Helicopter money (HM) is money printed by the central bank that is given to the people. Figuratively speaking, Mario Draghi1 would fly over the Eurozone and drop new €50 bills out of a helicopter to the population below. In the first part of this series, I explored the possible sources of HM. The current post looks at the political constraints that prevent the ECB from firing up the engines of its helicopters.
Unconditional ‘helicopter drops’ go against the nature of politics
An important part of governing involves making financial choices. Politics determines what is taxed and what the tax revenue is spend on. Some incomes and assets are tax-exempt, while others are heavily taxed. The same picking of winners and losers is also evident for spending decisions. There are states that direct a lot of resources to their military. Many subsidize favored industries. Countries like Belgium spend over a quarter of their GDP on social security. Even when there is no corruption, politicians will benefit specific groups at the expense of others.
But whatever the expenditure of the state is, there is always some conditionality that reflects a degree of control over the recipient. Government employees have to work for their wages, pensions are paid according to job histories and past contributions, and benefits for the unemployed or the sick go to those in need2. Politicians decide whether the money is going into the pockets of themselves and their cronies, to persuasive lobby groups or to their constituents. Just handing out money to everybody with no strings attached is not done3. As far as I know, not even communist states have ever given away money unconditionally. When everybody gets the same amount of money, politicians cannot score points with the interest groups they represent.
Preference for directly creating jobs and for building infrastructure
Economists make a good case for how helicopter money would work. By giving extra money to the public, people will spend more and increase aggregate demand. Because companies sell more stuff, they will increase production, hire extra workers and ramp up investment.
In practice, politicians will likely prefer more direct interventions to solve the problems faced by society. Giving everybody helicopter money would render the state powerless over the spending choices of the public.
During the Great Depression, there were millions of unemployed men in the US and in Europe. The economist John Maynard Keynes put forward the idea of burying bottles filled with cash and have the unemployed dig them up. Although this would have been a pointless activity, at least it would have employed those out of work.
In reality, massive public work programs were set up in the US and in Germany. The programs built new infrastructure.
Also today in 2016, many are advocating that central bank “printing” (dubbed public money) should finance (the repair of) infrastructure, rather than a pure HM drop. President Trump might order the Banco de México to print the pesos needed to pay for his Great Wall4.
Frank van Lerven has made a detailed overview of all the things public money created by the Bank of England could buy.
Who gets how much?
HM drops within a monetary zone that coincides with national borders (like in the USA, the UK, Japan or Switzerland) would require making a lot of tough decisions. The basic question is one of fairness. Here are some of the questions that need to be answered, you can no doubt think of others:
Will all citizens receive HM? What about the citizens abroad? What about foreigners living in the country? Do children receive HM, or is it restricted to adults? Will everybody get the same amount of money, irrespective of their wealth? Or will there be social corrections? What about convicts, do they have a right to HM? Will the helicopter drop take into account the cost of living (£1000 buys less in London than it does in Glasgow)?
Will HM create resentment among those who have a job or savings? They could get the impression that their money is being debased while undeserving others are getting a free ride.
While those are tough questions within a country with a national central bank, HM drops in the Eurozone would be a nightmare. How would the money be distributed? Should a Slovak get the same amount as an Irishman? Or should the money be allocated according to the number of ECB shares held by each country? Does anybody who has witnessed the never-ending problems with Greece seriously believe that Germany would agree to helicopter money drops? The thought of “printing money” conjures up the ghost of hyperinflation.
Central bank independence and addiction to “free” money
When money is created by the central bank, the government can spend more than it taxes without increasing its debt. This will result in a lot of political pressure on the central bank. The government will try to take credit for any economic uplift that is a result from the HM. The opposition will accuse the central bank of being the lapdog of the sitting government.
Once the concept of debt-free money is accepted, it will be tempting to use HM in a macroeconomic environment where it is not appropriate.
A future post will investigate the economic circumstances under which helicopter money might be a powerful weapon in the central bank’s arsenal, assuming the political issues listed above are sorted out.
- Or Janet Yellen in the dollarzone, i.e. the USA. Her predecessor Ben Bernanke once used the helicopter metaphor in a speech about fighting deflation. Critics have mocked him as “helicopter Ben” ever since.
- Or those capable of gaming the system.
- The absence of control over who gets money from the state is probably also the reason that the idea of a universal basic income (UBI) has not been implemented yet, irrespective of how the UBI would be financed.
- How could I resist this joke? :)