« L'Europe se fera dans les crises et elle sera la somme des solutions apportées à ces crises »—Jean Monnet
The heated debate on helicopter money of the last weeks seems to have, for now, settled down; it’s therefore a good time for a reasoned and multidisciplinary attempt to reflect on the issue. “helicopter money”, meaning the provision of newly printed money to citizens (and banks, and companies) for free is dreamed to both kickstart consumption and bring inflation back to target. Indeed, it’s precisely mainstream monetary theory which advises against helicopter money in normal times, because this would irremediably create an inflationary spiral which would easily get out of control; if in doubt, look at Venezuela.
But we don’t live in normal times; Europe has flirted with deflation for the most of the last two years, and apparently none of of the many moves the ECB has fielded has been able to rise inflation expectations.
To be clear: Europe’s deflation is not completely an endogenous problem. In particular, the trade war between oil producer countries and the end of sanctions to Iran have heavily depressed oil prices; most of energy prices are, to some extent, indexed to oil; as a result, the cost of a core production factor has fallen and inflation with it.
Part of the problem, however, is endogenous indeed. Since the Eurocrisis, it was decided that the German economic model is the most successful among the available options, and we have worked hard to create a “German Europe”. I won’t enter in the debate on whether that was a wise choice or not; but as a matter of fact, reduction in labour costs, containment of consumption patterns, ad prevention of credit booms have been the key priorities of economic policy in almost all countries that did not already follow such a paradigm even before the crisis.
The ECB fielded an impressive arsenal of monetary weaponry in order to get inflation back to the “close, but below, 2% a year in the medium term” target. Most of the measures, so far, did not work towards this goal. The unspoken totem of chartalists and post-keynesian economists -printing money and distribute it for free- suddenly stopped to be a one-way ticket to the economist’s pre-retirement scheme, and begun to be debated on the FT, the Economist and the Wall Street Journal. Which, by the way, witnesses how quick mainstream economists are willing to reconsider their dogmas if the need arises.
Despite the sudden love that many economists felt for helicopter money, however, the thing remains a very bad idea for the ECB. free stuff, and especially free money, is addictive.
Let’s be clear: if, in pure theory, helicopter money were to be used suddenly, as a total surprise, in limited amount, and -fundamentally- only, only once, it would probably succeed in stimulate some additional consumption, but its inflationary effects would be limited.
Failure in achieving these criteria, however, would be a complete disaster.
If the ECB were to announce that, in one week time, it would allocate 1000 euros to each bank account, short-term inflation would rise almost immediately. There would also be other additional effects however. First of all, if the ECB were totally credible in announcing that the programme would happen only once, credible to the point that everyone believed it, then helicpoter money would not help in achieving the “close but below 2% in the medium term” inflation goal. Without a change in the fundamentals of the economy, prices would just go back over time to where they were before the allocation, as the new money progressively ends up in bank coffers. The issue, in fact, it’s not that there is not enough money, but that money is neither invested or used for consumption, but treasured. So if the money allocation were to be absolutely temporary, then short term inflation would overshoot, but in the long term deflation would persist (or even, artificially, increase, as prices go back to the original level after the overshooting).
The only way to avoid this problem is for helicopter deliveries to be open-ended. In that case, prices would keep increase till the inflation target of 2% over the medium term would be reached. Such a policy, however, would spell the end of ECB independency. Money is addictive, as free consumption is. Why stop at 2% if we can consume “for free”? “the people”, now addicted to monetary, labour-free income, stimulated by populist politicians, would ask to use the instrument again.
And again. At some point (probably very soon) the trick would stop working, as inflation expectations will rise automatically discounting the forthcoming monetary expansions. But this would not hinder “the people” expectations, which will ask even more credit to defend their purchasing power eroded by inflation; they won’t get that the very action they ask to defend their purchasing power is precisely what erodes it in the first place. This will continue to the point that the ECB independence will be lost forever. It took 40 years for most of the EU to accept monetary independence in the first stance, but once the demon is unleashed, monetary independence could be gone in second. This is consistent, unfortunately, with our understanding of democracy: helicopter money would permanently transfer to the ECB a role in fiscal and redistributive policies; however, as we all know, redistributive and fiscal policies have to be dealt with in democratically elected parliaments, not in technocratic institutions. As long as “no taxation without representation” remains a fundamental principle in Europe, the ECB won’t be able to deal with redistributive policies unless it relinquished its independency.
In sum, yes: helicopter money is a very bad idea; let’s keep Europe clear from that, and let’s build a proper European treasury instead.
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