Cocooned as they are in their central London offices, Bank of England officials concentrate on what they’ve been told to concentrate on: monetary policy, inflation and the like. More important and fundamental economic considerations like output per head tend to elude them.
And so it is with this speech by David Miles, External Member of the Monetary Policy Committee of the Bank of England. He claims there is little or no difference between QE and helidrops.
Well the difference is blindingly obvious to the average family. That is, the average British family can see the difference between being given say £1,000 and alternatively having that money channelled to some pension fund which invests the money in the bonds of some far-away country, which is a typical example of what happens to QE money. But that’s arguably a cheap shot at QE. So let’s get serious.
He says, “So the key difference between the helicopter drops of money (which is money financed fiscal policy) and conventional QE is that, with the latter, the terms on which the asset purchases by the central bank are made are flexible and sensitive to inflation pressures in the economy, while with money financing they might not be.”
Nonsense. There is absolutely no reason to think that “the terms on which asset purchases . . .are made” are any more “flexible” than the terms on which helidrops might be made. That is, a central bank when deciding if stimulus is in order would take exactly the same care (or lack of care) to ensure that stimulus really was was warranted regardless of whether it was thinking of effecting stimulus via QE or via helidrops. There is absolutely no reason to suppose a central bank would take less (or more) care in one scenario rather than the other.
A few sentences later he says, “Why would irreversible helicopter drops be superior, when they might ultimately generate inflation pressures that would be unwelcomed? Why not prefer a more flexible policy where asset purchases can be adapted if inflation pressures pick up and the demand stimulus they generate no longer brings forth more output but instead just creates higher prices?”
“Irreversible helicopter drops”??? Now he has slipped from claiming that helidrops are less “flexible” to claiming they are totally “irreversible”. Well that will be news to Britain’s finance ministers past and present. That is, when those finance ministers have decided to raise taxes and withdraw money from the private sector, taxes have (lo and behold) actually risen. And money has (lo and behold) actually been extracted from the private sector.
Lags.
However Miles is not 100% wrong: the levers that control monetary policy can be pulled more quickly than the levers controlling fiscal policy. E.g. a central bank can raise its base rate within 24 hours of deciding to do so. In contrast, altering a sales tax or income tax may take a month or two. But that difference is not very important because the TOTAL LAG between the decision to implement a change in monetary or fiscal policy and that change actually having an effect is in the order of a year or more.
QE is distortionary.
However the really fundamental flaw in Miles’s argument, and indeed the fundamental weakness in QE (and monetary policy in general) is that it involves boosting an economy via just one section of the economy. That is, the aim is to stimulate borrowing and investment. A more cack-handed and incompetent form of stimulus is difficult to imagine.
Why not stimulate an economy just via people with red and blond hair? There is no question but that there’d be a trickle-down effect that would benefit those with brown and black hair. Why not stimulate the British economy by pumping loads of money into Yorkshire: there is no question but that ultimately the rest of the country would benefit from free spending Yorkshire folk with £20 notes falling out of their back pockets.
In short, the beauty of helidrops is that they are NON-DIRECTIONAL or NON-DISTORTIONARY. They assist achieving the FUNDAMENTAL OBJECTIVE of economic activity: supplying Mr and Mrs Average with what Mr & Mrs Average want.
But of course our London based elite, both at the Bank of England and Westminster view Mr & Mrs Average with a degree of distain which is matched only by the distain in which Mr & Mrs Average hold the elite.
Political considerations.
But helidrops are not entirely problem-free. One problem (not spotted by Miles as far as I can see) is that reversing helidrops is politically more difficult than reversing QE. That is reversing helidrops involves tax increases and/or public spending cuts. And the two latter tend to produce objections, especially from the loud-mouthed buffoons at the top of our trade union movement.
The only possible solution to that is to explain to union leaders before implementing a helidrop what is going on, and pointing out that the drop might need to be reversed. And if that doesn’t work, then nothing will. If a substantial portion of a country wants to behave like buffoons, then the only solution is to give them what they’ve asked for: buffoon type policies like QE.
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"Why not stimulate the British economy by pumping loads of money into Yorkshire: there is no question but that ultimately the rest of the country would benefit from free spending Yorkshire folk with £20 notes falling out of their back pockets."
ReplyDeleteYep, us Yorkshire folk are notoriously free spending...
You may have better luck with the Scots.
I did actually think of that technical flaw in my argument while writing it. But then I thought “Yorkshire is the biggest country in England” (as Yorkshsire folk never tire of telling us). And that makes the distortion less extreme. I mean if I’d chosen Rutland, the distortion would have been ridiculous: wads of £50 notes falling out of back pockets, etc.
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