Give people money to spend, literally
We wrote yesterday that there is a strong case for further monetary stimulus across all the world’s large economies. As we put it, heed the yaysayers, not the naysayers. Against this the naysayers may respond that more monetary stimulus would be a fine thing but central banks have run out of ammunition. They are wrong about that and the best way to establish this is to consider what all agree is the monetary policy of last resort — “helicopter drops”, or gifts of newly minted money from the central bank to the public or, ideally, the private sector. If even that wouldn’t have an effect, there is little hope for more moderate policies.
The Bank of Japan is widely seen as the most likely candidate to try helicopter money, as Reuters and the New York Times report. This is for a combination of reasons. The BoJ has long been a pioneer of new monetary policies. Japan’s government has the largest gross debt and fiscal deficit in the rich world, which casts doubt on its willingness to use fiscal policy and perhapsthe effectiveness of fiscal stimulus if consumers curtail spending in response to worries about the public finances. Indeed the Japanese fiscal package announced today is much less than meets the eye.
Resistance to a BoJ helicopter drop in Japan, however, seems fierce. A recent case in point is a puzzling analysis by Richard Koo, Nomura’s chief economist — puzzling because it simultaneously says gifts of newly minted money won’t increase spending and that they would make the yen lose value. But of course the latter is the same as yen inflation — exactly what policymakers are struggling to achieve — which it is generally thought would boost spending. It would come with an attendant reduction in the real value of Japan’s debt overhang, which Koo himself incisively argues mires the economy in a “balance-sheet recession”.
Be that as it may, Koo is in good company. There is a surprisingly widespread view that helicopter drops are ineffective or, more precisely, no more effective than other more conventional policies such as central bank asset purchases or “quantitative easing”. Brad DeLong, in his usefully public musings about what to think, highlights Paul Krugman’s critique of helicopter money as well as Eric Lonergan’s recent response.
Krugman succinctly makes the now conventional argument why giving new hundred-dollar notes away (to the government or to the people) will not increase demand, or at least no more than quantitative easing. Both, he says, depend on the government actually providing additional fiscal stimulus and, if it does, then the type of financing is irrelevant. The world, economically speaking, is the same whether or not the central bank buys bonds with new money or simply gives new money away.
But the world is not the same. Lonergan explains one reason why: institutional differences matter. “Helicopter money is partly useful precisely because it addresses the institutional failure of fiscal policy” — in other words, since governments are so unwilling to borrow and spend despite record low interest rates, forcing money into people’s hands is a way to circumvent fiscal policymakers’ recalcitrance. (Then there is the small matter of the law. According to Deutsche Bank researchers, all the major jurisdictions allow central banks to give money to the private sector but most prohibit direct transfers to the public sector.)
There is another difference that matters. In QE or other asset purchases, the central bank issues new money and buys securities — typically government bonds — with it. In other words, it swaps securities with cash in the private sector’s wealth holdings while leaving the size of those holdings the same. All that changes is that the income stream from the purchased bonds now returns to the government (central banks repay their profits to the finance ministry) instead of accruing to private holders — which depending on the public and private sector’s marginal propensity to spend could make a small difference to demand.
With helicopter drops, there is no such swap. The newly minted cash is added to the private sector’s wealth holdings. From the point of view of private individuals, their net wealth (or their net income stream, if helicopter drops are carried out in portions over time) has increased, and for a large enough increase, they can be counted on to spend more. That should boost nominal demand even if the government, whose financial situation remains unaffected, does nothing.
(Some argue that recipients will worry that the new money is not “permanent” — that once the economy recovers, the central bank will try to reverse the increase in the money supply. But as Lonergan writes elsewhere, “households in receipt of a check from the central bank don’t ask, ‘before I spend/save/repay debt with this windfall, can you remind me if the associated change in monetary base is permanent or temporary?’”)
The accounting counterpart to the private sector’s increase in net wealth will be a fall in the net equity of the central bank — a transfer, as it were, of some of the profitmaking opportunity from being an issuer of legal tender. So one could see helicopter drops as shifting net wealth from an institution that does not engage in spending to the private sector, which does. Far from being essentially a fiscal operation as some would have it, this seems like the purest form of monetary policy possible.
And why would we not engage in it? If not now — in a situation with persistent deflationary pressures, inadequate demand leaving resources idle, and large nominal debt overhangs — then when? The worst-case scenario is that helicopter money only boosts inflation and not real spending. But as we pointed out yesterday, we are in the paradoxically fortunate situation that greater nominal spending growth is a good thing regardless of whether it is initially the volume or the price of demand that goes up.
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