Authers' Notes: Send in the Helicopter Money?

(Bloomberg) -- In the latest installment of Authers’ Notes, our Bloomberg book club, Senior Markets Editor John Authers led a conversation about "The Case for People’s Quantitative Easing" with its author, Frances Coppola, and Bloomberg Opinion’s Clive Crook.

Any opinions John, Frances and Clive express are their own. Bloomberg makes no recommendations about particular securities or investment strategies.

Below is a complete transcript of blog entries in the order they were originally posted. And if your curiosity about the book club demands further reading, check out our last discussion -- on "Red Flags" by George Magnus -- and pick up a copy of the next book on our list: "The Myth of Capitalism: Monopolies and the Death of Competition" by Jonathan Tepper and Denise Hearn. -- Mike Nizza

10/17 11:00 ET

Frances is a Forbes contributor and author of the Coppola Comment finance & economics blog. She spent 17 years working for banks, where much of her focus was on settlement, accounting and risk-management systems. She writes for a variety of media and industry publications, including the Financial Times, the Independent, Open Democracy, CapX and Wired. She is also a frequent commentator for the BBC.

Anny Kuo  TOPLive Editor

10/17 11:02 ET

The reason we are discussing this now, apart from the fact that Frances has just published an admirably clear and succinct defense of the helicopter money concept, is that the idea is rapidly rising to the top of the political agenda. There is broad consensus, correct or otherwise, that QE as practiced over the last decade has stoked inequality while failing to stimulate economic growth. Now, Milton Friedman’s idea of "helicopter money", floated over 50 years ago, is on the agenda.

Politicians are interested, and so are some of the most important opinion-leaders in markets and economics. Stanley Fischer, once deputy chairman of the Fed, recently produced a paper broadly endorsing the idea. So did Ray Dalio of Bridgewater Associates.

But how would printing money work in principle? And how could we avoid allowing the precedent of creating money to degenerate into a spiral of hyper-inflation or of irresponsible government spending? These and all the questions surrounding a "quantitative easing" that was aimed directly at individuals will be up for discussion.

John Authers  Senior Editor

10/17 11:02 ET

Let’s start with a simple question:

What are you proposing in your book and how does it differ from previous experiments like QE or UBI?

And reminder if you have a question, please go to authersnotes@bloomberg.net.

John Authers  Senior Editor

10/17 11:04 ET

I’m proposing that to respond to an economic shock, central banks should use one-off distributions of money directly to individuals to support aggregate demand. QE supports asset prices, but it doesn’t reach people with high propensity to spend, so I think we need helicopter drops as well as QE. UBI I regard as a long-term fiscal stabilizer rather than an emergency response.

Frances Coppola  Author, The Case for People’s Quantitative Easing

10/17 11:06 ET

I think your book is great and I recommend it to readers. Overall I also agree with your main thesis -- that helicopter money should be added to the central banks’ toolkit. But a couple of your arguments puzzle me. One is that you seem to say, in one key part of the book, that helicopter money isn’t actually needed – or wouldn’t be, if the fiscal authorities simply did their job.

Am I understanding you correctly? We only need helicopter money because governments are too timid to borrow in a conventional way at sufficient scale?

Clive Crook  Bloomberg Opinion Columnist

10/17 11:06 ET

I dismissed the idea of using central bank money creation powers to finance fiscal spending programs, for example infrastructure.

But I don’t think governments should do short-term demand stimulus. So I regard helicopter drops as primarily the role of the central bank.

Frances Coppola  Author, The Case for People’s Quantitative Easing

10/17 11:08 ET

Well yes I can see that helicopter money is a central-bank measure, if it’s to work at all. But why don’t you want governments to do fiscal stimulus?

Clive Crook  Bloomberg Opinion Columnist

10/17 11:09 ET

Clive, I do want governments to do fiscal stimulus, but as investment in the supply side not short-term support for aggregate demand after a shock.

Frances Coppola  Author, The Case for People’s Quantitative Easing

10/17 11:10 ET

Let’s move on to the next question.

