Ben Bernanke's Missed Opportunity to Bring Helicopter Money's Debate To the Next level
Ben Bernanke has once again publicly endorsed ‘Helicopter Money’ but his input fails at bringing the debate beyond conventional economic orthodoxy.
In a 2002 speech, Ben Bernanke did the unbelievable: he suggested that to thwart deflation central banks could simply create new money. Taking inspiration from Milton Friedman’s “Helicopter Drop” thought experiment, in which newly printed cash would be dropped out of a helicopter, Bernanke suggested using newly created central bank reserves to finance a tax cut. This radical idea, from such a mainstream economist, earned him the nickname ‘Helicopter Ben’.
Despite not being the chairman of the US Federal Reserve at the time, Bernanke should really be celebrated for taking the risk and putting forward such a radical idea (at the time) – an idea that probably didn’t go down to well will his golfing buddies. Indeed, the debate and discourse on monetary financing would not be where it is today had it not been for the infamous Helicopter Ben.
Helicopter Ben is back!
So when one of the intellectual forefather’s of QE for the People, who has since 2002 cautiously sidestepped the entire debate, takes to the stage to endorse the idea once again, I was obviously filled with excitement and enthusiasm. Sadly, however, these emotions soon dwindled as I read more and scrolled further down the page.
Obviously, having Bernanke come out and endorse the proposal once again is perhaps better than him remaining quiet in the background. But I found some of his rather disappointing, for two primary reasons.
Firstly, there are some issues content wise. There are some important things that could or should have been said that were neglected. Secondly, as such an influential economist, Bernanke had the unique opportunity to steer the debate – and finally put to bed some unnecessary theoretical fallacies. Instead, he gave them credence, almost adding fuel to the fire.
(Note: There are some other issues and insights within Bernanke’s article, however, we will deal with them in a future post).
What is Helicopter Money and How Does it Work – According to Bernanke
Bernanke begins his article by qualifying that helicopter money is a ‘valuable tool’ but should really only be used as a ‘last resort strategy’. Accordingly, Bernanke defines a ‘Helicopter Drop’ as:
“An expansionary fiscal policy—an increase in public spending or a tax cut—financed by a permanent increase in the money stock…I will call such a policy a Money-Financed Fiscal Program, or MFFP.”
Bernanke then goes onto accurately explain the practicalities of how such a MFFP could work in the USA:
“Congress approves a $100 billion one-time fiscal program, which consists of a $50 billion increase in public works spending and a $50 billion one-time tax rebate. In the first instance, this program raises the federal budget deficit by $100 billion. However, unlike standard fiscal programs, the increase in the deficit is not paid for by issuance of new government debt to the public. Instead, the Fed credits the Treasury with $100 billion in the Treasury’s “checking account” at the central bank, and those funds are used to pay for the new spending and the tax rebate. Alternatively and equivalently, the Treasury could issue $100 billion in debt, which the Fed agrees to purchase and hold indefinitely, rebating any interest received to the Treasury.”
Bernanke, then lists the following channels and benefits to such a programme:
"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."
How Helicopter Money works
Some of these are good points to make – but there are better points to make, or at least better ways to put these points. It is worth highlighting, firstly, that Helicopter Money works by increasing spending, without increasing the net level of both public and private debt.
Secondly, currently monetary policy aims to indirectly influence private sector behaviour by altering certain policy parameters – with the hope that it will (in a very round about way) influence private sector spending. This is partly why monetary policy is currently failing. Conversely, a money-financed helicopter drop increases spending directly.
Thirdly, and closely related, the compelling case for a money-financed helicopter drop is that increases the net financial assets held by the private sector. This is why famous economists at Citi Group, Willem Buiter, argues that helicopter money will always increases aggregate demand (spending).
Fourthly, the increase in net financial assets will allow the private sector to pay down its debts, reducing the debt-to-income-ratio. By reducing the debt-to-income ratio– by raising the level of income relative to debt – helicopter money increases financial stability and makes growth more sustainable.
Fifthly, this reduction in the debt-to-income-ratio would come without anyone having to sacrifice spending. Normally, private sector deleveraging means that a certain portion of spending/investment is sacrificed so that debts can be repaid. Helicopter money compensates for the reduction in spending that results from the deleveraging process.
Bernanke’s flawed theory
But as Professor Steve Keen and Eric Lonergan have both astutely pointed out, there is also some fallacies to Bernanke’s points to. According to Bernanke, Helicopter Money works because it causes “a temporary increase in expected inflation,” and because it “does not increase future tax burdens”. For me, it was admittedly disappointing to see Bernanke perpetuate this way of thinking, because as Keen notes, Helicopter Money primarily works because the increase in the stock of money directly triggers an increase in spending.
Yet, as mentioned by Professor Keen, Bernanke’s way of thinking is predicated:
“Mainstream economic model that Bernanke believes actually describes the real world, real people base their spending decisions today on their beliefs about what’s going to happen to inflation and future tax burdens.”
Regarding inflation, Bernanke’s point is that the belief in inflation will cause inflation – since firms and households will immediately start charging more for the goods and services they sell. Keen explains why this assumption equates to fantasy:
“The “inflationary expectations cause inflation” fantasy was developed to counter the argument that government policy could stimulate the economy. How can we counter it? Hey, let’s pretend that people use our model to predict the future, and pretend that our model is accurate too. So if the government increases the money supply with the objective of stimulating demand today, people will know that the increase in the money supply will just cause inflation in the future, so they’ll put their prices up immediately, and the government attempt to stimulate the economy will fail.”
But according to Bernanke, Helicopter Drops also work because people know that spending is financed by newly created money and not through the traditional channel of taxation (or borrowing). This is based on Bernanke’s premise, which echoes mainstream economic textbooks:
“To the extent that households today anticipate that increase in taxes—or if they simply become more cautious when they hear that the national debt has increased—they will spend less today, offsetting some of the program’s expansionary effect.”
Accordingly, Bernanke suggests that a Helicopter Drop will only work if people believe that the drop will have been permanently financed by an increase in the money stock – and not by a potential future increase in taxes.
Of course, the private sector does react to changes in taxes. But as Eric Lonergan suggests, the majority of “households don’t know what the monetary base is – nor do they care about its future path”. Indeed, this notion of reality is not grounded in empirical evidence (e.g. here, here and here),demonstrating that people do not accurately anticipate the future path of government expenditure. This leads Graham Hodgson to make the following accurate conclusion:
“Since the only circumstances in which Ricardian equivalence might occur do not exist anywhere in reality, there are no grounds for claiming that helicopter money will fail to lead to increased consumer spending, even if the process is initially financed by increased government debt.”
Helicopter Ben’s Missed Opportunity?
To conclude, it should be stated that Bernanke should be celebrated for his courage in bringing this idea to the mainstream in 2002. It is also good for the movement that he is publicly endorsing the idea again after such a long time. It's not surprising that Bernanke failed to adequately highlight the primary benefits of Helicopter Money and neither that he makes some theoretical fallacies about helicopter money – these fallacies are ultimately rooted in the orthodox neo-liberal handbook for central bankers.
Perhaps my expectations were far too high, but I cannot help but think that as an influential economist, Bernanke had a real chance to take the debate to the next level – and put to bed some of nonsensical fallacies currently preventing the debate from moving forwards.
Picture CC Brookings Institution