Despite aggressive actions by central banks, many of the world’s economies are still stagnating and facing new shocks, leading to renewed calls for helicopter money as a serious policy prescription for countries like Japan and the U.K.. And, if things go badly, maybe the United States?
The expression “helicopter money” goes back to a 1969 thought experiment by Milton Friedman for one way a government could stimulate more spending and inflation:
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.
Friedman reasoned that people would naturally spend the money.
The first thing to note is that the operation would not have to be, and indeed should not and legally could not be, implemented by the central bank. The Treasury (the government’s fiscal authority) could perfectly well do the same thing, handing out cash (or writing checks) to random individuals, or surely better yet nonrandom distributions to those the government most wants to assist, or alternatively paying for infrastructure projects deemed most worthy. Put this way, it is clear that the most important dimension of the operation is fiscal, not monetary, in nature. The core element is a grant of more purchasing power to certain individuals.
And where would the Treasury obtain the cash to deliver to the favored recipients or the funds in its account with the Fed with which to write checks? The standard way this would work is the Treasury would sell bonds to the public. When a private bank buys those Treasury bonds, it would pay for them by instructing the Fed to transfer a sum from its account with the Fed into the account the Treasury has with the Fed, which funds the Treasury can then disperse in whatever form it likes. But suppose that in a second step, the Fed buys those Treasury bonds from the private bank. This would leave the Treasury’s account with the Fed back exactly where it was before any of this happened. The helicopter-chasers have new cash in their hands and the Fed is holding more government bonds than previously. Thought of this way, it’s clear that helicopter money is simply a combination of two conceptually separate operations– a debt-funded fiscal expansion coupled with a monetary expansion that replaces the debt with liabilities of the Federal Reserve.
Does it make any difference whether the Fed implements the second step at all? Narayana Kocherlakota thinks not too much:
In the first case (where investors buy the bonds), the Treasury pays interest on an added $100 billion in debt. In the second case (where the Fed creates money), the Fed pays exactly the same interest on an added $100 billion in bank deposits– which means that it can remit that much less money to the Treasury.
One tangible difference, though, is that while the Treasury likely borrowed by issuing 10-year bonds paying 1.5% interest, the Fed effectively borrows by paying 0.5% interest on accounts kept with the Fed (or 0% if the public ends up wanting to hold the funds as cash). So the Fed would remit something like 1% of the 1.5% interest the Treasury pays back to the Treasury. Thus at current interest rates, the Treasury would find it a little cheaper to carry out the operation with the Fed’s cooperation than without. However, this strategy also runs a risk of costing the Treasury more if the Fed’s cost of borrowing subsequently rise above 1.5%.
A separate question is what happens when the Treasury has to pay the Fed back? The Treasury could then sell a new bond to a bank and pay back the Fed with the proceeds. But the Fed could undo this by buying the new bond back from the bank. If the Fed somehow committed to keep doing this forever, in effect it has allowed the combined Fed-Treasury government balance sheet to borrow at something like 0.5% instead of 1.5%.
But how and why would the Fed make such a permanent commitment? As Cecchetti and Schoenholtz noted, in normal times the Fed can’t simultaneously choose a level for the monetary base and a separate value for the interest rate– if it’s committed to put more money out there permanently, then it must be committing to a different time path for future interest rates. Perhaps the action of buying more government bonds would make it harder for the Fed to later sell them, and thereby implicitly commits the Fed to a lower interest rate in the future. But these arguments are the standard ones for why large-scale asset purchases, the recent tool of choice for monetary policy, could perhaps have some stimulative effects in the current environment, albeit weak effects operating through subtle channels.
If helicopter money is no more than a combination of fiscal expansion and LSAP, and if we think LSAP hasn’t been able to do that much, it’s clear that the fiscal expansion part is where the real action is coming from. On the other hand, if we think both components make a difference, there’s no inherent reason that the size of the fiscal operation has to be exactly the same as the size of the monetary operation.
Nevertheless, as has been true with LSAP, there might be some psychological impact, if nothing else, from announcing this as if it were a new policy. For example, I could imagine the Fed announcing that for the next n months, it will buy all the new debt that the Treasury issues. For maximal effect this would be coupled with a Treasury announcement of a new spending operation. Doubtless the announcement would bring out calls from certain quarters that the U.S. was going the route of Zimbabwe. And just as in the previous times we heard those warnings, those pundits would be proven wrong, as indeed the effects would not be that different from what we’re already getting from central bank expansions around the globe.
Helicopter money is no bazooka for stimulating the economy. Ben Bernanke offered this reasonable summary:
Money-financed fiscal programs (MFFPs), known colloquially as helicopter drops, are very unlikely to be needed in the United States in the foreseeable future. They also present a number of practical challenges of implementation, including integrating them into operational monetary frameworks and assuring appropriate governance and coordination between the legislature and the central bank. However, under certain extreme circumstances– sharply deficient aggregate demand, exhausted monetary policy, and unwillingness of the legislature to use debt-financed fiscal policies– such programs may be the best available alternative. It would be premature to rule them out.