When helicopter money is discussed, two words tend to come up: Weimar and Zimbabwe.

Are such comparisons overdone? Are there any risks of hyperinflation from People’s QE, and what controls are needed to avoid such an outcome?

And reminder if you have a question, please send to authersnotes@bloomberg.net.

John Authers  Senior Editor

10/17 11:11 ET

Hi all. With any form of monetary stimulus there is always a risk of runaway inflation - remember the dark warnings about hyperinflation in the early days of QE? But helicopter drops are intended to be one-off responses to negative economic shocks which cause a large fall in aggregate demand. The risk under these circumstances is deflation, not hyperinflation.

Frances Coppola  Author, The Case for People’s Quantitative Easing

10/17 11:12 ET

Hyperinflation is always associated with severe damage to the supply side, usually as a result of war or revolution. I wouldn’t recommend using helicopter money under these circumstances, not least because there is unlikely to be a responsible government in place.

Frances Coppola  Author, The Case for People’s Quantitative Easing

10/17 11:16 ET

But if the helicopter drops are successful, and the precedent is set that money can be created in that way, is there not a risk that it becomes politically ever harder to say no to further helicopter drops? Do Weimar and Zimbabwe show us that what most matters is a tough institutional framework to limit the use of helicopter money?

John Authers  Senior Editor

10/17 11:18 ET

Indeed helicopter drops could become victims of their own success in the absence of a robust institutional framework. I don’t think that’s a reason not to use them, just to be aware of the risks and ensure that the institutional framework is in place to mitigate them. In both Weimar and Zimbabwe, no such framework was (is, in Zim’s case) in place.

Frances Coppola  Author, The Case for People’s Quantitative Easing

10/17 11:19 ET

My own answer to the question about the place for fiscal stimulus is that under some circumstances helicopter money would be more effective in raising demand. But you seem to have no reservations about the effectiveness of fiscal policy in raising demand. That option is always there, and would always work, on your view. So why not just do that whenever you hit the effective lower bound on interest rates? I feel I’m in the odd position of believing that helicopter money is (sometimes) more needed than you do.

Clive Crook  Bloomberg Opinion Columnist

10/17 11:24 ET

I don’t think that’s what I said! I regard fiscal policy as being primarily about distribution. Tax and spending changes affect the distribution of resources. This can raise aggregate demand, but it’s not primarily its purpose. When the economy is short of money, more money is needed everywhere. It’s not enough to distribute money from one area to another, as fiscal policy does.

Frances Coppola  Author, The Case for People’s Quantitative Easing

10/17 11:25 ET

Bloomberg reporter Anchalee Worrachate asks:

You probably heard of the Thai government’s Chim, Shop, Chai (Eat, Shop, Spend) project, in which Thais get 1,000 baht (~$33) each. They have a way to track it to make sure you spend instead of putting it into your bank.

Is that qualified as helicopter money?

And reminder if you have a question, please send to authersnotes@bloomberg.net.

John Authers  Senior Editor

10/17 11:27 ET

Hi Anchalee, I’m not familiar with the project. If it is a completely indiscriminate short-term money distribution, I guess I would regard it as helicopter money, even though it is done by the fiscal authority. However, if it is a long-term initiative then it is closer to universal basic income, which I regard as an automatic stabilizer in the same way as unemployment benefit.

Frances Coppola  Author, The Case for People’s Quantitative Easing

10/17 11:28 ET

I suppose the follow-up question (and yes it’s covered beautifully in the book, but let’s talk this through) is whether our existing institutions are strong enough to deal with this. Are independent or quasi-independent central banks as currently constituted up to the job? Would we need to set up new bodies to oversee such drops?

John Authers  Senior Editor

10/17 11:29 ET

Central banks and fiscal authorities need a framework for cooperation without control from either side. Currently what we have seems to be more like each does its own thing, but in practice central banks have had to compensate for determined fiscal consolidation, which I would regard as fiscal dominance.

