{"id":6139,"date":"2017-03-27T16:23:12","date_gmt":"2017-03-27T14:23:12","guid":{"rendered":"http:\/\/stanislasjourdan.fr\/?p=6139"},"modified":"2019-12-16T00:35:28","modified_gmt":"2019-12-15T23:35:28","slug":"helicopter-money-and-basic-income-friends-or-foes","status":"publish","type":"post","link":"https:\/\/stanislasjourdan.fr\/en\/2017\/03\/27\/helicopter-money-and-basic-income-friends-or-foes\/","title":{"rendered":"Helicopter money and basic income: friends or foes?"},"content":{"rendered":"

Is Milton Friedman’s concept of ‘helicopter money’ comparable with the universal basic income? In this paper for BIEN I explain some key institutional distinctions between the two ideas, while making the case for a political convergence, especially in the context of the European Monetary Union. <\/strong><\/p>\n

This article was originally published on www.basicincome.org<\/a><\/em><\/p>\n

Spurred by Milton Friedman, the concept of \u201chelicopter money\u201d \u2013 under which central banks would distribute money to citizens \u2013 is making headway in economic debate, but is often confused with the idea of basic income. This article intends to clarify the distinctions and overlaps between these two concepts.<\/p>\n

\u201cLet us suppose now that one day a helicopter flies over this community and drops an additional $1,000 in bills from the sky, which is, of course, hastily collected by members of the community. Let us suppose further that everyone is convinced that this is a unique event which will never be repeated.\u201d<\/p><\/blockquote>\n

When Milton Friedman wrote those lines<\/a> in 1969, he probably never thought that \u201chelicopter money\u201d would become a buzzword in the 2000s post-crisis era. Friedman\u2019s thinking was indeed quite radically unorthodox. How did the prominent neoliberal advocate come to suggest people should receive free money and that we would all be better off as a result? Far from philanthropic thinking, Friedman was in fact simply trying to illustrate his theory of the neutrality of money.<\/p>\n

What would happen if we were to drop freshly printed notes over a population from a helicopter, just like rain? Nothing other than inflation, suggested Friedman, one of his main beliefs being that any increase in the money supply automatically leads to a proportional increase in consumer prices. Through this thought experiment, Friedman drew the conclusion that central banks can always avoid deflation by producing money and causing it to circulate in the economy.<\/p>\n

In fact, however, the idea that we could create money and distribute it to the people goes back much farther than Friedman. In 1924, British engineer Clifford Hugh Douglas<\/a> elaborated his theory of the \u201csocial credit\u201d, its main component being the distribution of a monthly \u201cnational dividend\u201d generated from money creation, the level of which would vary according to national production.<\/p>\n

Although Douglas did gain some notable following at the time, especially in Canada, the idea was ultimately consigned to the oubliettes of history, leaving Friedman with the alleged paternity of the idea, centre-staging the helicopter analogy with it.<\/p>\n

The concept wasn\u2019t much thought of for 30 years following Friedman\u2019s discussion, however, and it might have been forgotten again if it hadn\u2019t been brought back to public attention in 2002 by one of the most influential voices of monetary policy. In a famous speech, the Federal Reserve chair Ben Bernanke alluded to this concept, making  the case that, under important deflationary trends like that seen in Japan, the central bank could resort to helicopter money-style instruments to achieve its 2% inflation target.<\/p>\n

Yet, far from initiating serious consideration, these remarks only caused Bernanke to endure mockery and \u201chelicopter Ben\u201d as a persistent nickname.<\/p>\n

This is probably because the concept runs counter to the whole ideological turn of the 20th century in terms of monetary policy. Starting from the 50s, money creation has been gradually shifted from the sphere of public sovereignty into the quasi-monopolistic realm of the private banking sector. This process ultimately resulted in the outright prohibition, in most jurisdictions, of monetary financing of government budgets. Helicopter money sounds very much like a reversal of this trend, and a dangerous one<\/a> to the ears of many mainstream economists.<\/p>\n

An alternative form of money creation<\/h3>\n

There is recurring confusion around the exact meaning of helicopter money, which is probably caused by the simple fact that the alleged proponent of the idea, Milton Friedman, never seriously intended to implement it.<\/p>\n

Thus, the concept finds itself often described in very diverse terms, ranging from the old-fashioned monetization of public debt<\/a> to its purest form (and probably the one Friedman actually had in mind): the distribution of money directly to all citizens by central banks. The latter will be the one we assess in this article.<\/p>\n

Helicopter money can thus be defined as the creation of money, without corresponding assets, and its distribution into citizens\u2019 bank accounts.<\/p>\n

It is therefore an alternative form of money creation, which is strictly different from the most common way in which money is created today: through the banking sector\u2019s credit issuance functions. It is worth clarifying this point here: as the Bank of England has clearly demonstrated<\/a>, today\u2019s monetary supply is almost entirely controlled by private banks issuing credit into the economy. This is sometimes referred to (somewhat misleadingly<\/a>) as the \u201cfractional reserve banking system\u201d. Although the benefits and pitfalls of such an arrangement are subject to never-ending controversy between academics, the way in which this system functions is nowadays largely undisputed.<\/p>\n

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Money tree sculpture in front of the Central Bank of Ireland.<\/p>\n<\/div>\n

