Helicopter money and basic income: friends or foes?

Helicopter money and basic income: friends or foes?

Spurred by Milton Friedman, the concept of “helicopter money” – under which central banks would distribute money to citizens – 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.

“Let 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.”

When Milton Friedman wrote those lines in 1969, he probably never thought that “helicopter money” would become a buzzword in the 2000s post-crisis era. Friedman’s 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. If you need to make more money, you should consider renting out your spare room.

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.

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 elaborated his theory of the “social credit”, its main component being the distribution of a monthly “national dividend” generated from money creation, the level of which would vary according to national production.

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.

The concept wasn’t much thought of for 30 years following Friedman’s discussion, however, and it might have been forgotten again if it hadn’t 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.

Yet, far from initiating serious consideration, these remarks only caused Bernanke to endure mockery and “helicopter Ben” as a persistent nickname.

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 to the ears of many mainstream economists.

An alternative form of money creation

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.

Thus, the concept finds itself often described in very diverse terms, ranging from the old-fashioned monetization of public debt 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.

Helicopter money can thus be defined as the creation of money, without corresponding assets, and its distribution into citizens’ bank accounts.

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’s credit issuance functions. It is worth clarifying this point here: as the Bank of England has clearly demonstrated, today’s monetary supply is almost entirely controlled by private banks issuing credit into the economy. This is sometimes referred to (somewhat misleadingly) as the “fractional reserve banking system”. 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.

Money tree sculpture in front of the Central Bank of Ireland.

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’ treasuries, and is therefore not legally prohibited under the monetary financing rule (Art. 123 of the EU Lisbon Treaty).

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

Under QE, central banks create money (the so called central bank’s reserves) 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 “portfolio rebalancing effect”. This type of money creation is therefore targeted to the financial sector, with assets as collateral on the central bank’s balance sheet and, more importantly, is a temporary operation: the central bank destroys the money once the bonds it holds come to maturation.

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.

Helicopter money as an alternative to quantitative easing

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’s QE programme was first applauded as progress, after years of speculation and resistance to implementation of QE when it was desperately needed – when the Greek crisis hit. However, it is becoming clear that QE recipes, in Europe and elsewhere, never really do the trick.

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 “transmission channel” of monetary policy does not work so well under QE. To be fair, this is not the banks’ 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.

Economists talk of a “liquidity trap” whereby injections of cash into the private banking system by a central bank fail to stimulate the real economy. QE doesn’t overcome this trap.

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 that its own QE programme has increased by 40% the wealth of the richest 5% of Brits.

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, Steve Keen, Anatole Kaletsky, Willem Buiter, Adair Turner, John Muellbauer, Bradford Delong and Martin Sandbu, have advocated for central banks to implement some form of helicopter money. Anatole Kaletsky and Steve Keen almost simultaneously proposed re-branding the concept “QE for People”, which later became the name of a European campaign (for which the author currently works).

Conference about “Quantitative Easing for People” at the European Parliament

The case for QE for People is quite straightforward: since the banking sector is not currently able to “transmit” the central bank’s monetary policy accommodation by increasing their loan’s issuance, why shouldn’t 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.

The debate on helicopter money took another turn when it was mentioned by the ECB’s chief Mario Draghi, under the spotlights of a press conference on March 9th 2016 and later by other senior ECB officials. “Helicopter money is a very interesting concept” 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’s part, the fact is this single sentence provoked a historic tide of comments and debate on the idea, including within policymaker spheres.

How about basic income?

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 “helicopter money” programme (the basic income experiment).

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

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 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.

There is nevertheless some theoretical overlap with basic income. In addition to Douglas, several key advocates of basic income have put forward the case that money creation could be used to finance the benefit, either as a “boot” phase or as a way to supplement the fiscal means to finance basic income schemes. The French economist Yoland Bresson made the case that perpetual low interest sovereign bonds could be used to kick off the basic income in a first stage, thus leaving time for the government to implement all the necessary reforms of the tax-benefit system to make UBI fully functional.