Frances Coppola  Author, The Case for People’s Quantitative Easing

10/17 11:31 ET

You raise the issue of the “institutional framework.” This is the other thing that puzzled me about your book. At many points you uphold the need for central-bank independence – that we need an independent central bank with helicopter money in its toolkit. Elsewhere though you say you want to kill the sacred cow of CB independence, emphasizing that the boundary between the CB and the finance ministry is always blurry and arbitrary. So I’m not sure what kind of institutional division of labor you’re actually proposing.

Clive Crook  Bloomberg Opinion Columnist

10/17 11:32 ET

Clive, "independence" which means a central bank cannot cooperate with a fiscal authority, is a sacred cow. Monetary operations have fiscal consequences and fiscal operations have monetary effects. I propose in the book that the roles of the central bank and fiscal authority should be more clearly defined so they can cooperate without one controlling the other.

Frances Coppola  Author, The Case for People’s Quantitative Easing

10/17 11:35 ET

Fiscal policy doesn’t merely "distribute money from one area to another." It increases aggregate demand -- doesn’t it? And on your view solvency is not a problem for the governments of countries that issue their own currencies.

There’s no debt ceiling to worry about, on your view; no problem re "fiscal space." So spend and borrow! What am I missing?

Clive Crook  Bloomberg Opinion Columnist

10/17 11:36 ET

Clive, the aggregate demand effect of fiscal policy comes from its distributional effects. In other words, where the government chooses to spend and whom it chooses to tax is what makes the difference. It’s possible to make tax cuts, for example, that have almost no effect on aggregate demand, because the people they target don’t need to spend the money. Central bank helicopter money can raise aggregate demand while being agnostic to distribution.

Frances Coppola  Author, The Case for People’s Quantitative Easing

10/17 11:39 ET

Tamas Peter Vojnits, ex-chief economist at OTP Bank, Budapest, weighs in:

No doubt, the purchasing power newly created by a central bank would be very powerful, as it would not rely on either existing or future private saving, and thus even a small amount would probably be much more expansionary than if the same amount was spent in the form of traditional fiscal expansion. And exactly because of this it is like playing with fire.

When this disciplinary force, transmitted usually by capital markets, disappears, and politicians realize the full potential of creating purchasing power out of thin air, it is only a question of time that things might go astray. Would they be able to resist the temptation to apply it in much bigger doses?

John Authers  Senior Editor

10/17 11:42 ET

Tamas’s question is related to earlier questions about hyperinflation and responsibility. There is always a risk that a central bank and/or fiscal authority will overdo it, and it is possible that this might mean inflation overshoots. However, there are other tools that can be used to correct an overshoot. In the end, it boils down to having responsible governance of both central bank and fiscal authority.

Frances Coppola  Author, The Case for People’s Quantitative Easing

10/17 11:44 ET

I think Mr Vojnits’ point is important, and as I recall Adair Turner, who also favors helicopter money, makes a similar point. The potential behavioral response to helicopter money, and the way it changes a government’s entire perception of the choices facing it, is dangerous. There are also critics who make the same point, but from the point of view of the people receiving the money.

Once people know that the central bank can just drop them money from helicopters, even if at first this was only done in extreme circumstances, the risk has to be that they will demand it in ever less extreme circumstances. Are these fair criticisms and how do we deal with them?

John Authers  Senior Editor

10/17 11:48 ET

John, the question about political demands for unnecessary helicopter drops is again about the institutional framework. If the central bank decides when helicopter drops are needed and how much to distribute, the political risk is diluted.

Frances Coppola  Author, The Case for People’s Quantitative Easing

10/17 11:51 ET

Mr Vojnits now has this follow-up:

For all the theoretical merits of helicopter money as a potential crisis-fighting tool the ultimate question for me has always been, as is the case with all kinds of conventional and non-conventional monetary policies, "how to take away the punch bowl, just as the party gets going".

