Helicopter money

Helicopter money has been proposed as an alternative to Quantitative Easing (QE) when interest rates are close to zero and the economy remains weak or enters recession. Although the original idea of helicopter money describes central banks making payments straight to individuals, economists have used the term 'helicopter money' to refer to a wide range of different policies, including the 'permanent' monetization of budget deficits which is nothing else than the old-fashioned idea of debt monetization – with the additional element of attempting to shock beliefs about future inflation or nominal GDP growth.^[1] A second set of policies, closer to the original description of helicopter money, and more innovative in the context of monetary history, involves the central bank making direct transfers to the private sector financed with base money, without the direct involvement of fiscal authorities.^[2][3] This has also been called a citizens' dividend or a distribution of future seigniorage.^[4] The idea was made popular by the American economist Milton Friedman in 1969 and reinforced in contemporary times by former Federal Reserve chairman Ben Bernanke.

Origins

Although very similar concepts have been previously defended by various people including Major Douglas and the Social Credit Movement, Nobel winning economist Milton Friedman is known to be the one who coined the term 'Helicopter Money' in the now famous paper “The Optimum Quantity of Money”, where he included the following parable:

Let us suppose now that one day a helicopter flies over this community and drops an additional $1,000 in bills from the sky, which is, of course, hastily collected by members of the community. Let us suppose further that everyone is convinced that this is a unique event which will never be repeated.

Originally used by Friedman to illustrate the effects of monetary policy on inflation and the costs of holding money, rather than an actual policy proposal, the concept has since then been increasingly discussed by economists as a serious alternative to monetary policy instruments such as quantitative easing. According to its proponents, helicopter money would be a more efficient way to increase aggregate demand, especially in a situation of liquidity trap, when central banks have reached the so-called 'zero lower bound'.

Friedman himself refers to financing transfer payments with base money as evidence that monetary policy still has power when conventional policies have failed, in his discussion of the Pigou effect, in his 1968 AER Presidential address.^[5] Specifically, Friedman argues that "[the] revival of belief in the potency of money policy ... was strongly fostered among economists by the theoretical developments initiated by Haberler but named for Pigou that pointed out a channel - namely changes in wealth - whereby changes in the real quantity of money can affect aggregate demand even if they do not alter interest rates." Friedman is clear that money must be produced "in other ways" than open-market operations, which - like QE - involve "simply substituting money for other assets without changing total wealth." Friedman references a paper by Gottfried Haberler written in 1952, where Haberler says, "Suppose the quantity of money is increased by tax reductions or government transfer payments, and the resulting deficit is financed by borrowing from the central bank or simply printing money".^[6]

It is noteworthy in light of more recent debates over the separation between monetary and fiscal policy, that Friedman viewed these policies as evidence of the potency of monetary policy. In the same AER address he is highly critical of the timeliness and efficacy of fiscal measures to stabilise demand.

The idea of helicopter drops was revived as a serious policy proposal in the early 2000s by economists considering the lessons from Japan. Ben Bernanke famously delivered a speech on preventing deflation in November 2002 as a Federal Reserve Board governor, where he says that Keynes "once semi-seriously proposed, as an anti-deflationary measure, that the government fill bottles with currency and bury them in mine shafts to be dug up by the public." In that speech, Bernanke himself says, "a money-financed tax cut is essentially equivalent to Milton Friedman's famous 'helicopter drop' of money." ^[7] In a footnote to that speech, Bernanke also references an important paper by Gauti Eggertson which emphasises the importance of a commitment from the central bank to keep the money supply at a higher level in the future.^[8] The Irish economist, Eric Lonergan, also argued in 2002 in the Financial Times, that central banks consider cash transfers to households as an alternative to further reductions in interest rates, also on the grounds of financial stability.^[9] In 2003, Willem Buiter, then chief economist at the European Bank for Reconstruction and Development, revived the concept of helicopter money in a theoretical paper, arguing that base money is not a liability, which provides a more rigorous case for Friedman and Haberler's Pigouvian intuitions.^[10]

Starting from 2012, economists have also called this idea "quantitative easing for the people."^[11][12]

Policy response to the global financial crisis

In December 2008, Eric Lonergan and Martin Wolf suggested in the Financial Times that central banks make cash transfers directly to households, financed with base money, to combat the threat of global deflation.^[13][14] From around 2012 onwards, some economists began advocating variants of helicopter drops, including 'QE for the people', and a 'debt jubilee' financed with the monetary base.^[11] These proposals reflected a sense that conventional policies, including QE, were failing or having many adverse effects - on either financial stability or the distribution of wealth and income. In 2013, the chairman of the UK's Financial Services Authority (FCA), Adair Turner, who had been considered a serious candidate to succeed Mervyn King as Governor of the Bank of England, argued that deficit monetisation is the fastest way to recover from the financial crisis in a speech.^[15]

Implementation

Although the original definition of helicopter money describes a situation where central banks distribute cash directly to individuals, more modern use of the term refer to other possibilities, such as granting a universal tax rebate to all households, financed by the central bank. This is for example what Australia did in 2009^[16] or the United States with the Economic Stimulus Act of 2008. The use of tax rebates explain why some consider helicopter money as a fiscal stimulus as opposed to a monetary policy tool.

