Published in the Wall Street Journal yesterday from John Phelan, “Central Bankers Are All ‘Corbynistas’ Now”:
When Britain’s Labour Party leader Jeremy Corbyn floated his idea for a “people’s quantitative easing” in September, many commentators laughed. The proposal to have the Bank of England print new money and hand it to a government-owned institution to “invest” in the economy was condemned as both inflationary and a threat to the central bank’s independence.
Well, central bankers are all Corbynistas now. In recent years the crank monetary ideas of yesterday have become the policy tools of today. Negative nominal interest rates, which a few short years ago were seen by many as a practical impossibility, have now been adopted by a number of monetary authorities. And now People’s Quantitative Easing, or PQE, could be set for a similar journey from the fringe to respectability.
Consider the increasingly popular idea of helicopter money. This is the policy idea that takes its name from Milton Friedman’s famous thought experiment illustrating how throwing cash out of a helicopter would trigger inflation but not affect real variables just as output and employment. It has been plugged by such heavyweights as Ben Bernanke, the former chairman of the U.S. Federal Reserve; Berkeley economist Brad DeLong; andLord Adair Turner, the former chairman of Britain’s Financial Services Authority. It is being openly flirted with by the Bank of Japan and economists are now lobbying the Bank of England to try it.
The theory behind helicopter money is that, contrary to Friedman’s conclusion, growth of the money supply can spur growth in the economy, but that monetary growth has been stifled in recent years. While central banks have vastly expanded the stock of some forms of money, such as bank deposits at central banks, this hasn’t translated into an expansion of credit to businesses and households. It’s this latter expansion of credit that filters through to increases in spending.
But while the narrowest measure of the money supply—the types of money and credit over which the central bank exercises the most control—has expanded by 516% in Britain since May 2006, the broader measure of money and credit has increased by only 56% during the same period. The usual monetary-policy transmission mechanism, that central banks put base money into financial institutions to be used as a basis to create broad money, has broken down.
Helicopter money seeks to remedy this problem by bypassing the financial system as an intermediary of monetary policy and opening a new channel directly to the wider economy. By printing up new money and putting it into the hands of firms and individuals to spend rather than to hold, prices will rise and so, it is hoped, will output.
In countries where high levels of debt and borrowing mean that a lack of nominal gross-domestic-product growth is a major problem, the helicopter drop looks ever more tempting. Japan, with the largest debt as a proportion of GDP in the developed world, is the prime example. Japanese officials, who pioneered the once-quirky policy of large-scale central-bank asset purchases, or quantitative easing, have in recent months been considering with the idea of helicopter money. Haruhiko Kuroda, the governor of the Bank of Japan, announced at the BOJ’s most recent meeting a “comprehensive assessment” of monetary policy to be ready for the next meeting in September. The assessment may well end up endorsing the helicopters.
But how to do it? It is one thing to talk about hypothetical helicopters dropping money into an economy full of eager spenders. It is quite another to make it actually happen. One idea, proposed by economist Daiju Aoki of UBS Securities, would be the sale of 50-year bonds by the Japanese government to the Bank of Japan in return for newly printed cash. If the government held these bonds, Mr. Aoki says, “that would be like helicopter money.”
There are even bolder versions. Last Thursday, 35 economists wrote to the Guardian newspaper to say that “the money [created by the Bank of England] could be used to fund either a tax cut or direct cash transfers to households, resulting in an immediate increase of household disposable incomes.” More likely perhaps, the economists also proposed that “a fiscal stimulus financed by central bank money creation could be used to fund essential investment in infrastructure projects—boosting the incomes of businesses and households, and increasing the public sector’s productive assets in the process.”
If that sounds familiar, it’s because this amounts to Mr. Corbyn’s People’s Quantitative Easing concept in all but name. The idea much derided last year is becoming so mainstream that even a leadership candidate for Britain’s Conservative Party, Stephen Crabb, could recently propose a £100 billion ($130 billion) public-works investment fund that wasn’t so different from PQE. Mr. Corbyn’s PQE is essentially indistinguishable from the suggested 50-year Japanese bonds.
This probably says more about the central bankers’ desperation than Mr. Corbyn’s prescience. With government spending and borrowing constrained by slow growth and high debt, and supply-side reforms still politically far off in many economies, the pressure is mounting on central bankers to act as magicians pulling rabbits out of their hats. The longer this continues, the deeper they’ll have to rummage around for the next rabbit. It’s enough to make one wonder what will be the next extreme idea to follow the journey from crank to orthodoxy.
Mr. Phelan is a fellow at the Cobden Center.