So, I wonder if there is an automatic mechanism in the author’s mind, a kind of automatic stabilizer, that could effectively handle the problem of time-inconsistency in a practical way. I could come up with a bunch of technical solutions, but none of them address well the human factor; ultimately it’s the politicians’ responsibility to carry out economic policies that serve the common good.

John Authers  Senior Editor

10/17 11:54 ET

Mr Vojnits touches again on the institutional framework. Central banks are only as independent as politicians allow them to be. If central banks are to be able to take away the punchbowl, they must have the backing of responsible politicians. This is true whether ’removing the punchbowl’ be raising interest rates, unwinding QE or stopping helicopter drops.

Frances Coppola  Author, The Case for People’s Quantitative Easing

10/17 11:59 ET

I very much agree that independence doesn’t rule out cooperation. But the hard question is what precise form this cooperation should take. In particular, do both branches need to agree to do helicopter money before they do it? Do they need to agree on the right amount, and on the timing and exit conditions? And what happens if they disagree? A fully independent central bank could go ahead with helicopter money regardless, even if the finance ministry disagreed. A fully subservient CB could be told to do it whether it liked it or not. Two very different regimes. And neither is really “cooperation.”

Clive Crook  Bloomberg Opinion Columnist

10/17 12:03 ET

I don’t really think there is any such thing as a fully independent central bank. But if there were, clearly it could do helicopter drops against the wishes of the finance ministry. Equally, a captive central bank (and they do exist) could be directed to do them. But in each case, the institutional framework is flawed. One authority is controlled by the other.

Frances Coppola  Author, The Case for People’s Quantitative Easing

10/17 12:04 ET

Dec Mullarkey, managing director at SLC Management in Wellesley Hills, Massachusetts, asks:

Is helicopter money only effective if it’s spent? If used to reduce debt, it seems to do little for current conditions. Clearly debt reduction would create potential borrowing capacity but the intended instant “bazooka” effect seems delayed.

John Authers  Senior Editor

10/17 12:05 ET

Mullarkey’s question is important. The point of helicopter money is that people should spend it. If a large proportion of it is saved, the effect on aggregate demand would be diluted - it would become similar to QE.

However, if households used it to pay down debt there would still be a spending boost, because less of their income would be going into debt service, so they would have more disposable income.

Frances Coppola  Author, The Case for People’s Quantitative Easing

10/17 12:07 ET

We now have a question on Modern Monetary Theory from Timothy Calkins of Nottingham Advisors. He points out correctly that the Democrats on the presidential trail are currently outdoing each other with "not-inexpensive". All of them are at least intended to reduce inequality, which has become one of the most pressing political issues of our time.

So, he asks:

"Wouldn’t funding these plans via MMT actually leverage the inequality reduction potential, making it more pronounced?"

I think he is suggesting that politicians keen to reduce inequality should enthusiastically endorse helicopter money.

Do you agree, or is inequality beyond the scope of the narrow set of circumstances that would justify a helicopter drop?

John Authers  Senior Editor

10/17 12:09 ET

Helicopter money is not the right tool for reducing inequality. That is rightly the role of fiscal policy, which as I said earlier is fundamentally about distribution of resources.

Frances Coppola  Author, The Case for People’s Quantitative Easing

10/17 12:09 ET

I have seen many proposals to use central bank money creation power to finance long-term initiatives such as a green new deal. Clearly central banks could buy bonds issued by a government or state investment bank, but I think directing a central bank to do so irrespective of economic conditions would make it more difficult for the central bank to stabilize aggregate demand over the economic cycle, which is its primary job.

Frances Coppola  Author, The Case for People’s Quantitative Easing

10/17 12:10 ET

Charlie Smith of Fort Pitt Capital Group LLC in Pittsburgh asks:

Why is a positive (2%, 3% …whatever) inflation “target” necessary in the first place? Isn’t real, productivity-driven price deflation (and concomitant real wage increases) the raison d’etre of a functioning free market economy?

John Authers  Senior Editor

10/17 12:12 ET

Can I return to my original thesis, which is that helicopter money is needed when there is a deflationary shock? Ordinary deflation arising from productivity gains is not a shock. It would be associated with a growing economy.

