Of Voices in the Air and Never-Ending Dreams of Helicopter Drops

Confusions about so-called helicopter money (HM) continue unabated. My recent letter to the editor of The Financial Times, titled “’Helicopter money’ is a muddled fiscal policy by another name,” has not met with universal approval. In fact, it seems to have ruffled some feathers and caused some annoyance.

Simon Wren-Lewis is a case in point. In a response to my letter (and a piece in the FT by John Kay) published on the Mainly Macro blog, Wren-Lewis reiterates his concerns that trying to distinguish fiscal from monetary policies is ultimately pointless and that central banks need to have HM in their armory since otherwise delegating stabilization would be dangerously incomplete. Mr. Wren-Lewis is perhaps best known for his selfless efforts at trying to wring any sense out of mainstream macroeconomics – an endeavor that takes a lot of wringing indeed. Another case in point is fellow helicopter warrior J. Bradford DeLong, who re-published Wren-Lewis’s HM elaborations on his own blog with the remark “intellectual garbage collection.” The wisdom of HM is just too obvious to be challenged, it seems.

But first recall here that Bradford DeLong is the supposedly “New Keynesian” macroeconomist who a few years back published a piece titled “The Triumph of Monetarism?” in the Journal of Economic Perspectives, arguing – quite correctly actually! – that New Keynesianism was really muddled New Monetarism by another name. It is also the same new monetarist economist who not so long ago published a piece together with Larry Summers titled “Fiscal Policy in a Depressed Economy,” in which the two argued that the time was right for governments to ramp up their investment spending and not worry about debt. That argument made quite a bit of sense to me at the time – and it still does today, as I suggested in my FT letter.

In any case, I was quite amused when at an event at the Brookings Institution on May 23 Larry Summers proclaimed that: “Helicopter money, hear me, helicopter money is fiscal policy. There is no such thing as helicopter money that isn’t fiscal policy.” That may well be just yet another useless point to make of course. But I will leave it to Messrs. Wren-Lewis and DeLong to do the intellectual garbage sorting of Mr. Summers’ remark.

Moving on, a rather interesting piece was published on VoxEU by Claudio Borio (together with Piti Disyatat and Anna Zabei). Borio’s earlier research at the BIS focused on central banks’ operating procedures. He isn’t someone who can be easily fooled about what central banks are doing or not doing. Furthermore, and this may not be a coincidence, he is also one of those rare cases among monetary economists who clearly identified what I long ago dubbed the “loanable funds fallacy” in Ben Bernanke’s “saving glut hypothesis” (see here).

Bernanke, of course, is also known as “helicopter Ben” for proposing to the Japanese authorities engaged in fighting deflation that a tax cut coupled with government bond purchases by the central bank was the real world equivalent to Milton Friedman’s original helicopter fiction (see here). Bernanke got this one right. He clearly distinguishes that there are two things and two parties involved. First, the fiscal authorities either cut taxes (or send out transfer checks) or, and that’s my own preferred choice, boost spending directly; transforming the energy infrastructure to mitigate climate change, for instance. Second, the monetary authorities, as a “dealer in money and debts” (Keynes), make sure to help accommodate the portfolio preferences of banks and nonbanks and establish interest rates that are in line with the economic situation. The more aggressive variety of such endeavors on the part of the monetary authorities became known as “quantitative easing,” which is all about dealing in money and debts (see here). Belatedly, even the eurozone’s monetary authorities have accepted to play their part. What we are still waiting for is that the fiscal authorities start playing their part too. For otherwise it will all come to nothing in the end.

But first back to Borio et al. They have some dry humor to spare on the “permanent” part featured in monetarist modeling fantasies about HM and end up questioning whether HM is really “an additional tool for monetary policy or simply a reformulation of what central banks have done so far, albeit with greater fanfare.” Based on Borio’s earlier research on actual central bank operating procedures, they conclusively show that “either helicopter money results in interest rates permanently at zero – an unpalatable outcome to most, including those that advocate monetary financing – or else it is equivalent to either debt or to tax-financed government deficits, in which case it would not yield the desired additional expansionary effects.” That’s of course much in line with what MMT proponents like Scott Fullwiler have long argued. And for the more realistic case alluded to by Borio et al., that interest rates will not stay at zero permanently, what QE helps to accomplish is essentially a shifting of seigniorage through time (see here). That intertemporal shifting exercise can be extremely helpful indeed, even if its potential is not unlimited (as some seem to think who dream of helicopter drops all too badly these days).

Is it a “free lunch” then or not? This is where Borio et al. go wrong, repeating Friedman’s dictum that “there is no such thing as a free lunch.” For regarding central bank action, seigniorage and fiscal policy, the denial of a free lunch assumes that the economy is operating at its full employment potential and at the desired inflation target rate. If not, however, there can be plenty of scope for the central bank to accommodate mobilizing idle resources and realize potential growth – and without any “price tag” other than the income claims on output that come along with any economic activity. Whether interest rates are zero or not mainly influences the distribution on these income claims. Borio’s own New Austrian leanings may make it difficult to concede today’s reality of idle resources awaiting mobilization by “Keynesian stimulus.”

But this is of course the very point that HM proponents – new monetarists wearing their occasional Keynesian clothes – are ultimately after: to boost spending and economic activity. And that’s all good. But, to repeat, the part to be played in this by the monetary authorities is even in place in the eurozone now. It is the fiscal part that is scandalously missing in action.

So should we then just pretend that the fiscal-monetary distinction does not exist or does not matter at all? Wren-Lewis and his HM (“QE for the people”) friends want the checks to simply get mailed out by the central bank rather than the government, and they want to call the mailing “innovative” monetary policy rather than what it really is: fiscal policy. So the final irony in this whole HM saga is the fact that our mainstream new monetarists fall back on the independent-central-bank-as-benevolent-dictator solution to all problems political. If our politicians are too stupid, just leave it to central bankers. Suffice to mention here that Post Keynesians are generally more skeptical about both independent central bankers and benevolent dictators than our monetarist mainstreamers (see here). And I may also add that the arch-monetarist Milton Friedman actually hated the whole idea of central bank independence. Abolishing democracy is unlikely to solve our deadlocked politics. Central banks are no helicopters, and independent central bankers are no saints or angels either.

Perhaps at some point our HM proponents would also not hesitate to delegate the climate change mitigation issue to independent central bankers because our elected politicians can’t really be trusted with anything important; while unelected central bankers still need to be able to save the world even when QE becomes ineffective. And perhaps at some point they would even delegate control over the nuke suitcase to independent central bankers too – simply because our elected politicians fail to do the job that our mainstreamers have identified as the right one. As their final act we may then leave it to our elected politicians to switch off the light in parliament/congress – and simply enjoy benevolent dictatorship ever after.

The moral of the story is that our new monetarist mainstreamers dreaming of helicopter drops not only have huge troubles grasping money and central banking; which is not so surprising since their fantasy modelling world is inherently nonmonetary. They also seem to be intellectually challenged grasping the concept of democracy. We either need to dump the idea that monetary policy is apolitical and purely technical, a job best left to independent technicians for that reason. Or we need to dump the idea that political decisions are to be made by “government of the people, by the people, for the people.” For fiscal policy is clearly not apolitical and purely technical. You can’t have your cake and eat it too.