The Stakes of the Helicopter Money Debate: A Primer

The swelling wave of argument and discussion around “helicopter money” has two origins:

First, as Harvard’s Robert Barro says: there has been no recovery since 2010.

The unemployment rate here in the U.S. has come down, yes. But the unemployment rate has come down primarily because people who were unemployed have given up and dropped out of the labor force. Shrinkage in the share of people unemployed has been a distinctly secondary factor. Moreover, the small increase in the share of people with jobs has been neutralized, as far as its effects on how prosperous we are, by much slower productivity growth since 2010 than America had previously seen, had good reason to anticipate, and deserves.

The only bright spot is a relative one: things in other rich countries are even worse.

The wave’s second origin comes in an institutional change that took place in rich countries around the year 1980, back in the era in which Paul Volcker took control of the Federal Reserve. Back then we changed our economic policy institutions. The stagflation of the 1970s convinced many that the political branches of government were incompetent at managing the business cycle. The business cycle disturbed inflation, unemployment, and short run growth. The political branches had tried to use the tools they controlled to manage the business cycle. The stagflation of the 1970s convinced many that they had failed and could not but fail. And the stagflation of the 1970s also convinced the political branches that they did not want responsibility for managing the business cycle—that to assume responsibility was to accept blame, because it would go badly.

Thus back in 1980 Paul Volcker grabbed for the Federal Reserve the power they released. Henceforth the Federal Reserve—and its kith and kin central banks elsewhere in the world—were to be “independent”: They were to be effectively freed from meddling by vote seeking politicians with or seeking soundbites. They were tasked be good technocrats finding a way for the economy between the Skylla of inflation and the Kharybdis of unemployment. And thus they were to manage the economy generate stable, satisfactory, and equitable growth.

But could the Federal Reserve and its kith and kin elsewhere do the job? Did they have the tools? Volcker’s view, and the consensus view of mainstream economists, was that they did have the tools: Milton Friedman had demonstrated, to the satisfaction of a rough consensus of mainstream economists, that central banks’ powers to create money with which to conduct financial open market operations and to both supervise and rescue the banking system were more than powerful enough to do the job.

Now note that back in 1936 [John Maynard Keynes had disagreed][]:

The State will have to exercise a guiding influence… partly by fixing the rate of interest, and partly, perhaps, in other ways…. It seems unlikely that the influence of banking policy on the rate of interest will be sufficient by itself…. I conceive, therefore, that a somewhat comprehensive socialisation of investment will prove the only means of securing an approximation to full employment; though this need not exclude all manner of compromises and of devices by which public authority will co-operate with private initiative…

By the 1980s, however, for Keynes himself the long run had come, and he was dead. The Great Moderation of the business cycle from 1984-2007 was a rich enough pudding to be proof, for the rough consensus of mainstream economists at least, that Keynes had been wrong and Friedman had been right.

But in the aftermath of 2007 it became very clear that they—or, rather, we, for I am certainly one of the mainstream economists in the roughly consensus—were very, tragically, dismally and grossly wrong.

Now we face a choice:

1. Do we accept economic performance that all of our predecessors would have characterized as grossly subpar—having assigned the Federal Reserve and other independent central banks a mission and then kept from them the policy tools they need to successfully accomplish it?

2. Do we return the task of managing the business cycle to the political branches of government—so that they don’t just occasionally joggle the elbows of the technocratic professionals but actually take on a co-leading or a leading role?

3. Or do we extend the Federal Reserve’s toolkit in a structured way to give it the tools it needs?

Helicopter money is an attempt to choose door number (3). Our intellectual adversaries mostly seek to choose door number (1)—and then to tell us that the “cold douche”, as Schumpeter put it, of unemployment will in the long run turn out to be good medicine, for some reason or other. And our intellectual adversaries mostly seek to argue that in reality there is no door number (3)—that attempts to go through it will rob central banks of their independence and wind up with us going through door number (2), which we know ends badly…

[John Maynard Keynes had disagreed]: https://www.marxists.org/reference/subject/economics/keynes/general-theory/ch24.htm (John Maynard Keynes (1936): The General Theory of Employment, Interest and Money (London: Macmillan).