Helicopter money: the fundamental deceit

9 Jun 2016 | By Tom Traill

There is no escape from the topic of helicopter money. It is like the opening sequence of MASH is on infinite loop. Almost every newspaper columnist and celebrity blogger has offered their opinion on its merits and demerits. Helicopter money has become extremely fashionable, despite, or maybe because, there are varying interpretations of what it is and whether it represents a material departure from existing policies.
According to the Helicopter Man, Ben Bernanke, helicopter money is a money-financed fiscal program (MFFP). Stepping away from the literal distribution of cash from a helicopter, the general idea is for the relevant finance ministry to distribute a fixed amount of money in the form of a tax cut, a tax rebate or an infrastructure project.  While it is not strictly necessary to involve the commercial banking system, many proposals do.  Adair Turner’s suggestion is that the central bank is credited with a money asset – a perpetual zero-coupon bond issued by the government, allowing the central bank to credit the commercial banks with additional reserves at the central bank of equal value.
Helicopter money, so defined, sits at the nexus of fiscal and monetary policy. As such it represents a deliberate blurring of the distinction between the central bank and the finance ministry. This blurring could be mitigated by the central bank allocating an account to the Treasury. This account could then be credited at a time and to a level that the central bank decrees, so that the Treasury could disseminate the money as it chooses. Presuming that the method of implementation makes a difference, tax rebate vs tax cut for example, then there is still a dilution of central bank independence.
While there are an increasing number of high-profile advocates of helicopter money, their advocacy is often a form of thinly-veiled fiscal activism.  Remember that QE can be construed as monetary finance of government deficit spending. Certainly, the UK public sector made a huge contribution to the expansion of the money supply (see chart) through its QE programmes. If the objection to further QE is that it involves more, highly-concentrated purchases of government bonds, then helicopter money is seen as a way of achieving the same end while avoiding the issuance of bonds in the first place.
Yet there is, by no means, uniform support for the policy, and there are a number of potential pitfalls in its implementation. What if the recipients of the windfall decide to save a large proportion of it, or use to fund foreign holidays or imported goods? What benefit to domestic demand would then result? Some of these concerns can be allayed by the use of time-limited vouchers. However, there is nothing to prevent the vouchers being traded for cash, allowing consumer preferences for foreign travel or goods to be exercised as before.
A fiscal stimulus based on infrastructure spending would have a much smaller potential for leakage, but the benefits of the cash drop would be far less evenly distributed and the economic value of the expenditure would still be open to question.
Beyond and above these valid concerns, there lies a fundamental deceit at the heart of the proposal that has garnered little mention. Helicopter money would mean the end of inflation targets. There are a number of descriptions of a MFFP as QE with a fiscal stimulus, but that is glossing over a vital distinction: QE is nominally finite and reversible, while MFFP is nominally permanent. If the central bank promises that MFFP is permanent, then it cannot in good conscience uphold an inflation target. If it upholds its inflation target, then it must revoke the permanence of the money injection.
In a world of fractional reserve banking, the authorities would retain no control over the amplification of bank credit that would ensue from the helicopter drop, and thus no control over the inflationary scenario that would unfold. While there is apparent scope to drive inflation higher from today’s low levels without contradicting the stated inflation objective, there are no credible mechanisms for reining back the stimulus, once released.
It is impossible to judge how much monetary finance is appropriate. It’s akin to back burning in forestry, burning away the undergrowth to encourage new growth. They may plan to clear 20 acres, but then a warm wind comes out of nowhere and they accidentally burn down the whole forest.
Make no mistake, helicopter money disenfranchises the central bank and renders it powerless to defend an inflation target, whether breached from above or below. Effective central bank independence is out of the window when the helicopters are whirring.

 

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