The Treasury's Helicopter Cop-Out

Central planners using others as a scapegoat.

Central planners using others as a scapegoat.Predictably, the depths of the present economic crisis, including the remarkable flattening of interest rates since it began, have led to several calls by economists, including Jordi Gali and the Mercatus Institute's David Beckworth, for the Fed and other central banks to ready their money choppers for a major money-financed spending-spree.

Helicopter Money vs. Deficit Monetization

"Helicopter money" in its strictest sense is money simply given to people by a central bank. This needn't be done using actual helicopters, of course; and in practice, proposals for it have central banks handing out free money, not directly to the public, but to their sponsoring governments, for use in financing some spending or transfer program.

Either way—and this point is crucial—helicopter money is distinct from deficit monetization in its usually-understood sense. As Kevin Dowd explains, "debt monetization involves an explicit increase in the federal government’s indebtedness, whereas under helicopter money that same increased indebtedness is written off by the Fed" or whichever central bank undertakes it.  It has the central bank increasing its liabilities without acquiring any offsetting, valuable asset.

Alternatively, as "Helicopter Ben" explains, helicopter money can be likened to an extreme version of deficit monetization in which the Treasury gets money from the Fed in exchange for a security that bears no interest and that the Fed agrees to hold on to forever. The Fed, in other words, has to commit itself to permanently increase its balance sheet by the amount of its security "purchase."

Dubious Advantages

The benefits of helicopter money, Bernanke explains, consist of

(1) the direct effects of the public works spending on GDP, jobs, and income;

(2) the increase in household income from the rebate, which should induce greater consumer spending;

(3) a temporary increase in expected inflation, the result of the increase in the money supply. Assuming that nominal interest rates are pinned near zero, higher expected inflation implies lower real interest rates, which in turn should incentivize capital investments and other spending; and

(4) the fact that, unlike debt-financed fiscal programs, a money-financed program does not increase future tax burdens.

Significantly, as Bernanke also notes, advantages (1) and (2) would also be achieved by a debt-financed government spending program. Benefit (3) can, in turn, be achieved through other sorts of unconventional monetary policy, including ordinary or expanded-asset quantitative easing (QE), aided perhaps by a Fed commitment to temporarily raise its inflation target, or by its agreeing to switch to NGDP level targeting.

This leaves only advantage (4). But this "advantage" is no real advantage at all. It assumes, first of all, that Ricardian Equivalence holds, or at least that the public takes considerable account of future tax increases in adjusting their current spending, but that they do not take future inflation into account in doing so.* But that's not all: under the present abundant reserves or "floor" system, even helicopter money generates a future tax burden, because it generates fresh reserves on which the Fed must pay interest at a variable rate; and the Fed may have to increase this rate to keep inflation under control.

It follows that, as the IOER rate approaches the government's non-helicopter financing rate, the reduction in the government's future tax burden approaches zero. Should the IOER rate exceed the alternative financing rate, helicopter money, instead of having a fiscal advantage, actually results in a greater fiscal burden.

Yet it's precisely in the sorts of extreme crises in which helicopter money is most likely to be proposed that this last possibility is most likely to come into play. As I write, for example, the Fed has also lowered its IOER rate to a measly 10 basis points. Yet one-month and three-month T-bill rates have fallen lower still! Though rates on longer-maturity Treasurys are above IOER, still those fixed rates seem like a safer long-run bet than the floating IOER alternative.

And Real Disadvantages

If the advantages of helicopter money are doubtful, its potential costs are hard to dispute. Here again, Bernanke is a good guide. He observes, among other things, that "helicopter money" might prove incompatible with the Fed's use of an interest-rate operating target and that it could threaten the Fed's political independence, particularly by serving "as a 'slippery slope' for legislators, who might be tempted to use it to facilitate spending or tax cuts when such actions no longer make macroeconomic sense"—that is, as a slippery-slope leading toward "fiscal QE."

Perhaps the biggest drawback of helicopter money has to do with the way in which it smudges the boundary line separating fiscal from monetary policy, and the division of powers that boundary line is supposed to protect. This problem becomes most evident in pondering the question, "whose responsibility is helicopter money?" while supposing that Treasury-central bank cooperation can't be counted on. If the government is to take the initiative, then the central bank must be made subservient to it, risking the undermining of its monetary control while opening the floodgates to fiscal QE. If, on the other hand, the central bank is to take charge, the government must arrange its spending plans in accordance with the central bank's wishes. Neither prospect seems appealing. Call it the "helicopter money dilemma."

Passing the Fiscal Policy Buck

But a helicopter money dilemma exists only assuming that helicopter money can achieve something that can't be achieved through a combination of ordinary bond-financed deficit spending and responsible monetary policy. For reasons I've explained, I don't believe this to be so at the moment. On the contrary: just now it makes more fiscal sense for the Treasury to flood the market with T-bills, while the Fed sticks to achieving its monetary policy targets, whether by means of non-helicopter QE or otherwise. As Bernanke observes, several conditions must hold for helicopter money to be necessary, among which is the "unwillingness of the legislature to use debt-financed fiscal policies." Why insist that the Fed take on duties that properly belong to Congress, when we can just as well insist that Congress do its job?


*In a footnote Bernanke observes that "It’s true that higher inflation acts as a de facto tax on money holdings, but that tax becomes relevant only if actual inflation rises, which would be a sign that the program is achieving its goal of stimulating spending." This is correct. But rather than evading the issue it only suggests that, to the extent that forward-looking taxpayers expect helicopter money to spur spending, it won't!