We have come to the end of QE as far as developed countries are concerned. Only the ECB is still actively buying bonds, and even here, it has reached limits. Both the Fed and the Bank of England have stopped buying and, sooner or later, will have to reduce their portfolio. Bond-yields are flat as flat can be. Yet, the economies are mired in low GDP growth and low inflation.
Obviously, something has grown wrong. Monetarist were warning us that printing money would lead to inflation. Open Market Operations, which is all that QE is, has failed to induce investment. The cash is lying idle in bank vaults or in corporate treasuries. Apart from hectic M&A activity, all that money is not being transmitted to the real economy. What is to be done? How do we tweak the transmission mechanism so that money will kick the economy into growth?
Attention has, thus, shifted to helicopter money. It was Milton Friedman who had speculated that one way money could enter the economy is if a helicopter dropped notes of $1,000 on passers-by on the ground. It was said as a stark answer to the question which was posed to him. If money is a good predictor of nominal income (as Friedman and his co-author, David Zneidelman, had shown), it still left the question of how to use that insight for policy. How can money be made to enter the economy? The answer was helicopter; it was thought to be amusing but no one went beyond that.
Now, economists are saying that QE having reached its limit, we need helicopter money. One way to think about it to have the government finance its deficit by letting the Central Bank pick up the bill. As no debt is incurred, the government’s liabilities have not increased. Thus, we reverse the age-old phobia of monetising deficit. If done in large enough amounts, that may boost the economy.
Willem Buiter, formerly of the LSE and now chief economist, Citibank, and Adair Turner, formerly a regulator in UK, have endorsed the idea. It is not clear whether Keynes’s scheme for multiplier involved monetary financing of the expenditure. But this is now a hot topic. Sufficient stimulus could be provided for the economy by injecting cash. Of course, the usual warning is that such money will lead to inflation. But, since David Hume, we have known that initial effects of monetary injection are positive. Only persistent injection of money may run into supply barriers and cause inflation.
So, here at last is free lunch. Or is it? Even if we ignore the long-run inflationary danger, how do we know the money will boost the economy? If the government is financing an infrastructure project, the immediate extra spending will depend on the capital-labour ratio. Simple ‘shovel ready’ projects may be what you need. Capital equipment is cheap and it will be labour which will get the bulk of the money and will spend it.
Even so, there is a danger that some might save, pay off debt rather than spend the money. How do you speed the process up? The answer lies in the ideas of Silvio Gesell, whom Keynes praised for a revolutionary idea. This was: if you have hoarded cash, then you have to get it stamped every month to retain its value. Thus, there is a cost to hoarding. Inflation can also cost the hoarder lost purchasing power.
Gesell’s idea has been further developed by Lord Robert Skidelsky, the biographer of Keynes, and myself. We propose that the government give each adult £1,000. This can be in the form of Oyster card or smart card which will store the £1,000. The card will be programmed to lose value one month after it has been issued. Let us say the purchasing power would reduce by 19% if not spent.
The advantage of this scheme is that it punishes hoarding. This provides a positive reason for spending. There is also no issue of capital-labour ratio. The money goes straight to the individual consumer who will spend it. Thus, the transmission of money is dis-intermediated and is spent quickly. Of course, the supply-side has to be ready. Otherwise there will be hyper-inflation for a month and, then, all would go quiet. You could spread out the distribution of smart cards over one year so that there is no large scale pressure on the available resources. Unless there is no spare capacity, the effect should be positive.
It may yet be that sooner or later some country will experiment with helicopter money. We may have turned a corner from fiscal and monetary orthodoxy to a more innovative approach. Desperate times call for new ideas. This may be one.
The author is a prominent economist and Labour peer