Under a strict definition, where helicopter drops are simply transfers from the central bank to the private sector financed with base money a number of economists have argued that they are already occurring.^[17] In 2016, the European Central Bank (ECB) launched a TLTRO programme lending money to banks at negative interest rates, which amounts to a transfer to banks. Also the use of differential interest rates on tiered reserves to support commercial banks' profitability in the face of negative interest rates, opens up another source of helicopter drop - albeit intermediated by banks.^[18]

In the case of the Eurozone, the use of TLTROs is believed by some economists to provide a legal and administratively tractable means of introducing transfers to households. These could be structured via zero coupon, perpetual loans, which all European adult citizens would be eligible to receive. Eligible commercial banks could administer the programme.^[19]

Controversies

Many economists would argue that helicopter money, in the form of cash transfers to households, should not be seen as a substitute for fiscal policy. Given the government's borrowing costs are extremely low at close to zero interest rates, conventional fiscal stimulus through tax cuts and infrastructure spending should work. From this perspective, helicopter money is really an insurance policy against failure of fiscal policy for political, legal or institutional reasons.^[20]

Differences to Quantitative Easing

Quantitative easing (QE), like helicopter money, involves money creation by central banks. Some economists argue that helicopter is different because the money created would be 'permanent' - it is irreversible QE. Others argue that it is really no different to an expansion of fiscal policy combined with increased QE.

In contrast, financing transfers to the private sector by creating money has a different effect on the central bank's balance sheet than conventional QE. Under QE, central banks create reserves by purchasing bonds or other financial assets. There is an 'asset swap'. Under Helicopter money, central banks create money and distribute it right away, without tangible counterparts (such as assets) in their balance sheet's liabilities.

Implications for central bank balance sheets

One of the main concerns with transfers from the central bank directly to the private sector, is that in contrast to conventional open-market operations the central bank does not have an asset corresponding to the base money created. This has implications for the measured equity of the central bank, because base money is typically treated as a liability, but it could also constrain the central bank's ability to set interest rates in the future. The accounting treatment of central banks' balance sheets is controversial.^[21] Most economists now recognise that the 'capital' of the central bank is not really important.^[22] What matters is can the expansion of base money be reversed in the future, or are there other means to raise interest rates. Various options have been proposed. Oxford professor, Simon Wren-Lewis has suggested that the government pre-commit to providing the Bank of England with bonds, if needed. The European Central Bank can in fact mandate an increase in its capital, and the introduction of tiered reserves and interest on reserves gives central banks an array of tools to protect their own net income and the demand for reserves.^[23]

Supporters

Former chairman of the Federal Reserve Ben Bernanke is known to be one of the proponents of helicopter money when he gave a speech in November 2002 arguing, in the case of Japan, that "a money-financed tax cut is essentially equivalent to Milton Friedman's famous 'helicopter drop' of money."^[24] In April 2016, Ben Bernanke wrote a blog post arguing that "such programs may be the best available alternative. It would be premature to rule them out."^[25]

Citigroup Chief Economist Willem Buiter is also known to be a prominent advocate of the concept.^[26] Other proponents include Financial Times' Chief Commentator Martin Wolf,^[27] Oxford economists John Muellbauer,^[12] and Simon Wren-Lewis, Economist Steve Keen, the political economist Mark Blyth of Brown University, Berkeley economics professor and former Treasury advisor, Brad DeLong,^[28] UCLA economics professor, Roger Farmer, American macro hedge fund manager Ray Dalio, Irish economist and Fund manager Eric Lonergan,^[29] Anatole Kaletsky.^[30]

Bill Gross, Portfolio Manager of the Janus Global Unconstrained Bond Fund also argues for the implementation of a basic income, funded by helicopter drops.^[31][32]

Critics

Inflationary effect

In the past the idea had been dismissed because it was thought that it would inevitably lead to hyperinflation.

