Helicopter money and fiscal policy

Both John Kay and Joerg Bibow think additional government spending on public investment is a good idea, and that helicopter money (HM) is either a distraction (Bibow) or fiscal policy by subterfuge (Kay). They are right about public investment, but wrong about HM.

We can have endless debates about whether HM is more monetary or fiscal. While attempts to distinguish between the two can sometime clarify important points (as here from Eric Lonergan) it is ultimately pointless. HM is what it is. Arguments that attempt to use definitions to then conclude that central banks should not do HM because its fiscal are equally pointless. Any HM distribution mechanism needs to be set up in agreement with governments, and existing monetary policy has fiscal consequences which governments have no control over.

Here is where Kay and Bibow are right. At this moment in time, even if a global recession is not about to happen, public investment should increase in the US, UK and Eurozone. There is absolutely no reason why that cannot be financed by issuing government debt. Furthermore, in the event of a new recession, increasing ‘shovel ready’ public investment is an excellent countercyclical tool. Indeed there would be a good case for bringing forward public investment even if monetary policy was capable of dealing with the recession on its own, because you would be investing when labour is cheap and interest rates are low.

Where Bibow is wrong is that the existence of HM in the central bank’s armory in no way compromises the points above. HM does not stop the government doing what it wants with fiscal policy. Monetary policy adapts to whatever fiscal policy plans the government has, and it can do this because it can move faster than governments.

This goes part of the way to answering Kay, but he also suggests that HM is somehow a way of getting politicians to do fiscal stimulus by calling it something else. This seems to ignore why fiscal stimulus ended. In 2010 both Osborne and Merkel argued we had to reduce government borrowing immediately because the markets demanded it.

HM is fiscal stimulus without any immediate increase in government borrowing. It therefore avoids the constraint that Osborne and Merkel said prevented further fiscal stimulus. To put it another way, they did not say that increasing government spending or cutting taxes were bad in itself, but just that they were extremely unwise because they had to be financed by adding to government debt. HM is not financed by increasing government debt.

Many argue that these concerns about debt are manufactured, and that in reality politicians on the right pushing austerity are using these concerns as a means of achieving a smaller state: what I call here deficit deceit. HM, particularly in its democratic form, calls their bluff. If we can avoid making the recession worse by maintaining public spending, financed in part by creating money while the recession persists, how can they object to that? Politicians who wanted to use deficit deceit will not like it, but that is their problem, not ours.

There is a related point in favour of HM that both Kay and Bibow miss. Independent central banks are a means of delegating macroeconomic stabilisation. Yet that delegation is crucially incomplete, because of the lower bound for nominal interest rates. While economists have generally understood that governments can in this situation come to the rescue, politicians either didn’t get the memo, or have proved that they are indeed not to be trusted with the task. HM is a much better instrument than Quantitative Easing, so why deny central banks the instrument they require to do the job they have been asked to do.

Its ideology, stupid

Wolfgang Münchau takes to task in today’s FT the latest example of German opposition, and in particular opposition from finance minister Schäuble, to ECB policies. However I think he ends up missing the obvious target. He discusses the particular problems negative rates pose for Germany’s financial sector, and in his last paragraph writes

“This episode is a reminder that the collective spirit that was so strongly present in the first years of the eurozone has gone. That — not the presence of imbalances or other technical problems — constitutes the single biggest danger to the long-term viability of Europe’s monetary union.”

I would suggest this has the causality wrong. Any collective spirit has gone because of these ‘technical problems’. The biggest technical problem is an obsession with inappropriate collective fiscal consolidation (austerity). In the Eurozone the ECB is being forced to try negative interest rates because it is having to undo the impact of fiscal consolidation. And the man most responsible for this obsession is Schäuble.  

Gavyn Davies nicely sums up my own view about negative interest rates. Without radical institutional and social changes (which may not be desirable), bank profitability puts a limit on how far central banks can go, and for that reason exploring these frontiers could be counterproductive. But the alternative of more QE, possibly directed at other assets besides government debt, is way down the list of effective and reliable instruments for managing aggregate demand right now. Helicopter money is a much better way of giving central banks more ammunition. But the focus right now should not be on any of this, if we are genuinely concerned about social welfare. As John Kay says, “we need less financial ingenuity and more common sense”.

What we should be talking about is why governments are not doing much more public investment. Yet in the US, Germany and the UK any dramatic increase in public investment seems out of the question. Barry Eichengreen, in an article entitled “Confronting the Fiscal Bogeyman”, writes of Germany:

“The ordoliberal emphasis on personal responsibility fostered an unreasoning hostility to the idea that actions that are individually responsible do not automatically produce desirable aggregate outcomes. In other words, it rendered Germans allergic to macroeconomics.”

In the US, antagonism to the Federal government rooted in the past has meant Republican leaders are  

“antagonistic to all exercise of federal power except for the enforcement of contracts and competition – a hostility that notably included countercyclical macroeconomic policy. Welcome to ordoliberalism, Dixie-style. Wolfgang Schäuble, meet Ted Cruz.”

He ends

“Ideological and political prejudices deeply rooted in history will have to be overcome to end the current stagnation. If an extended period of depressed growth following a crisis isn’t the right moment to challenge them, then when is?”

He does not mention the UK, where the antagonism to public investment seems to lack any deep historical explanation, and may just reflect stupidity or an ideology imported from the US.

When I talk about public investment people normally think about big projects, like HS2 in the UK. I like to point out that simpler and perhaps more boring things, like repairing roads, are at least as important, and can be done immediately. But if there is one area above all else where much more needs to be done right now it is investment in renewable energy.

The recent news on climate change is not good. It is foolish to read too much into one or two months figures, but this chart is nevertheless quite scary. It is scary because we know of various possible ‘tipping points’ (like the melting of all Arctic ice or the mass release of methane from permafros) which could accelerate global warming. Most climate models assume we will control carbon emissions in time to stop that happening, but we cannot be sure of that, because we are in uncharted territory.

We know we need a massive expansion of renewable energy, but one problem that has so far stopped that being a complete solution to climate change has been that sometimes the wind neither blows nor the sun shines. We need to be able to cheaply store electricity, but our current battery technology is not good enough. Battery technology is also crucial in making electric cars as attractive as petrol based cars. But technology could come to the rescue. Existing batteries could be made much more efficient, or completely new battery technologies could be made viable. Much more efficient transmission could also help. And if you look at all three links, you may notice one common factor. These potential breakthroughs have all come from research undertaken in the public sector. As Mariana Mazucato has argued, the state is “better able to attract top talent and pursue radical innovation”.   

China put over $80 billion into the renewable energy sector in 2014. That is nearly 1% of its GDP. It has committed to spend 25 times that amount over the next 15 years on clean energy. Both the US and Europe spent much smaller amounts ($38 and $58 billion respectively), even though their economies are much larger (the US figure is around 0.07% of its GDP). In dollar terms, the Chinese government also spent more on Green R&D than Europe or the US. [1] The scope for US and European governments to spend more on researching and help with developing green technology is huge. Yet in the UK the government has recently cut back its support for renewable energy, even though the UK’s need for renewable energy is urgent.

Climate change may be the most important example, but it is not alone. It is absurd that when the potential for technological change leads people to write about robots taking over, actual productivity growth is slowing everywhere. As an IMF report says, "innovation [is] highly dependent on government policies." I think Brad DeLong, in commenting on Eichengreen’s article, has it exactly right when he writes “it is long past time for a frontal intellectual assault on the[se] dangerous and destructive ideologies”.   

 

[1] If we include corporate R&D, Europe moves ahead of China in $ spend, but China is still ahead of the US.