Helicopter Money Was Not Friedman’s Idea
“If the Treasury were to fill old bottles with banknotes, bury them at suitable depths in disused coalmines which are then filled up to the surface with town rubbish, and leave it to private enterprise on well-tried principles of laissez-faire to dig the notes up again (the right to do so being obtained, of course, by tendering for leases of the note-bearing territory), there need be no more unemployment and, with the help of the repercussions, the real income of the community, and its capital wealth also, would probably become a good deal greater than it actually is. It would, indeed, be more sensible to build houses and the like; but if there are political and practical difficulties in the way of this, the above would be better than nothing.” The General Theory of Employment, Interest, and Money, p. 129.
Keynes, of course, had a better plan than simply dropping cash from helicopters or the Treasury writing checks to people because he actually envisioned job creation and capital investment which would increase the wealth of the community. And as he said, building houses or roads would be better, but even during the Great Depression, those were controversial ideas.
“A separate question is what happens when the Treasury has to pay the Fed back? The Treasury could then sell a new bond to a bank and pay back the Fed with the proceeds. But the Fed could undo this by buying the new bond back from the bank. If the Fed somehow committed to keep doing this forever, in effect it has allowed the combined Fed-Treasury government balance sheet to borrow at something like 0.5% instead of 1.5%.”
Then it’s not helicopter money. Helicopter money has to appear as an actuarial loss on the Fed sheet, a loss the Fed cannot recover from except by earning an actuarial gain. There is no reversible path.
The entire discussion is just an academic exercise as long a conservatives control the government. Republicans and Tories would rather see the entire world economy go down in flames than increase spending during an economic crisis.
It’s seriously amusing that you really believe, Joseph, that if ONLY we just printed money and gave it to the people, that would solve our economic problems.
Tim Duy and David Beckworth have, separately, argued that the Fed effectively tightened policy by establishing 2% PCE growth as a ceiling, and setting up an asymmetric response above and below the target. If true, then the Fed might have defanged LSAPs through implicit liabilities against money supply triggered by inflation and unemployment targets. A person’s views on LSAPs reflects their views on monetary channels, which can flip one’s interpetation of helicopter money into a primarily monetary operation with fiscal details.
The correct way to do Helicopter money is to aggressively give it to entities that will spend it – for example graduated payments (inverse to income) to everyone below the poverty level.
one of the very best and most sensible pieces written to date on helicopter money
although I’m biased, because this runs along similar lines:
Yes, I looked. The reference brings up a major point. If government insists on maintaining monopoly control over money then it bears the real liabilities of the helicopter. So the helicopter flights never can happen.
But absent the helicopter the currency banker never bears an actuarial gain or loss, so, simply put, long term growth implies long term deflation. I looked and looked, none of the magic tricks create free and unencumbered cash (except actuarial Fed losses). And, in fact, absent housing and medical we are suffering a quite steep deflation. I presume we eventually go back to 1980 prices, just after the Nixon shock. Or break we Say’s law in some horrid fashion. Or we figure out that currency bankers suffer gains and losses.
Here is another good piece on helicopter money that was written before this post:
Quantitative easing and LSAP have no been able to do that much because the Fed never really changed it’s 1.5% inflation mandate (the 2% “target” is a ceiling, not an average). Monetary expansion was never permanent.
We all knew that they would withdraw stimulus at the first opportunity, as they are doing now. Proving economists like Sumner correct.
“Does it make any difference whether the Fed implements the second step at all?”
We already have deficit spending. If the Fed permanently retired enough bonds to cover the deficit, inflation would rise. The second step is the most important bit, not the first step! But the trick is that the Fed needs to abandon it’s peevish focus on inflation.
The technocrats at the Fed are mostly responsible for the policy induced failure and stagnation. Unfortunately, it’s human nature to blame everyone except the person in the mirror.
What are the unintended consequences of QE?
What are the unintended consequences of helicopter money?
What does it say about the scientific integrity of the economics profession that it has been dead silent on the downside of central bankers’ policies without precedent?
Above the author explains how asset purchases, or open market transactions by the Fed when they buy a bond from a bank, takes physical reality as a ministerial typing of an ammount into that bank’s accounts.
Real bottle-money as Keynes might have said would come about if the Fed staff entered an amount into a Treasury account instead, and there simply are no other things involved, key strokes (against which claims for payment on lawful obligations against the govt may draw upon, just like always).
Whenever people talk about heicoptering or bottle-money and talk about debt, they are confused and adding to the confusion. No debt. If there is a debt registered it is not bottle-money or heicoptering.
Now why is it writers keep trying to bring the creation of these registered debt positions? Don’t know and I hope it isnt for the purposes of misleading people, and I don’t think this is the case here as the author points out that the Fed is not permitted by statutory law from key stroking new amounts into Treasury accounts.
That is an anachronism, puts the dealer network into a rent-sought position of control and gain. Just change the statute to permit the Fed to enter created-new-money amounts via key strokes not into a bank’s accounts but into Treasury’s directly (the Congress could direct this or authorize some discretionary range of action to the Fed).
But you know, the Fed is already just key stroking when it remits excess to Treasury now, so it can key stroke to Treasury accounts. If it simply redeemed the govt debt it holds now this effects an account entry to Treasury offsetting their need, as this author points out, to borrow externally to liquidate the principal due.
