Ben Bernanke (ex-Chairman of the Federal Reserve) discusses "helicopter money" in "What tools does the Fed have left? Part 3: Helicopter money."
Within the article, he runs through the story about helicopter money. He first explains why some deficient analytical frameworks find the idea attractive, then why helicopter money does not offer any new policy space. If you strip out the blah-blah-blah in his text, he says exactly what I wrote in my article linked above (even excluding some introductory quotations, it takes him 1174 words before he gets to the rather critical point that helicopter money will not work).
As my former Fed colleague Narayana Kocherlakota has pointed out, the fact that the Fed (and other central banks) routinely pay interest on reserves has implications for the implementation and potential effectiveness of helicopter money. A key presumption of MFFPs is that the financing of fiscal programs through money creation implies lower future tax burdens than financing through debt issuance. In the longer run and in more-normal circumstances, this is certainly true: The cost to the Treasury of spending increases or tax cuts – and thus the future tax burden – will be lower if the Fed provides the financing. In particular, when the Fed’s balance sheet has shrunk and reserves are scarce again, the Fed will be able to manage short-term rates without paying interest on reserves (as it did traditionally), or in any event by paying a lower rate on reserves than the Treasury must pay on government debt. In the near term, however, money creation would not reduce the government’s financing costs appreciably, since the interest rate the Fed pays on bank reserves is close to the rate on Treasury bills.OK, so there is no way helicopter money can improve matters. However, that does not mean we abandon the idea. Instead, he floats a trial balloon (trial helicopter?):
However, let’s imagine that, when the MFFP is announced, the Fed also levies a new, permanent charge on banks [emphasis mine - BR]—not based on reserves held, but on something else, like total liabilities—sufficient to reclaim the extra interest payments associated with the extra $100 billion in reserves. In other words, the increase in interest paid by the Fed, $100 billion * IOR, is just offset by the new levy, leaving net payments to banks unchanged. (The aggregate levy would remain at $100 billion * IOR in subsequent periods, adjusting with changes in IOR.) Although the net income of banks would be unchanged, this device would make explicit and immediate the cheaper financing of the fiscal program associated with money creation.So the logic runs as follows:
- There is little point in increasing government spending to stimulate the economy if taxes are raised to match the new spending. The net effect is only to increase the relative size of the government in the economy; the fiscal deficit would be unchanged. (Technically, that would only be a first order approximation of the net stimulus. The tax and the spending may have different "multipliers," and so there could be a net effect on the economy.)
- Instead, the government increases spending, and this will have the effect of raising debt and money issuance.
- Since most "money" issuance would likely end up as excess reserves, any liability issuance mix will increase consolidated government interest costs.
- To offset these interest costs, Ben Bernanke suggests giving the central bank new taxation powers.
I may just be an ignorant control systems Ph.D., but it seems that the logic above has some consistency issues. In any event, the key point seems to be: even though helicopter money makes no economic sense, it might be a good idea as it gives the central bank more power (the ability to set taxes with minimal democratic oversight).
Simon Wren-Lewis: "Nice Government You Have There"Professor Simon Wren-Lewis of Oxford also wades into this issue in "Money and Debt."
This article is a sterling example of why money needs to be abolished from economic theory.
Money is not the government’s or central bank’s liability. (For a clear exposition, see another piece by Eric [Lonergan], or this by Buiter.)This statement is obviously incorrect. From the Weekly Financial Statistics on the Bank of Canada's web site:
Remember that "helicopter money" cannot guarantee the creation of currency (notes and coins); the most likely outcome would be the creation of excess reserves -- which pay the same interest rate as Treasury bills. In other words, helicopter money will increase the amount of interest-bearing liabilities. One could argue based on linguistic grounds that certain interest-bearing liabilities are not "debt," but we cannot redefine accounting terminology to pretend that liabilities are somehow not "liabilities," even if "money" has "network effects." ("Network effects" apparently have the same relation to "money" as "eyeballs" had to "internet stocks" in the 1990s.)
However, the crux of Professor Wren-Lewis' argument is:
I think this all kind of misses the point. Base or high powered money (cash or reserves) is not the same as government debt, no matter however many times MMT followers claim the opposite. (For a simple account of why the tax argument is nonsense, see Eric Lonergan here.) Civil servants can frighten the life out of finance ministers by saying that they may no longer be able to finance the deficit or roll over debt because the market might stop buying, but they cannot do the same by saying no one will accept the money their central bank creates.In other words, the risk is that mutinous bureaucrats can threaten elected politicians with debt default if the politicians do not follow the policy preferences of the bureaucrats.
From a real-world perspective, this is an issue that always needs to be kept in mind. I touched on it in Section 6.6. of Understanding Government Finance ("Rollover Risk").
Finally, it should be noted that these mechanisms to prevent default assume that the central bank and the Treasury are looking to defend the national interest, and lean against any attempt by the private sector to force it into a default. It is entirely possible that these officials can be captured intellectually, and side with the market participants who believe that “market forces” should dictate fiscal policy. Nevertheless, the ability of these officials to force a default is limited, as the voters (and bondholders) would most likely crucify any political leader that allowed a default to occur.I would suggest that the sensible solution to deal with out-of-control civil servants would be for the democratically elected government limiting the power of said civil servants, instead of increasing their scope for mischief.
To be clear, the ability of the central bank to set interest rates gives it more than enough power already, and I am not advocating stripping the bank of that ability (although I have no strong argument against doing so). Except in an emergency like wartime, there are reasonable arguments in favour of leaving interest rate policy in the hands of technocrats. If government fiscal policy threatens an inflationary outcome, the ability to raise rates should be enough to keep policy "sustainable." (Although one can debate the effect of interest rates on the economy, high interest rates are toxic for real estate. Given the over-representation of real estate interests in governments at all levels in the English speaking world, this is a powerful political lever.)
Creating a debate about interest rates and inflation is much more consistent with representative government than dropping hints about entirely arbitrary default risks. Furthermore, the bond market acts to limit the power of central bankers with respect to interest rates. If the set interest rates at a "too high" level, the bond market will price a reversal of the policy, reducing interest costs relative to the policy rate. However, if the central bank arbitrarily pushes the government into default, market forces can do little to stop the move.
Concluding RemarksAlthough "Helicopter Money" debate is clouded in economist mysticism about money, the underlying debate revolves around the role of the technocrats in setting public policy.
(c) Brian Romanchuk 2016