immiseration of nations and sectors. Deflation is gaining hold, and as the japanese experience shows when this is the case then it can take a very long time to wipe out. Deflation increases the nominal level of debt over time, exactly what is NOT needed. That a central bank could stand round with its hands in its pockets watching this suggests a level of disengagement from reality that is pathological.
We should consider helicopter money. It is, macro economically, essentially the same as a fiscal stimulus. The ECB cannot engage in direct monetary financing of governments. There is, I submit, nothing to stop them doing so for individuals. The helicopter has come a long way since Friedman’s thought experiment. We now have much more stable and more targeted choppers. Lets consider a situation where the ECB prints vouchers. Each is for a sum of say €100 and can only be spent in toto no change. We want to stimulate demand remember, so no taking the helicash to the pub. In fact, the vouchers can only be exchanged for either a) debt repayment or b) large ticket consumer goods. Looking at retail sales as the heartbeat of the economy we see that compared to Jan 2006 they are 4% lower in deflated volume terms across the Eurozone. In some countries the fall from peak is 20% + (Portugal, Slovenia, Latvia, Spain a whopping 35% Cyprus and Greece down fully 53% from peak). Even German trade is barely up from 2006 and down 3% from peak. So, let the helicash be utilizable for this. Reflate domestic demand, and do it over a period of time. We know that fiscal multipliers are large in a recession – lets make them work for us.
To make it work we need to make it fair and large. This is the argument expressed by Mark Blyth and Eric Lonergan, who note that the argument against this approach is grounded not in economics but in politics and ideology. Make it big, make it count, and target it. Final domestic demand is about €9tr in the Eurozone. Lets do 1/3, and inject €3tr into the Eurozone, over a year. That works out at about 8k per person. To make it fair we need to weight it towards the lower earners, so lets say this is in quartiles, with 10%/20%/30%/40% as a distribution. The helicash vouchers get sent to the bank, they give cash then swap the vouchers for cash at the eurosystem. In principle there is no reason why the private sector cannot create the vouchers, abstracting from the issues of distributional fairness and complexity above. Banks, private institutions, create money all the time. Money is here the medium of exchange. If the ECB were to accept old tealeaves as collateral for pictures of bridges Ireland would become enormously wealthy.
We see this week Obama deciding that 53 years of action repeated time and again seeking but failing to get a different result suggesting that the action be discontinued. We have tried tight fiscal and monetary discipline in the Eurozone to no avail . Its time for something more, something different. Its time for people who KNOW that the policies are wrong to stop sitting in comfort atop Barad Dur, aka the ECB tower, and to face down the hawks. But, they wont. Deep in the heart of many macroeconomists, we must conclude, is a gradgrindian approach, one that sees nobility in austerity and sees recessions as beneficial. They arent. Its Christmas. Time for the Ebeneezers of Frankfurt to relent. But, they wont
The latest brilliant wheeze from the ECB is to engage in some QE, but to ensure that it wfill not work by designing it such that the risks fall on the countries that need it. In thrall to the inflatiophobia of the ordoliberal elite in Germany the ECB displays insouciance, indolence, ineffectiveness, and indifference. It has shown itself to be unable to face down its internal critics, and has participated in the bullying of smaller nations that we thought was a relic of the past actions of central powers. The governing council members need to face down the Bundesbank once and for all. Either the ECB is a central bank for a community or it is not. If it is not, then stop pretending to be. If it is, stop the central bank of one member pretending it is not. The logic is binary, and hard. The guys on top are well paid to make such hard decisions. Lets demand they do.
This is a version of an Irish Examiner column of 20 December 2014. Merry Christmas.
A version of a column in the Irish Examiner, 20 December 2014