LONDON (Reuters Breakingviews) – Some economists say central banks should fund the fight against the coronavirus by printing money and giving it to governments. There would be no need to raise taxes either now or in the future, the argument goes; nor would government debt need to increase.
Whenever something looks too good to be true, it normally is. So-called “monetisation” risks fuelling inflation and undermining economic discipline. It should be used only as a last resort. There are better ways to finance emergency packages to protect people and companies during the pandemic lockdowns.
The notion that central banks are a magic money tree is sometimes called “helicopter money”, after the economist Milton Friedman conducted a thought experiment in the late 1960s about what would happen if the government dropped dollar bills from the sky. Ben Bernanke, former chair of the U.S. Federal Reserve, popularised the idea early this century as a way of defeating deflation.
Nowadays, helicopter money is touted as a way to fund governments so they can give people enough money to live on while the economy is shut down. Recent advocates include Adair Turner, former chairman of the UK’s Financial Services Authority, and Jordi Gali, the Spanish economist.
Now, it is of course vital to get money to people in need. But before rushing to the printing presses, consider the risks.
The first is inflation. People may say, with the economy hurtling into a deep recession, there’s no risk of that. And it’s true that there’s no sign of inflation right now. While the prices of some basics like food may go up, the prices of commodities such as oil have plummeted. What’s more, if central banks create helicopter money, people will probably squirrel much of it away, rather than circulating in the economy.
But what happens when the world comes out of corona hibernation? Many people will leave their homes and spend their helicopter money. Unless the supply side of the economy springs back into action like a jack-in-a-box, there will be less stuff to buy. The combination of an increase in demand and a reduction in supply could boost prices.
Whether this is just a one-off increase in the cost of goods, or the start of a new inflationary cycle depends on how forcefully populations push for increased wages and pensions to compensate for the price hikes – and how strongly governments and central banks resist.
This leads to the second risk of helicopter money. Friedman, who never suggested a cash drop as a serious policy proposal, imagined that it would be a “unique event which will never be repeated”. The snag is that, once governments discover how easy it is to fund their spending plans, it will be hard to put this genie back into its bottle. Today’s populist politicians might react with glee to the idea that they don’t need to make hard choices over what to spend money on and where to get it.
What’s the harm in that, one might ask? Why should we want politicians to make tough decisions if they can just turn on the printing presses? In a word, hyperinflation.
Of course, there’s absolutely no sign of that now. But hyperinflation – and with it the devaluation of money and massive dislocation of economies – would be the result of continual monetisation. Central banks would lose their independence and all economic discipline would be thrown to the wind.
It would, of course, be possible to stop such an inflationary virus through harsh fiscal and monetary measures. But the longer that goes on the harder it will be to suppress it. And even then, the credibility of governments would have been damaged and that would have long-term costs.
The coronavirus crisis is terrible. But it doesn’t merit a measure that the UK didn’t even use to fund two world wars. Governments should be able to fund themselves through less drastic means.
The current weapon of choice is quantitative easing. The Federal Reserve, European Central Bank and Bank of England are pumping trillions of dollars into the economy by buying government bonds. This is making it easier for governments to sell investors new bonds and so finance their emergency packages.
Now this elaborate money-go-round bears some similarities to helicopter money – and carries its own risks. But it is not quite the same. First, because the governments are expected to pay back the money they borrow. And second, because the central banks keep their independence, making it harder for politicians to push them around in the future.
Quantitative easing is a bazooka that is proportionate to the crisis. By contrast, helicopter money is a weapon of mass destruction. It’s not a toy. It should only be used in the most extreme emergencies and now is not the time.
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