Must-Read: Eric Lonergan: Helicopter Money Is Different

Must-Read: Eric Lonergan: Helicopter Money Is Different:

There are some genuine policy innovations and some old policies in new clothes…

The two innovations are: (1) Transfers to the private sector from the central bank financed by changes in base money…. (2) Money-financed budget deficits, which attempt to alter beliefs about variables in the future….

The old policy in not-so-well disguised new clothes is simply money-financed government spending. The monetisation of deficits neither deserves nor needs a new name…. I want to focus on why (1) is novel, and is urgently needed, and why (2) is an unhelpful distraction…. The analytical confusion is straightforward: the central bank is not the national treasury; base money is different to government bonds, and a check (or perpetual loan) from an independent central bank is not a tax cut. None of these distinctions are trivial in practice or in law…. There are good reasons why we want central banks to issue money, and governments to issue bonds. They’re different. A rare voice of clarity in this discussion, Martin Sandbu at the FT, puts it succinctly:

It is more helpful to call policies involving the government budget fiscal policy and policies involving central bank money monetary policy. That avoids collapsing important distinctions….

So my first conclusion is straightforward: money-financed transfers to the private sector from central banks are a policy innovation. This is not ‘just’ fiscal policy. It is very different–and likely far more effective–than any fiscal policies currently on the table.

Now what about the other type… shocking our beliefs about the future[?]… The tedious theoretical games being played by some… which masquerade as policy insights, are confusing at best. The prevalent reference to ‘permanence’ seems determined to haunt us…. [But] when the answer to most questions pertaining to our long-term economic futures is ‘don’t know’, households have evolved to be rationally myopic, forming habits, and using sensible rules-of-thumb. Modelling their responses to receiving a check in the post from a central bank could be a daunting task–except we know what they do. Those on lower incomes tend to spend a large share, some save the windfall, others repay debt. Forecasting the increase in demand is imprecise, but far less so than with negative interest rates or QE…. Oh, and households in receipt of a check from the central bank don’t ask, ‘before I spend/save/repay debt with this windfall, can you remind me if the associated change in monetary base is permanent or temporary?’…

There is scope for policy innovation, contingency planning, and better policies for the long run. As it stands, granting central banks the power to make money-financed transfers to the private sector–as close as possible an approximation to Friedman’s helicopter drop–seems the best on offer.