The key advantage of helicopter money resides precisely in the fact that it would bypass banks as money creators, and is therefore one way for the central bank to maintain the money supply regardless of whether banks play their role as suppliers of money into the economy. In its purest form, helicopter money also bypasses governments\u2019 treasuries, and is therefore not legally prohibited under the monetary financing rule (Art. 123 of the EU Lisbon Treaty).<\/p>\n

A second clarification is also required at this point: helicopter money is also different from the so called \u201cquantitative easing\u201d (QE) policies that have been implemented by several central banks, although they pursue a similar objective: boosting the money supply to avoid deflationary pressures.<\/p>\n

Under QE, central banks create money (the so called central bank\u2019s reserves<\/i>) and mobilize those reserves to purchase financial assets on a large scale and over a certain period of time. Usually, central banks purchase sovereign bonds with the intention of pushing down interest rates on those bonds, to encourage the financial sector to move away from investing in sovereign bonds and to instead lend money to riskier projects under the so-called \u201cportfolio rebalancing effect\u201d. This type of money creation is therefore targeted to the financial sector, with assets as collateral on the central bank\u2019s balance sheet and, more importantly, is a temporary operation: the central bank destroys the money once the bonds it holds come to maturation.<\/p>\n

Helicopter money is therefore very different from QE. In fact, it is precisely because of the many shortcomings of QE that helicopter money is being presented by a growing number of people as a superior alternative.<\/p>\n

Helicopter money as an alternative to quantitative easing<\/h3>\n

The assessments of QE programmes in the US, Japan, and the UK have been subject to a wealth of contradictory conclusions. In Europe, the ECB\u2019s QE programme was first applauded as progress, after years of speculation and resistance to implementation of QE when it was desperately needed \u2013 when the Greek crisis hit. However, it is becoming clear that QE recipes, in Europe and elsewhere, never really do the trick.<\/p>\n

Generally speaking, QE does cause lending conditions to improve, but it does not automatically lead to an increase in bank lending. In other words, the \u201ctransmission channel\u201d of monetary policy does not work so well under QE. To be fair, this is not the banks\u2019 fault: there is little banks can do when conditions are so bad that virtually no companies or households want to take on debt because the economy is already over-indebted.<\/p>\n

Economists talk of a \u201cliquidity trap\u201d whereby injections of cash into the private banking system by a central bank fail to stimulate the real economy. QE doesn\u2019t overcome this trap.<\/p>\n

Even worse, QE is often accused of creating asset bubbles and increasing wealth inequality, because the massive injection of money is narrowly targeted towards financial asset  disproportionately owned by the rich. The Bank of England itself estimates<\/a> that its own QE programme has increased by 40% the wealth of the richest 5% of Brits.<\/p>\n

Against this background, helicopter money is experiencing a comeback, perhaps with even more strength than Friedman could ever have imagined. Since the start of the crisis, prominent economists and commentators, including Martin Wolf<\/a>, Steve Keen<\/a>, Anatole Kaletsky<\/a>, Willem Buiter<\/a>, Adair Turner<\/a>, John Muellbauer<\/a>, Bradford Delong<\/a> and Martin Sandbu<\/a>, have advocated for central banks to implement some form of helicopter money. Anatole Kaletsky and Steve Keen almost simultaneously proposed re-branding the concept \u201cQE for People\u201d, which later became the name of a European campaign<\/a> (for which the author currently works).<\/p>\n

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Conference about \u201cQuantitative Easing for People\u201d at the European Parliament<\/p>\n<\/div>\n

The case for QE for People is quite straightforward: since the banking sector is not currently able to \u201ctransmit\u201d the central bank\u2019s monetary policy accommodation by increasing their loan\u2019s issuance, why shouldn\u2019t the central bank do it by itself? If the main task of central banks is to maintain inflation at around 2%, certainly the most effective way would indeed be to distribute money to people so they can spend it.<\/p>\n

The debate on helicopter money took another turn when it was mentioned by the ECB\u2019s chief Mario Draghi, under the spotlights of a press conference on March 9th 2016<\/a> and later by other senior ECB officials<\/a>. \u201cHelicopter money is a very interesting concept\u201d Draghi said, while adding that the idea was not yet being considered by the ECB. Whether one think this was sincere curiosity or a clumsy statement on Draghi\u2019s part, the fact is this single sentence provoked a historic tide of comments and debate<\/a> on the idea, including within policymaker spheres.<\/p>\n

How about basic income?<\/h3>\n

Similarities between helicopter money and basic income have led some commentators to offer very confused explanations, claiming, for example, that Finland was already undertaking a \u201chelicopter money\u201d programme (the basic income experiment).<\/p>\n

Undeniably, there are resemblances between the two concepts, as both involve making unconditional payments to all citizens and usually without means-testing. Basic income\u2019s principles of universality and unconditionality can also be found in helicopter money.<\/p>\n

Key differences quickly emerge under careful analysis, however. Under a helicopter money regime, there is no clear commitment from the central bank to make payments periodic. Quite the contrary in fact, as most proponents of helicopter money (read the prolific Eric Lonergan<\/a> for example) are keen to be clear on the fact that this should be an exceptional measure, to be used on a one-off basis, with the possibility (but not the commitment) to renew if necessary.<\/p>\n