Martin Wolf also says we need to talk about helicopter money, and the FT leader took a similar line the previous day. Here I admit I am conflicted. The macroeconomist in me wants to complain: as I have said in the past, helicopter money is either a plea for fiscal expansion - which is good, but why not call it that - or a policy for above target future inflation, which may also be good but why not call it that too? However perhaps I am being politically naive - maybe it is the only way we can get governments at the moment to undertake fiscal expansion.
Let me first summarise the macroeconomics as I see it. Suppose the government cuts taxes using new money created by the central bank (often called base money). This helicopter money seems formally equivalent to debt financed tax cuts, with the central bank buying the government debt through Quantitative Easing (QE), and then destroying the debt so it can never be sold. If so, helicopter money differs from tax cuts plus QE only in so far as the money creation with QE is temporary (the debt owned by the central bank is not destroyed), while with a helicopter drop it is permanent. With temporary money creation (QE) it is possible to claim that future inflation will not be allowed to exceed the target, because the central bank is free to reverse QE as much as it needs to. Standard macro would suggest that a permanent increase in base money will raise the price level eventually, so it may no longer be possible to prevent inflation exceeding its target at some point.
Is this standard macro right? I think many get confused by discussion flipping from prices to quantities or vice versa. They may think that the central bank can always raise interest rates to keep inflation in check. But just as in a free market the apple producer cannot flood the market with apples and keep the price of apples high, the central bank cannot flood the economy with money and keep interest rates high. It cannot independently control base money and short term interest rates.[1]
That is the macroeconomics as I see it. What about the naive part. First there is a standard point. A central bank could promise to raise inflation in the future, but will it keep that promise? There is a time inconsistency problem here, which I have talked about before. Perhaps we need some device to force the central bank to make good on raising future inflation, and printing money now might be just that device. In that sense, helicopter money may be a more effective means of increasing future inflation than raising the inflation target. However, if that is the argument, it is better to be honest and call for helicopter money as a means of raising future inflation. The FT leader I mentioned appeared to suggest the opposite.[2]
Second, perhaps this is all about fiscal policy after all. Governments have convinced themselves that we need austerity because government debt needs to come down, and helicopter money allows them to relax austerity without compromising on debt. Stop trying to convince governments they can be much more relaxed about debt in a recession, and let them use money creation as a way of getting fiscal stimulus. As long as there is not too much helicopter money, the increase in future inflation will probably be manageable and will help the recovery, so why quibble. But lets keep quiet about the future inflation bit - we do not want to put them off.
Which brings me back to Dr. Carney. Just imagine that the Chancellor told him over the next few months that he had decided to embark on a limited programme of helicopter money. The aim was to stimulate the economy, and the fact that the money was being used for tax cuts before an election was just one of those coincidences. As the Chancellor knew that Dr. Carney was in favour of additional stimulus, he was sure that he would be happy to go along with this. What would Dr. Carney say? Well we already know from episode one:
“with respect to so-called helicopter money, which was referred to there, I will be absolutely clear, I cannot envisage a circumstance where I would support that as a strategy”
Do I think these are the words of a seasoned central banker who is afraid to break a taboo? I suspect instead they are the words of a good macroeconomist who wants to call a spade a spade. If the Chancellor announced bond financed tax cuts, we know Dr. Carney would not object. If he announced a higher inflation target - well that is also a decision for the Chancellor and not the Governor. But announcing a policy that could severely compromise the future Governor’s ability to do what he is mandated to do, while pretending it does not - I think he has every right to object to that.[3]
[1] Perhaps the hope is that tax cuts financed by printing money will increase demand - because the government has not issued any debt which will require future tax increases to pay back or service (Ricardian Equivalence will not apply) - yet the central bank can still sell what assets it has to mop up the money created by the tax cut. But as this leaves the private sector holding the same amount of government debt as they would if the tax cut was debt financed, it is difficult to see how this trick could work.
[2] As I explained here, if helicopter money was expected to raise prices, consumers would need to save all the tax cut to preserve the real value of their money balances. However savings would still fall because higher prices at the zero lower bound would reduce real interest rates. So the policy is more expansionary because future inflation increases. Here is a closely related post.
[3] I cannot help noting, however, that to the extent that austerity involves price increases of some form, you could legitimately argue that the Chancellor is already making life rather difficult for the MPC. Here is a chart from a recent speech by MPC member Ian McCafferty [HT uneconomical]. The FT suggests the government’s increase in university tuition fees may add 0.3% to inflation both this year, and in the following two years.
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