These theories relate to the understanding of basic income as a mechanism of pre-distribution (as opposed to redistribution), whereby basic income is a recognition of the intrinsic value of all participants in society, or even as common inheritance. If all citizens create value “because they exist”, then it makes sense to “pre-validate” this economic value using money creation. If we are all richer today because of our predecessors’ work and heritage, then one can argue that more money should be introduced into circulation to recognise this added wealth.

These are, however, only marginal justifications today, put forward to support neither helicopter money nor basic income. Beyond some theoretical common ground, the differences between the two policies are most clear when one understands that they pursue different objectives.

Put simply, helicopter money can be framed as a punctual measure (extreme, one may say) with a rather narrow purpose: to stimulate economic activity by boosting people’s incomes under some strict circumstances, that is, when the economy is under threat of deflation.

Basic income, on the other hand, pursues a very wide range of objectives from poverty alleviation to work emancipation, gender balance incentivization, social protection modernization, more aggressive redistribution and so on. In contrast, stimulating people’s purchasing power is certainly not the main argument for doing basic income.

From those different objectives also stem different institutional frameworks. If the objective of helicopter money’s proponents is merely to stimulate demand, then transfers to citizens is only one practical means by which to achieve this single clear goal. From this viewpoint, it also makes sense to give independent central banks the legal capacity to distribute a citizens’ dividend as a new instrument in the monetary policy toolbox.

If basic income pursues more numerous and complex objectives, by contrast, it then makes sense that it should be the responsibility of elected governments to design and implement it, just like any other fiscal policy.

In conclusion, helicopter money could be seen as one of many “partial basic income” proposals: schemes that share some of the characteristics of basic income but not all of them. Yet given the very clear institutional distinctions just covered, it does not make sense then to associate too closely the two concepts. In this light, it might be more meaningful to refer to helicopter money payouts as “social dividends” or “monetary dividends” as opposed to “basic income”.

Can helicopter money lead to basic income?

Despite all the institutional and practical distinctions drawn above, it is quite enlightening to recognize the political porosity between the two proposals. Helicopter money proponents tend to also favor basic income (though not all do) and vice versa.

This is probably because the two ideas, to some extent, share some common strategic interests and help one another in the struggle for cultural acceptance of each proposal, especially in regards to unconditionality and the disconnection of money from labor.

From a basic income viewpoint, the rise of the helicopter money discussion is a useful addition to basic income’s financing question. If central banks can create money, then surely it would be easier to finance a basic income.

On the other side, it is also convenient for helicopter money proponents that the basic income discussion is making headway in the argument for universal payments to citizens: it levies an important moral blocage.

Even more strategically, perhaps, there is a case for seeing helicopter money as a necessary step to the implementation of a full-fledged basic income policy.

This is a particularly relevant argument when it comes to the European Monetary Union, which is currently deprived of any significant common fiscal policy. Because of this, it will probably take years before we might see something like a eurodividend (an EU basic income scheme financed by an EU budget) as articulated by Philippe van Parijs.

Speech by Philippe van Parijs on the Eurodividend at the European Social and Economic Committee in Brussels.

To circumvent this cumbersome and very long-term political route, Slovenian economist Jože Mencinger has repeatedly suggested the use of helicopter money as an “ideal experimental possibility” to kick-start a form of basic income in the EU.

Instead of QE, the ECB could start a helicopter money scheme by giving 200 euros per adult citizens for one year – no strings attached, no taxes involved, simply courtesy of the ECB’s (digital) printing presses. This would involve about three times less money printing than under QE and yet would be more likely to fulfill the ECB’s objective.

If this works and garners favorable public opinion, there would be even greater political momentum for implementing something like a permanent eurodividend scheme. The ECB’s temporary scheme would allow some time for EU policymakers to create the institutional and fiscal infrastructure for such a eurodividend to be functional.

