August 30, 2012 7:19 pm
Come on Bernanke, fire up the helicopter engines
By Samuel Brittan
Some practical men do not like the idea of a thought experiment. Yet these exercises are an essential part of the growth of human knowledge. Indeed, Friday’s address by Ben Bernanke at the meeting of central bankers in Jackson Hole, Wyoming makes it appropriate for one such experiment: to ask what would happen if, in the main industrial countries, currency notes were to drop from helicopters as a deliberate act of policy?
No one has explicitly argued for this as a deliberate act. But Milton Friedman raised the possibility in an essay he wrote on the “optimum quantity of money”. He mentioned the helicopter as a device to avoid discussing the intricacies of the banking system, which he had done sufficiently on other occasions. Years later, Mr Bernanke described various expedients, including quantitative easing, as being the nearest equivalent to such a drop.
.
This led to some on Wall Street naming him “Helicopter Ben”. However, there is an important difference. QE will work through the banking system. Helicopter money is available for those fit enough to pick it up.
.
John Maynard Keynes raised a similar possibility during the 1930s when he said that if there was no better way of getting out of a depression, pound notes should be buried in the ground, leaving it to the well-tried forces of self interest to dig them up again.
Let us assume that, impatient with the endless stagnation of the world economy, countries fire up their helicopter engines. What if some countries stay out? If China abstains it will lead to the appreciation of the renminbi, which much of the world is hoping for. If the eurozone abstains, this will lead to an appreciation of the euro and will probably put paid to the membership of the peripheral countries.
But back to the main analysis. The object of the helicopter drop would be to boost spending for those who pick up the money, who should feel wealthier and not become more indebted. They should have every reason to spend. The more worried they became about helicopter money, the faster they would spend it.
Would this be inflationary? In many situations, yes. But a drop, whether actual or metaphorical, would only occur when the danger is that of deficient demand. And we are dealing with a world in which there is not enough spending to keep resources reasonably well employed. So the main initial effect will be to boost output and employment. Should the danger become one of demand inflation, the normal instruments of higher central bank interest rates and budget surpluses would be available. There is no technical problem about how to reverse it if circumstances change.
Would the unusual and eccentric nature of the device incite suspicion, which might cause consumers to hold off? Here comes the subtlety that is so often missed. The more suspicious people became of helicopter money, the more likely they would be to spend it before it lost its value. One can, of course, imagine various ingenious twists. Helicopter money could be stamped so that it lost its value if it were not spent by a certain date.
.
The basic danger is, of course, political. Could we rely on governments to take unpopular restrictive measures once their citizens had experienced manna from heaven? This is indeed the problem. But surely during a deep or prolonged recession, the risk of inaction becomes much greater and the risk of inflation much less.
The next question is whether there is any slightly more conventional equivalent to turning on the rotor blades? Of course there is: infrastructure spending and temporary tax cuts. With all such devices it is important that there should be no fixed time at which they should be reversed. With all the best technical economics in the world we cannot reliably predict the future. All that is required is a firm statement that these are emergency measures and will not be built into the government’s long-term tax and spending strategy. It goes without saying that such expansionary measures should be financed by central banks and not by market borrowing that could push up interest rates in an unhelpful way.
.
Still, one might ask why we need these complexities? Why can’t we just boost spending or cut taxes in the time-honoured manner?
The main reason is ideological. The prevailing dogma is that anti-slump measures must be on the monetary side rather than the fiscal one. At many times this makes sense, as monetary policy can be adjusted throughout the year and is also at one further remove from political interference. And the helicopter drop just about counts as monetary policy, courtesy of Friedman and Mr Bernanke. It is impossible to imagine the Republican party convention countenancing a fiscal stimulus. But a few of its more reasonable members might just countenance the Fed experimenting with the equivalent of a helicopter drop so long as the metaphor is not used.
.
Copyright The Financial Times Limited 2012
0 comments:
Publicar un comentario