Helicopters and slippery slopes

One of the reasons I am against using helicopter money as a counter-cyclical monetary policy tool is that, once society gets a taste for it used in these circumstances, there will be pressure to use it for acyclical purposes, financing whatever might win an election.

Well, if you think this is concern-trolling [an internet term I only recently realised applied to me], you need look no further than the debate about helicopter money in the UK.  The early interventions, in the darker days of the crisis, urged it as a tool to boost aggregate demand and close the output gap, while conventional fiscal policy was constrained.

Now, with the helicopter idea out there again, comes the next step:  Corbyn’s ‘People’s QE’, being touted as a means of general deficit financing, pretty much orthogonal to whether it’s actually needed for monetary policy purposes [since no reference is made to the fact that those charged with monetary policy are not voting for more stimulus of any kind].

You can see why.  Corbyn is making some expensive promises about ending austerity and renationalising industries.  After all the fuss caused by proposals to sell slightly more bonds than the Tories, printing money seems like a corridor of least resistance.

Going further back, you could argue that the first slippage was QE itself.

As the public grappled with the ‘print money, buy assets’ meme, it’s only natural to wonder why if the Bank can buy those sterile old bonds, it can’t buy something more useful for us all.  Such worries were alive and well when I was in the Bank of England.  And they were not helped by the UK Treasury using the ‘profits’ from these purchases [which one would expect to be reversed later, as assets are sold by the BoE] to reduce its routine borrowing.

This is a small argument in favour of the idea pushed recently by Miles Kimball and Willem Buiter, that institutional reform should be undertaken to remove the zero bound to central bank interest rates, to preserve maximum continuity in monetary policy operations when a large stimulus is needed.  Or, in due course, of raising the inflation target.  This would not achieve the same flexibility in permitting large stimuli, but it could be got with less institutional innovation, and a smaller risk of a kind of ‘WTF’ moment when the populous grapples with the idea it has to pay someone to borrow their money from them.

Stepping back, the resurgence of helicopter money talk of one sort or another has been one episode amongst many that show the forces arrayed against monetary policy regime stability.

When interest rates were pushed to their natural floors, and inflation was allowed to rise into the 5 per cents, the conservatives thought this an example of outrageous overreach, and/or forecast spiralling inflation.   Now, on the other side, we have calls for the authorities to solve our problems by harvesting magic money trees.

So far, the monetary policy regime, held together in the UK at least by slender legislative threads, has stayed intact.  That it has is pretty impressive.

One of the things I grasped in my time writing speeches for my betters at the BoE was the idea that monetary stability wasn’t simply a technical matter of the monetary authority figuring out the right interest rate setting, or even the Treasury figuring out the right mandate to hand off to the central bank.  It was the endurance of a political consensus about what the means and goals of monetary policy should be.

It often seems like there are a great many who don’t share the same basic understanding of the mechanics and benefits of monetary policy as the economics profession [who knows they may yet be proven right].  So it’s something of a marvel that what I see as basically the right monetary framework has survived despite this lack of understanding.

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9 Responses to Helicopters and slippery slopes

  1. “since no reference is made to the fact that those charged with monetary policy are not voting for more stimulus of any kind”

    Perhaps the Bank Of England are happy with the current *scale* of stimulus, but we can’t be sure they wouldn’t be satisfied with a different *form* of stimulus, e.g. Helicopter Money.

    If Helicopter Money was announced by the government, and this led the Bank to scale back their current stimulus programs to some extent, while also continuing with their current predictions for variables such as inflation, then perhaps that would mean that the Bank considers HM as a substitute for conventional QE?

    • Tony Yates says:

      I think the BoE are dead set against HM. Though, in fact, I’m not sure I care what they think. Since, ultimately, it’s for the Government to determine whether these instruments are at their disposal.

  2. I don’t share the concerns in the above article about “slippery slopes”, not that slippery slopes are not an ever present danger.