In the long run, nothing forbids us from thinking that the ECB could permanently fund such a eurodividend scheme at a certain level, as Kevin Spiritus and Willem Sas have sketched. Yet such funding cannot be seen as an obligation for the ECB under the current legal framework. More intellectual debate will be required before policymakers come to the conclusion that some form of permanent helicopter money is necessary and desirable.

There is still much work to be done before either basic income or helicopter money can be put in place. However, 10 years after the financial crisis, it is clear that central banks’ models have not delivered as they were expected to. There is clear mismatch between the massive size of their balance sheet interventions and the bleak outlook of the economy.

There is a growing case that the whole central banking theoretical framework must be revised. Helicopter money is certainly one idea that is usefully challenging the monetary policy status quo. It will surely take another leap of determination and audacity for central bankers to take this step forward, but we should not rule out that it might also be the most pragmatic thing central banks can do at some point in the future. When things get to this point, the basic income movement must stand ready to play its part in facilitating the move towards helicopter money, while making sure to build upon this gigantic central bank experiment towards a permanent and sustainable basic income.

Thanks to Genevieve Shanahan for proofreading this article.

Credit pictures: Courtesy Financial Times; Positive Money, picturesbyJOE, UBI-Europe

EU: MEPs call on Mario Draghi to consider helicopter money

EU: MEPs call on Mario Draghi to consider helicopter money

Eighteen members of the European Parliament have signed an open letter to the Head of the European Central Bank, emphasizing the need to consider “helicopter money” — a proposal to distribute money directly to people as a citizens’ dividend.

Some advocates argue that a basic income should be financed by “helicopter money” — the printing of new money by central banks for direct distribution to individuals. To be sure, the policy is contested, even among basic income supporters. Many suggest redistributive policies to fund a basic income, as opposed to the creation of new money, and some have vocally opposed helicopter money.

However, while basic income advocates might argue about the advisability of printing new money, the European Central Bank (ECB) has pressed on with its decision to do so: under the Quantitative Easing (QE) program, which ECB President Mario Draghi initiated in March 2015, the ECB been creating €60 billion each month. The ECB then uses this money to purchase government bonds, primarily from private institutions.

The question at this point is not whether to print new money, but what to do with it.

Many economists have worried that QE has been ineffective. Although the policy is meant to stimulate the economy (in particular, inflation), detractors contend that it has done little to spur economic growth — while, meanwhile, poverty and inequality have increased, and inflation remains very low.

The Quantitative Easing for the People campaign holds that, rather than being given to banks, “the money created through QE should be spent into the real economy so that it can benefit individuals and society as a whole.” For example, the money could be distributed directly to individuals, as in helicopter money.

On June 17th, QE for the People announced that a group of 18 Members of the European Parliament signed an open letter to Mario Draghi “calling on the ECB to study the viability and implementation of helicopter money.” Signatories include MEPs from the Left, the Greens and Socialists.

The letter puts forward two proposals [as alternative policies to QE], including a ‘green quantitative easing’ plan and the so-called ‘helicopter money’, a mechanism by which central banks would distribute money directly to individuals. It was co-signed by MEPs from 11 countries of the EU, including representatives of the Socialists and Democrats, the Greens, and members of the European United Left/Nordic Green Left groups of the European Parliament.

In March, Draghi called helicopter money a “very interesting concept.” Nonetheless, the ECB was not considering it. The letter from the MEPs urges Draghi and the ECB to reconsider.

You recently cited the potential legal obstacles to the deployment of helicopter money. However, several eminent economists have already outlined how helicopter money could be distributed directly by the ECB, without going through government accounts and remaining in compliance with the EU Treaties. [emphasis in original]

Stan Jourdan, Campaign Manager for QE for the People and former basic income campaigner, has called the letter “a strong signal that an alternative to QE is needed, and that there is political appetite for discussing innovative monetary policy ideas.”

“The letter is an outstretched hand to the ECB to open up the discussion on policy alternatives with the Parliament. We hope that Mr Draghi takes up their offer.”

