A lot of the discussion of helicopter money is about macroeconomic mechanisms, which is of course fair enough and - for me at least - interesting. But helicopter money, because it is quite like fiscal policy, also raises ethical issues, and these are taken up in a recent postby Jeremy Stangroom. It is this and related issues that I want to talk about here.
To avoid distractions, let’s focus on a specific type of helicopter money (HM). The state sets up a distribution mechanism (the flight path of the helicopter, if you like) which the central bank is mandated to use if interest rates are in danger of hitting the zero lower bound, and it judges that without using this mechanism it will probably undershoot its inflation target. If at some later date the central bank finds that it is danger of becoming ‘policy insolvent’, the government agrees to recapitalise it. Thus there is no question of abandoning the inflation target in the distant future: HM is being used to avoid undershooting the inflation target in the near future.
This policy is close to being identical to a reverse poll tax. The key difference is that, unlike an actual government cash transfer that is debt financed and therefore appears to be almost surely matched by some tax increase or equivalent later, with HM the future tax increase may or may not happen, depending on whether the central bank does or does not need recapitalising.
The other key difference between HM and a reverse poll tax is that HM is initiated by the central bank. This encounters a form of the ‘no taxation without representation’ argument: redistributions should be made by the democratically elected government. However in the case of HM, the distribution mechanism is set up and endorsed by the government. Many distribution mechanisms are possible, and which is used is the government's choice. The only qualification is that the mechanism has to have a powerful, immediate and reasonably predictable impact on aggregate demand. (Paying for infrastructure investment could only be on this list of potential uses for HM if the investment could be immediate, and not just substituting for investment the government would have undertaken anyway.)
Thus HM is still government sanctioned. In addition the circumstances in which HM would be used are limited and precisely described, and the agent making these decisions - the central bank - should be accountable to the government. Of course many government agencies already make decisions that have huge impacts on particular individuals: in the case of the UK, NICE for example.
An additional argument that I together with MarkBlythandEricLonerganhave made is that conventional monetary policy also involves redistributions between savers and borrowers. Here JeremyStangroom makes a good point: savers and borrowers undertook their debt contracts knowing that interest rates could well rise or fall. In contrast, no one has contracted for helicopter money.
However I think there is an additional point to be made here. Savers and borrowers generally take out nominal debt contracts, and so they will be affected by movements in inflation. They may well undertake these debt contracts in the expectation that inflation will average the central bank’s inflation target. HM money is a way for the central bank to ensure this expectation is fulfilled.
I also think it is always important to discuss HM in comparative terms, and in particular thinking about it as an alternative to QE. Indeed I think this should become mandatory in discussing HM: after all most people who propose it do so because they think it does the same job QE is meant to do but better. To the extent that the central bank makes a loss on QE (and if QE is temporary they really could make a loss, which is why the Bank of England got the government to cover these losses), it involves given newly created money away. In this case the beneficiaries arethosewho sold their government debt to the central bank and then subsequently bought it back at a profit. It is not clear that most people would regard those profits gifted by an arm of the state as a just desert. [1]
I think at the end of the day the ethical issue does all come down to the extent that the government can delegate decisions which have distributional impacts on the population. After all, the relevant budget constraint from the private sector’s point of view is the consolidated public sector which includes the central bank. Newly created money has to go to someone. Absent QE the profits the central bank makes are returned to the government. With QE, there is a good chance that the central bank may be transferring this money to the financial sector. With HM, money goes to the public. HM has not been called ‘QE for the people’ for no reason. Arguably the state provides too much support to the financial sector as it is, even without QE.
[1] QE is not about buying assets to make a profit. The central bank buys existing government debt when it is expensive, because QE only happens when actual and expected short rates are low, and then sells it back to the market when short rates are higher (QE is expected to be unwound after short rates rise). This saves the government money on interest payments but also involves a capital loss.
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