16 Aug 2012

Helicopter Money : Not the right answer

This morning's Guardian has an article saying that nearly half of the economists who originally backed Cameron and Osborne's austerity program are now saying that the government should be borrowing money to invest in infrastructure.  You can see the original report in an article in the New Statesman.

Well, I suppose you could call that progress. There appear to be some economists who have realized that they were previously talking rubbish.

But apparently none of them seems to have realized that the idea that governments should be borrowing money from commerial banks makes no sense. The Bank of England can create money, as it did when it happily generated £375 billion of quantitative easing that it pumped into the financial sector - with no useful effect.

Surely, there must be better things to do with central bank money?

One option that has been proposed by a number of people, including Simon Jenkins, writing in the Guardian, is the idea of "helicopter money", an idea that was apparently originally mooted by Milton Friedman. The government simply prints lots of new bank notes, and drops them out of helicopters. People scramble for the notes and then use the money to spend into the economy.

It is admittedly a better way of injecting new money into the economy than the one that we currently have. Right now, commercial banks create new money as debt. So any increase in money is automatically associated with getting yet money people (companies or governments) even more in debt. But you cannot borrow yourself out of debt. Helicopter money does have the advantage that it gets money into the economy without the need to increase debt further.

When will politicians and ecnomists and journalists realize that there is absolutely no problem with the government spending newly created money into the economy. The power to create money and decide where it goes is far too valuable to just chuck it out of a helicopter. Here are some examples of what an intelligent government could do.
  1. New money could be used to build low-cost rented public sector housing - allowing ordinary citizens to find somewhere decent to live. It would provide a much needed boost to the construction industry. But in addition, if the houses were built and owned by local councils, they would provide a much needed source of rental income - a source that all but disappeared following Thatcher's selling off of council houses in the 80s. 
  2. New money could be used to build better public transport systems. This would have a massive long-term benefit - allowing people to get to work far cheaper than now. In the UK, rail fares have been going up far faster than inflation for years - with the latest fare increases of 6.2% due next january meaning that many commuters will be paying over £5000 a year for a season ticket. We are told that this is to cover the need for investment. Well, why not use newly created central bank money to build the new infrastructure. The savings on transport costs and delays would mean that all British industry would be better off.
  3. Building hospitals using private funding has proved disastrous for everyone except the people who will be raking in the fees for several decades. Direct government investment, with no debt attached is a perfectly sensible way on financing projects that a clearly in the interests of all citizens.
So, no. Helicopter money is not a solution. Debt-free public financing of projects that are directly in the public interest is the most intelligent way to get money into the economy.

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