The complete letter, as well as the list of signatories, can be found on QE for the People’s website.

QE for the People is supported by multiple basic income advocacy groups, including Unconditional Basic Income Europe, Mouvement Français pour un Revenu de base (France), Runder Tisch Grundeinkommen (Austria), and Rendimento Básico Portugal.

Mario Draghi photo (2014) CC European Parliament

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UNITED STATES: Fund Manager Bill Gross Endorses Basic Income

UNITED STATES: Fund Manager Bill Gross Endorses Basic Income

Last Wednesday, May 4, billionaire bond manager Bill Gross (of Janus Capital) made waves when he endorsed universal basic income in his Monthly Investment Outlook – or, perhaps more accurately, declared a UBI to be inevitable.

Mr. Gross, like many other commentators on current economic trends, foresees massive job loss due to automation:

Virtually every industry in existence is likely to become less labor-intensive in future years as new technology is assimilated into existing business models. Transportation is a visible example as computer driven vehicles soon will displace many truckers and bus/taxi drivers. Millions of jobs will be lost over the next 10-15 years. But medicine, manufacturing and even service intensive jobs are at risk. Investment managers too! Not only blue collar but now white collar professionals are being threatened by technological change.

He is critical of the idea, currently en vogue, that the appropriate response is to make higher education more accessible and affordable — submitting that a college degree might “better prepare students to be contestants on Jeopardy” but not necessarily lead to better jobs or more economic growth.

What, then, should be the alternative? Well, here’s what Mr. Gross says:

Instead we should spend money where it’s needed most – our collapsing infrastructure for instance, health care for an aging generation and perhaps on a revolutionary new idea called UBI – Universal Basic Income. If more and more workers are going to be displaced by robots, then they will need money to live on, will they not? And if that strikes you as a form of socialism, I would suggest we get used to it.

Indeed, he later goes so far as to assert, “The question is how high this UBI should be and how to pay for it, not whether it’s coming in the next decade. It is.”

On the question of how to financial a UBI, Mr. Gross recommends that central banks print more money – the idea popularly referred to as “helicopter money” and promoted in Europe as “QE for the People.”

Within hours, Mr. Gross’ proclamations led to a proliferation of news stories on basic income – including reports in Reuters, Wall Street Journal, Forbes, and CNN Money, to mention only a few.

Matt Levine (in his Bloomberg View column “Money Stuff“) drew upon some personal anecdotes from Bill Gross to common on the common objection-cum-question “Would people stop working if they had a basic income?”:

Imagine a young Bill Gross, offered a basic income, free of the constraints of needing to earn a living. Would he still have become an obsessive bond manager? Yes of course he would have, come on. Gross has been open about the fact that he’s not in bond investing for the money; he’s in it for the fame. And there is no universal basic income of fame, though I guess Twitter is getting us pretty close.

Meanwhile, other authors and commentators took a skeptical stance. Fortune columnist Chris Matthews, for example, questioned the political feasibility of UBI in present day America, and Myles Udland, writing for Business Insider, claimed that a UBI would not be welcomed because “in the US we have attached a stigma to receiving certain types of government assistance, and the sociopolitical hurdles to a basic income program are very high.”

To be fair, Udland probably penned this criticism before he had chance to the read David Calnitsky’s article in the Canadian Journal of Sociology, “‘More Normal than Welfare”: The Mincome Experiment, Stigma, and Community Experience,” reported upon in Basic Income News last week. Calnitsky’s article provides empirical support to what many have already expected: since it is given to everyone — “obscuring the distinctions between the ‘deserving’ and ‘undeserving’ poor,” as Calnitsky writes — a basic income should substantially diminish the stigma associated with the receipt of government monies.

Is basic income nonetheless too radical to be accepted in the States? At the very least, given the quickly burgeoning interest in the idea — and more and more prominent endorsements like that of Bill Gross — it seems premature to rule out its eventual widespread acceptance, which perhaps might happen sooner than we think.

Image Credit: Sequence Media Group

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