Could ‘helicopter money’ be an economic solution?
Ahead of the IMF’s world economic outlook last month, new managing director Kristalina Georgieva described the global economy as being in a ‘synchronised slowdown’, and the institution has subsequently trimmed growth forecasts for 2020. The often-mentioned factors were cited as inhibiting expansion, including geopolitical tensions, protectionism, slowing growth in the United States (US) and China, Brexit uncertainty, and upheaval in emerging markets.
These are valid concerns, and clearly any combination of these serve to undermine growth in the global economy. Yet there are signs that some of these problems are beginning to ease, with the likelihood of a no-deal Brexit subsiding, and progress made in the US/China trade dispute.
In many ways, the global economy has yet to exhibit any of the typical pre cursors to recession. Economic activity isn’t overheating, and inflation is under control. Central banks are loosening, rather than tightening monetary policy. Oil prices are stable. And financial markets continue their positive direction of travel, with the S&P 500 clocking up new record highs. So it is likely we’ll be spared a downturn for the foreseeable future.
Low on ammunition
Nevertheless, all economic cycles run their course, and at some point, a bust will make its presence felt. The difficulty for many countries, particularly in the developed world, is that both of the traditional levers used to combat recession are something of a spent force. An easing of monetary policy underpinned the response to the financial crisis, but central banks have been unable to normalise rates since. Some nations are actually experiencing negative rates.
As such, there isn’t much firepower in reserve from a monetary policy perspective. For this reason, the IMF and others are calling for fiscal policy to shoulder a greater share of the burden. Unfortunately, not many countries find themselves in a strong position on this front either. For example, Britain’s has a debt-to-GDP ratio of over 80 per cent and a rising deficit. However, this figure is comparatively prudent to other G20 countries such as France (98.4 per cent), the US (106.1 per cent) and Japan (253 per cent).
So, with limited room to manoeuvre, it is no surprise that economists and policymakers are starting to look further afield for solutions, and one idea which is gaining traction is ‘helicopter money’.
What is helicopter money?
The term ‘helicopter money’ was coined by US economist Milton Friedman in his 1969 paper The Optimum Quantity of Money. Essentially, it was an analogy likening loose monetary policy to a helicopter scattering cash on the ground. The concept of helicopter money has since evolved to encompass various policy proposals – primarily, that of financing fiscal debt through an increase in the money supply.
In the early 2000s, many central bankers argued that it could revive an ailing Japanese economy, which had suffered a lost decade of low growth, low (or negative) inflation, and soaring public debt. With many other countries now facing a similar liquidity/debt trap, it may only be a matter of time before one of them begins to weave ‘helicopter money’ into economic policy.
This differs from the widely-used policy of quantitative easing (QE), whereby the central bank purchases government bonds and other assets. The money created from this is then lent to commercial banks in a bid to encourage them to lend to consumers and businesses in the wider economy. Helicopter money, on the other hand, would bypass the banks, and simply fill the pockets of consumers with printed money – the mechanism being central-bank-financed fiscal deficits.
Another variation of this is ‘People’s QE’, championed by Labour Party leader Jeremy Corbyn, whereby the Bank of England would print money to be deposited in a ‘national investment bank’. The remit for this state-owned enterprise would be to boost investment in public services, housing and infrastructure.
Or another version of monetary financing could be to set up a backstop facility to be activated in times of recession if monetary policy becomes ineffective and inflation remains in the doldrums.
Yet all of the above are, in effect, different branches of the same tree: using expansionary monetary policy to finance a fiscal stimulus.
What are the risks of helicopter money?
An explicit policy of monetising fiscal deficits will put upward pressure on inflation. This would then be doubled up by the likely effect of helicopter money itself; namely, greater levels of economic activity and rising demand. It may sound like a tonic, rather than a threat, in the current climate of weak growth and missed inflation targets. However, muddying the waters between monetary and fiscal policy would undermine central bank independence, and potentially prompt politicians to spend with reckless abandon. Once the floodgates open, and credibility is lost, the path to hyperinflation becomes a short one.
Currency devaluation would also be an inherent risk, as helicopter money is contingent upon money creation. Another risk could be that people put their new windfall into savings, rather than spend it. As such, consumption would fail to receive its expected fillip.
There is also the burning question of who would actually be entitled to helicopter money. Everyone? Only the poor? Middle earners too? And, finally, the economic theory of helicopter money assumes effective and enduring cooperation between central banks and government. In practice though, there is a significant risk that one party could run roughshod over the other - or just a clash in ideas for implementing the policy, and the rules and controls which would need to be put in place.
So is it a non-starter?
These are extraordinary times for the global economy, and ordinary measures to keep things ticking along have proved inadequate. Even QE, which could hardly be described as ordinary – the Bank of England has pumped £445bn into the economy since the crash – has run out of steam.
Creative solutions will need to be found if things take a turn for the worse, and helicopter money may fit the bill. Many experts believe that the risks associated with helicopter money can be counteracted with a robust set of rules. Chief among these are limits on the extent to which money can be created; establishing a restricted set of circumstances for when the policy could be activated, and defining clear roles for both central bank and government.
For many others, however, helicopter money remains on the fringes of economic sanity, with Otmar Issing, former chief economist at the European Central Bank, being quoted in 2016 as saying that it would be ‘downright devastating’ and ‘a declaration of bankruptcy of the monetary policy’.
The idea of fiscal and monetary policy pulling in the same direction, rather than working at cross-purposes, is an enticing one. But whether it would prevail in practice is quite another matter. Perhaps we’ll find out in the future.=
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