However several prominent economist such as central banker Raghuram Rajan are against helicopter money on opposite ground. They claim that helicopter money would be ineffective because people would not spend the money.^[33] A survey conducted in the Eurozone concluded however that more than 50% of the distributed money would be spent by households.^[34]

Another range of concerns include the fact that helicopter money would undermine trust in the currency (which ultimately would lead to hyperinflation). This concern was particularly voiced by German Economist (and former Chief Economist at the ECB) Otmar Issing in a paper written in 2014.^[35] Later in 2016, he declared in an interview: "I think the whole idea of the helicopter money is downright devastating. For this is nothing more than a declaration of bankruptcy of the monetary policy"^[36] Richard Koo makes a similar argument^[37] when saying "if such envelopes arrived day after day, the entire country would quickly fall into a panic as people lose all sense of what their currency is worth."

In response, Lord Adair Turner argues: "Money financed deficits will always stimulate nominal demand. By comparison debt finance deficits might do so, but might not."^[38]

"There is no free lunch"

Another range of critics involve the idea that there cannot be such thing as "free money" or as economist say "there is no such thing as a free lunch". This critic was notably expressed by Bank for International Settlements researchers Claudio Borio, Piti Disyatat, Anna Zabai.,^[39] who claimed that helicopter drops to citizens would necessarily involve for the central bank to pay interests on the extra reserves being supplied.

In a response, the former IMF economist BIagio Bossone challenges the later assumption^[40] and argues:

"helicopter money is a 'free lunch' in the simple sense that, if it works and succeeds in closing the output gap, people won’t have to repay it through higher taxes or undesired (above optimal) inflation."

Legality

Other critics claim helicopter money would be outside of the mandate of central banks, because it is in effect a fiscal policy, not a monetary one.

Accountability issues

Bundesbank president Jens Weidmann also voiced opposition against helicopter money, arguing it would "tear gaping holes in central bank balance sheets. Ultimately, it would be down to the euro-area countries, and thus the taxpayer, to shoulder the costs because central banks would be unprofitable for quite some time."^[41]

In the Eurozone

On March 10, 2016, the idea became increasingly popular in Europe after Mario Draghi the President of the European Central Bank, said in a press conference that he found the concept 'very interesting'.^[42] This statement was followed by another statement from the ECB's Peter Praet who declared:^[43]

"Yes, all central banks can do it. You can issue currency and you distribute it to people. That’s helicopter money. Helicopter money is giving to the people part of the net present value of your future seigniorage, the profit you make on the future banknotes. The question is, if and when is it opportune to make recourse to that sort of instrument which is really an extreme sort of instrument."

In 2015, a European campaign called "Quantitative Easing for People" was launched^[44] and is effectively promoting the concept of Helicopter Money, along with other proposals for 'Green QE' and 'Strategic QE' which are other types of monetary financing operations by central banks involving public investment programmes. The campaign is currently supported by 20 organisations across Europe and more than 100 economists.^[45]

On June 17, 2016, 18 Members of the European Parliament (including Philippe Lamberts, Paul Tang and Fabio De Masi) signed an open letter^[46] calling on the ECB to "provide evidence-based analysis of the potential effects of the alternative proposals mentioned above, and to clarify under which conditions their implementation would be legal." If it doesn't consider alternatives to QE, MEPs fear the ECB would leave itself “unprepared for a deterioration in economic conditions."^[47]

In October 2016, a survey showed that 54% Europeans think helicopter money would be a good idea, with only 14% against.^[48]

In Japan

In a meeting with Japanese Prime Minister Shinzo Abe and Bank of Japan's Haruhiko Kuroda in July 2016 it was widely reported^[49] that former Federal Reserve chairman Ben Bernanke advised the policy of monetizing more government debt created to fund infrastructure projects,^[50] ostensibly as a way to drop "Helicopter Money" on Japan to stimulate the economy and halt deflation in Japan. Financial markets began to front-run this stimulus effort days before it was announced when accounts of Bernanke's visit to Japan were first reported.

Later in the month the Bank of Japan ongoing review of its monetary stimulus program was reported to be considering policies somewhat similar to "Helicopter Money", such as selling 50-year or perpetual bonds.^[51]

References

Other resources

• Helicopter money: A cure for what ails the euro area?, European Parliamentary Research Service, April 2016
• Helicopter Money: Why it works - Always, Willem Buiter, 2014
• Helicopter Money reloaded
• Recovery in the Eurozone: using money creation to Stimulate the economy, Frank van Lerven, 2015
• What do people mean by helicopter money?, Simon Wren-Lewis, 2012
• From Zirp, Nirp, QE, and helicopter money to a better monetary system, Thomas Mayer, 2016