Wednesday, 25 May 2016
So helicopter money isn't a free lunch?
This is an interesting article. That’s “interesting” in the Sir Humphrey Appleby sense of the word, i.e. something like “this may be a novel idea, prime minister, but I’m not overly impressed, to put it politely”. The article is by Claudio Borrio of the Bank of International Settlements and two co-authors (one also from the BIS).
The basic argument is that helicoptering involves the central bank in printing and spending base money into the private sector, which of course causes the reserves of commercial banks to rise. And since central banks control interest rates by keeping commercial banks short of reserves, the ability to control interest rates is then lost, which apparently is a near disaster.
As the abstract puts it, helicoptering “…would require giving up on interest rate policy forever.” Or – and making the same point - “The central bank can of course implement a permanent injection of non-interest bearing reserves and accept a zero interest rate forever....”
The alternative, so the article claims, is for the central bank to impose “a non-interest bearing compulsory reserve requirement equivalent to the amount of the monetary expansion (so that excess reserves remain unchanged – scheme 1), but then this is equivalent to tax-financing – someone in the private sector must bear the cost.”
Well certainly helicoptering drives interest rates to zero (unless banks’ reserve requirements are raised). But a permanent zero rate, while it is unconventional is not a bad idea. Milton Friedman and Warren Mosler advocated the idea. And here is another work which advocates abandoning interest rate adjustments.
As for the “alternative” mentioned just above, i.e. higher reserve requirements, that is not the same as “tax financing” UNTILL the state decides to impose extra reserve requirements on commercial banks. Meanwhile, helicoptering is stimulatory. Let’s run thru this.
Under tax financed public spending, the state grabs $X off the private sector and spends it back into the private sector, and perhaps also into sundry government spending departments: education, law enforcement, etc. As a result, what might be called “spenders” end up with no extra cash. Thus there may be a slight stimulatory effect (e.g. because the rich, who tend to pay more tax, do not cut their monthly spending when taxes rise as much as the poor). But the stimulatory effect, if it exists, is limited.
The alternative, namely helicoptering, involves the state simply printing $X and spending it. In that case, spenders end up with $X more: a totally different kettle of fish. If you’re a spender (e.g. a household, firm or state school) and you find you have loads of cash to spare, you’re more likely to spend than if you DON’T HAVE cash to spare!
So there is no question but that helicoptering is stimulatory.
Having done that, the state (i.e. government and central bank) may decide to rein in some of the stimulus, and it can do that by raising bank’s reserve requirements. But that doesn’t mean that helicoptering has not been effective in the mean time. Also, raising reserve requirements is perhaps equivalent to tax in the very broad sense that both raising reserve requirements and tax are deflationary. But what of it? Some stimulus is applied (via helicoptering) and then a year or two down the line, government reins in that stimulus. That would be nowhere near the first time that’s happened.
I.e. helicoptering is a form of stimulus, which like all forms of stimulus, can be, subsequently reined in.
No one argues that there is something wrong with an interest rate cut because it is subsequently reversed.
The BIS authors are right in a sense: helicoptering is not without problems. But then interest rate adjustments have problems as well. Personally I'm on the side of the above "Mosler" lot: i.e. I favor abandoning interest rate adjustments, expect in emergencies and relying on helicoptering.