Frances Coppola  Author, The Case for People’s Quantitative Easing

10/17 12:14 ET

I think a recurring issue here is the distinction between fiscal and monetary policy – and the corresponding division of labor (“institutional framework”) between the finance ministry and the central bank. Neither distinction is at all clear cut. Most economists see helicopter money as a form of fiscal policy. And helicopter money does in fact have distributional consequences.

Frances, I therefore think in advocating helicopter money you’re advocating giving the CB a larger piece of fiscal policy (larger than ordinary QE). And that makes sense! But the question is then how much discretion to allow the CB in using this new instrument. Limited? Unlimited? What’s your thinking on that?

Clive Crook  Bloomberg Opinion Columnist

10/17 12:16 ET

Clive, if we agree that QE is fiscal policy, then equally helicopter money is too. I’d rather not get hung up on the distinction. Your question is really whether central banks should have at their disposal all the tools they need to manage aggregate demand so as to meet the targets agreed with political authorities. And in my view they should. It doesn’t make a great deal of sense to deny them use of a money-creating tool, when creating money is their job.

Frances Coppola  Author, The Case for People’s Quantitative Easing

10/17 12:17 ET

Do you think the US or the EU ought to be deploying helicopter money right now? In other words, is either economy in your view currently suffering from deficient demand that conventional monetary and fiscal policies can’t address? Or is your proposal to get ready to deploy helicopter money at some future point when the need arises.

Clive Crook  Bloomberg Opinion Columnist

10/17 12:18 ET

Clive, the ECB should be using helicopter money right now. I don’t think that the Fed should, though. The U.S. economy is not currently suffering from deficient demand in the way that the EU is. That could change if the global economic slowdown intensifies.

Frances Coppola  Author, The Case for People’s Quantitative Easing

10/17 12:20 ET

This is from our wonderful Bloomberg Opinion colleague Therese Raphael in London.

Bloomberg reported this week on a speech that Gertjan Vlieghe gave on Tuesday, in which he acknowledged monetary policy may run out of ammunition at some point (we are not there yet, he said), but had two other objections to helicopter money. The idea that it is as likely to stoke runaway prices as trigger growth, you’ve answered in this live blog as well as your book. His other one was that it would suspend the use of interest rates and the inflation target as a tool. Can you remind us why this argument doesn’t worry you?

John Authers  Senior Editor

10/17 12:22 ET

I envisage helicopter money being used within an inflation-targeting framework, where inflation is used as the proxy measure for aggregate demand. Thus raising inflation would be the purpose of the helicopter drop. I think we have already run out of room on interest rates, frankly. Negative rates have serious distorting effects which are poorly understood. Better to use helicopter money where the risks are at least known.

Frances Coppola  Author, The Case for People’s Quantitative Easing

10/17 12:25 ET

How should helicopter money be targeted, if it should be targeted at all? We have had comments proposing both that it go only to the over-70s, and that it be used as a child subsidy.

This is from Piotr Matys, EM FX strategist at Rabobank:

It’s more of an observation than a question, but just wanted to point that in Poland the governing Law & Justice party significantly boosted the disposable income of Polish families by offering generous child subsidies. Regardless of monthly income, every family is entitled to PLN 500 per child per month. To my mind this example illustrates very well your argument that money should be directly distributed to individuals. It’s also important to emphasise that the National Bank of Poland is ready to lower interest rates and deploy unconventional tools if required.

I understand that it’s difficult for you to comment without knowing more details, but do you reckon that Poland’s Family 500+ programme could be a template for other countries looking to boost aggregate demand?

And this is from a Twitter follower called Matt Dubuque:

If quantitative easing is required again, give $2500 to every person over 70. They will spend it *all*!

Thoughts?

John Authers  Senior Editor

10/17 12:27 ET

I don’t agree with targeting helicopter money at particular groups. Firstly, unless the groups are very large the impact on agg demand may be quite small. Secondly, it is bound to raise questions about fairness and politicization of the central bank. Thirdly, entitlements such as child subsidies are notoriously difficult to remove or cut, but helicopter money is supposed to be one-off.