Bernanke’s blog, which you quoted, gave three requirements for launching helicopter money: “sharply deficient aggregate demand, exhausted monetary policy, and unwillingness of the legislature to use debt-financed fiscal policies.” You forgot to discuss the last one. The point is not that helicopter money is more effective than standard fiscal expansion. The point is that countries with huge national debts won’t take on any more debt even when they are suffering from demand deficiency. Helicopter money offers a way to run larger budget deficits without increasing national debts, and so has significant political potential to help countries escape recessions during times of high national debt levels, as now.
For Congress to authorize the Treasury to use the Fed as its private piggy bank, it should demand a massive overhaul of regulation, litigation, and the tax code. Otherwise, the result may be more squandered money that doesn’t get us out of this depression.
Surely the key question involved is whether the bonds ever need to be repaid. If they do need to be repaid, then this implies the need to raise tax revenues sufficient to repay them. But tax revenue cannot be increased relative to GDP without supply side effects that will ultimately hit a binding constraint. If the stream of tax revenue required to repay the bonds is not feasible, then the risk of default will increase. With monetization of debt, there is no ultimate risk of default, because (explicitly or via some fig leaf) there is no debt created that needs to be repaid.
Surely Japan is already at this point, though? Does anyone really believe that they will ever raise additional funds, either from tax revenue or sales of debt to the public, to repay thair 200+% of GDP debt? If so, then Japan gives us our test case for the efficacy of helicopter money. What conclusions can we draw from the experience of the Japanese?
Is there a lack of aggregate demand? It’s not clear there is. Nor is there an apparent lack of liquidity, as mom-and-pop speculators are now buying foreclosed properties.
“When you see this high percentage of the properties going to third-party investors, that is a sign that these speculators may be over-inflating the market.”
What we have is a crisis of productivity growth, as well as slower underlying GDP growth related to demographics.
That is probably true, and becoming more true over time. However, looking at U.S. bond and equity sensitivity to foreign shocks, the lack of a nominal level defense, and the lack of a symmetric response to under/overshooting the target, imports external monetary tightness. If the Fed believes in special neutrality at the ZLB, and they believe that the US is near full employment in a Phillips Curve context, then why did they set the PCE target at 2%? It’s almost asking for credibility issues in a disinflationary shock.
“Is there a lack of aggregate demand? It’s not clear there is. ”
what makes you say this? perhaps less lack of demand today, but it appears that was a major problem over the past seven years. supply siders got all the cheap capital they wanted, with limited results. if limited growth was not the result of supply restraint, then it had to be a demand issue. but perhaps it is not really a “lack” of demand, as this is in reference to previous economic performance. perhaps we are not lacking at all, and it is the secular stagnation some have alluded to. if that is the case, it is inappropriate to say demand should be higher. maybe this is the new normal?
I guess I believe that balance sheet recessions–depressions–do not require the same treatment as simple business cycle recessions. In a depression, I will take an R&R view, and assert that the problem is a lack of collateral, not the cost of money. In this context, interest rate interventions may not be particularly effective. If your mortgage is underwater, then the interest rate really doesn’t make that much difference.
In such an environment, it would seem to make sense to repair balance sheets directly, and that would be accomplished with unsterilized helicopter drops of money. You just keep pushing checks out the door until you see some inflation.
Now, there are risks here, too. For example, helicopter drops are blunt tools. I may be giving as much to creditors as debtors, when I really want to focus on debtors. Further, we really don’t know either the static or dynamic response function of the economy to unwashed helicopter drops. So this is really battlefield medicine. You may save the patient, but you could make it worse, too.
Still, I think the theoretical argument better supports a helicopter drop to Main Street than a QE to Wall Street in a balance sheet recession, by which I mean the 2009-2010 period.
I don’t think that kind of intervention is warranted now. Instead, I think we ought be getting the budget deficit under control.
“Instead, I think we ought be getting the budget deficit under control.”
that would make you an advocate of austerity at this point in time, whether you realize it or not. and austerity will probably not improve the economy at this time. we have seen, repeatedly, in the past seven years the application of deficit control throughout the world. as far as i can tell, none of the applications of deficit control resulted in the positive outcome desired.
As for helicopter drops:
We can actually take a crack at the impact of monetizing deficits and inflation.
In Argentina under Kirchner, the Central Bank was contributing unsterilized new money to the government budget on the order of 4.5% of GDP. This was associated with approximately 30% annual inflation.
So figure, if you wanted 3% incremental inflation, monetizing 0.5% of GDP should do the trick. In the US, figure $80-100 bn of monetization should get you 3% inflation, based very crudely on the Argentine experience. Other estimates would put the required monetary injection lower, perhaps $50 bn. So figure you could generate an incremental 3% of inflation with an unsterilized check of $500-1000 to each US household.
For the Argentine experience, see more on slides 4 and 12.
If you were trying to message to the American public that a helicopter drop in the US will not result in an eventual inflationary event such as what has happened in other countries that have engaged in monetizing the debt, how would you do so?