    One shouldn’t attach too much importance to what Corbyn says. He is a typical MP in that he doesn’t know much about economics. For a better thought out version of “print and spend” by some authors who know their economics much better than Corbyn, see the submission to the Vickers commission by Positive Money, the New Economics Foundation and Prof Richard Werner:


    Under that version of print and spend (and/or cut taxes), the decision as to how much to print is firmly in the hands of the central bank, or some similar committee of independent economists. At the same time, obviously political decisions, like what proportion of GDP to allocate to public spending remain, quite rightly, with politicians.

    And that split of responsibilities is in fact just the same as under the existing system. That is, under the existing system, the CB has the final say on the AMOUNT OF stimulus in that it can countermand what it believes to be excess of deficient fiscal stimulus with interest rate adjustments, or QE.

    Thus there shouldn’t be any more dangers of the slippery slope variety under the above three authors’ version of “print and spend” than under the existing system.

    • Tony Yates says:

      The version that are calibrated to monetary policy purposes are certainly a step up. But to make that credible they have to be unrelated to particular programs, which otherwise imply probably acyclical liabilities [unless it’s printing to pay u/e benefits or similar]. But I feel strongly that even this would be another step down that slippery slope.

  3. nicholbrummer says:

    One could of course make the exact same slippery slope argument about the policy of inflation targeting, with the extremer versions disregarding employment. That would be history.

    Of course the extreme cases of print-and-spend are war economies with their extremely focussed and very high productivity and innovation power. Germany was treated with a dose of Marshall aid, plus a nanny-role for the dollar that took away any need for local money printing, and embedded the belief that printing is not necessary, bad, taboo, should be prohibited forever, even in case of depression of war.

    Did the Marshall aid and the hegemony of the dollar move Germany and Europe along a slippery slope to the Euro with its inflation fetishism and taboo of printing, even when it is non-inflationary loss-absorption to recover from a crisis?

    • Tony Yates says:

      I agree, that the danger with the slippery slope argument, is that soon you fall down the slippery slope of seeing them everywhere!

      • metatone says:

        But the key here is that the economics profession persistently underestimates the damage of their own slippery slope where they assert that unemployment doesn’t matter, that whatever happens to the little people isn’t important… The reason new (and likely bad) thoughts about helicopter money keep springing up is that economists, including those at the BoE colluded in propping up banking entities and asset prices at the cost of cutbacks to services and benefits to the great mass of people…

      • Tony Yates says:

        I take the basic point, that these desparate conversations about HM have their origins in the crisis, but I think you have the econ profession entirely wrong.

  4. Lyn Eynon says:

    In this – and your earlier posts on ‘People’s QE’ – you confuse two issues: the amount of money that should be created and the form in which this should be created. ‘People’s QE’ is really about the second of these: it argues that monetary expansion should be directly linked with public investment rather than purchasing financial assets. This is a different argument from that about how much expansion is needed.

    Let’s see how this might work for housing. The BoE could fund this by purchasing directly from a government housing corporation bonds secured against anticipated rents, so that in the long run both the bonds and the associated monetary expansion become self-liquidating. Such bonds could have replaced the ‘Bankers’ QE’ that increased asset wealth but had limited effect on growth. Instead a ‘People’s QE’ would have both built homes and created jobs.

    So the case for the recent past is strong. But how does it look for a period such as now – or perhaps 2020 – when the BoE does not consider QE to be desirable?

    An obligation on the BoE to purchase public investment bonds would not in itself force the bank to expand the money supply. It could offset these purchases by selling other assets back to the market and/or constrain money creation by commercial banks through various macro-prudential measures. So there need not be an inflationary impact.

    There would be costs. ‘People’s QE’ at capacity would push up interest rates, reducing asset values and crowding out private expenditure. So the real discussion is not about monetary policy but about the relative size of the public and private sectors. And that is a matter for elected governments.

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