Thursday, August 11, 2016

Helicopter money drop, Corbyn and how to accelerate British (and, not only) growth

In your IB class you probably had heard of Milton Friedman's 'helicopter money drop'.

When the causes of inflation were discussed, it was explained that one of the causes of demand-pull inflation was 'excessive monetary growth'.  Milton Friedman had said that 'inflation is a purely monetary phenomenon' and it will result if 'too much money is chasing after too few goods/'  He illustrated this with his 'helicopter money drop':  Army helicopters ('Black Hawks'...) fly over the Athens' sky (...I tell my students), and they open up their bellies and start dropping zillions of bags full of money -dollar or euro bills.  People go nuts.  They grab  garbage bags, pillow cases, suitcases etc and fill them up frantically with as much money (100, 200 and 500 euro or dollar bills) as they can get hold of.  I will do the same but only for a few minutes. When I fill up one large garbage bag I will run to the closest jewelry store and buy myself watches, golden bracelets, diamond rings etc. but also, from the  kiosk next to my house, a cold beer.  I will then sit and watch sipping my beer as people frantically continue collecting zillions without realizing that after a little while, prices will surge!

But..., economies are suffering from deflation or near-deflation; they have not been growing; unemployment statistics may underestimate true unemployment (because of discouraged workers, involuntary part-timers etc.).  So?

Given that the unconventional monetary policies used these past few years, like QE (quantitative easing) and even negative interest rates (see on negative interest rates) have not really worked (they are thought to have inflated asset prices increasing income inequality and increased private debt), Friedman's idea sounds pretty sensible.  The Central Bank will hand cash directly to households and firms (I read somewhere that you could, for example,  receive in your mail a $1000 check to spend on whatever  you fancy, or the government could finance with such newly created money infrastructure projects (that also have a long run supply side effect).

WSJ article (see below):
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.
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.”
The Guardian article (see below):
Direct cash handouts to households would be a better way of boosting Britain’s flagging economy than the interest-rate cuts expected from the Bank of England on Thursday, according to a group of progressive economists.
In a letter to the chancellor, 35 economists have urged Philip Hammond to ditch the approach that has been followed by the government since the recession of 2008-09 and give the Bank the right to try more radical options.
The letter, to be printed in Thursday’s Guardian, suggests that the Bank should be allowed to create money to fund key infrastructure projects. Alternatively, the group says the Bank could pay for tax cuts or direct payments to households.
These ideas can be used in Paper 1 HL and SL essays related to policies that could lift an economy out of recession or accelerate flagging growth (see OECD calls for urgent action to combat flagging growth) or fighting deflation, or, in an essay on evaluating monetary policy etc. etc..

The articles that provided the stimulus for this post are:
Wall Street Journal:
Central Banks are all 'Corbynistas' now

The Guardian:
Cash handouts are best way to boost British growth, say economists

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