Frances Coppola  Author, The Case for People’s Quantitative Easing

10/17 12:28 ET

Ahead of Jackson Hole, the BlackRock Investment Institute caused a stir by publishing a document that largely endorsed helicopter money as an option for the central bank. The authors included Stanley Fischer, as I mentioned earlier, as well as Philipp Hildebrand, former head of the Swiss National Bank. Below is their key paragraph on the controls that would be necessary. Do we agree with them?

A practical way of “going direct” would need to deliver the following: 1) defining the unusual circumstances that would call for such unusual coordination; 2) in those circumstances, an explicit inflation objective that fiscal and monetary authorities are jointly held accountable for achieving; 3) a mechanism that enables nimble deployment of productive fiscal policy, and; 4) a clear exit strategy. Such a mechanism could take the form of a standing emergency fiscal facility. It would be a permanent set-up but would be only activated when monetary policy is tapped out and inflation is expected to systematically undershoot its target over the policy horizon.

John Authers  Senior Editor

10/17 12:30 ET

I very much like Stanley Fischer’s proposal. It seems to me to address the division of responsibilities between the CB and fiscal authority. The central bank decides when to put money in the helicopter, and how much, but the fiscal authority decides where to fly it.

Frances Coppola  Author, The Case for People’s Quantitative Easing

10/17 12:31 ET

Giving the CB all the tools it needs to manage aggregate demand – including fiscal policy in the form of helicopter money – widens its policy discretion a lot. Making that discretion subject to the political authorities’ targets, as you say, helps deal with the legitimacy issue.

But would the standard targets for monetary policy (like the Fed’s dual mandate) be enough to fill the gap, do you think. Or would they have to be supplemented somehow?

Clive Crook  Bloomberg Opinion Columnist

10/17 12:32 ET

Clive, there is a wider question here about the adequacy of an inflation target, or even a dual mandate. I personally think that there is an argument for NGDP targeting. But I think helicopter money would still work within an inflation-targeting framework. Inflation is, after all, our standard proxy measure of aggregate demand.

Frances Coppola  Author, The Case for People’s Quantitative Easing

10/17 12:35 ET

Back to my answer on Stanley Fischer, I just want to clarify something I said. In the book, I recommend central banks creating money and fiscal authorities distributing it, which is akin to Fischer’s idea. However, I warn that if fiscal authorities attempt to target the helicopter money to specific groups, they risk diluting its effects and creating entitlements that could be hard to remove.

Better to distribute indiscriminately as far as possible.

Frances Coppola  Author, The Case for People’s Quantitative Easing

10/17 12:36 ET

In a discussion between three Britons, it remarkably falls to an American colleague, Peter Coy of Bloomberg Businessweek, to insert Monty Python for the first time! He suggests that the way the conversation keeps coming back to institutions and whether politicians could be trusted with helicopter money is a tool is like the classic Arthur "Two Sheds" Jackson sketch, in which the hapless interviewee keeps having to answer the same question again and again.

John Authers  Senior Editor

10/17 12:38 ET

That concludes this conversation. Thank you for everyone who contributed, and thanks in particular to those whose comments we were not able to include. Everyone still helped to shape the conversation.

For our next book we will be moving on to a possibly even more contentious and topical issue - antitrust and whether capitalism is failing due to a failure of competition policy. The corollary is that capitalism can be fixed by a return to more aggressive antitrust enforcement.

The argument is made forcefully by Jonathan Tepper and Denise Hearn in last year’s The Myth of Capitalism - Monopolies and the Death of Competition. That is the next Bloomberg book club selection, and we will be discussing it here on the terminal next month. It’s a short, punchy and well-written book: enjoy!

John Authers  Senior Editor

To contact the reporter on this story: John Authers in New York at jauthers@bloomberg.net

To contact the editor responsible for this story: Mike Nizza at mnizza3@bloomberg.net

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