The Stimulus Our Economy Needs
“Future policymakers might choose to consider some additional tools that have been employed by other central banks,” Federal Reserve Board Chair Janet Yellen said in a widely watched speech in Jackson Hole, Wyoming, on Friday. She was referring to a number of possible monetary steps to help the economy, including potentially the much-debated notion of “helicopter money.” So what is helicopter money? It’s a basic, important policy concept with a truly awful name.
The term essentially refers to a fiscal stimulus that is explicitly funded by newly created money from the central bank, a permanent new injection of funds directly into immediate government spending. Now, the idea that governments, with or without the help of central banks, should spend substantial resources on creating jobs, both directly and through private sector incentives, is widely accepted among economists across the political spectrum. However, calling what might be a perfectly justified period of direct cooperation between the fiscal and monetary authorities during a period of acute economic weakness “helicopter money,” as proponents of the policy have done, almost certainly dooms it to failure.
Former Fed Vice Chairman and Princeton University economist Alan Blinder recently referred to it, rightly, as an “infelicitous term [that] keeps popping up in the financial press.” Talk of helicopter money has been aroused most recently by the United Kingdom’s disastrous decision to part ways with the European Union and by the apparent failure of Japan’s expansive monetary and fiscal stimulus efforts to deliver a sustained rise in inflation, much less growth and wages.
The underlying policy idea is sound, even instinctive. When push comes to shove and a majority of the country’s population is struggling to improve its lot, it behooves the economic authorities—from both a social and economic standpoint—to proactively, and perhaps jointly, counter the slump. The difference between the proverbial helicopter drops and the ordinary stimulus of either the monetary or fiscal kind is, in the former, that money is explicitly printed to fund a new round of budget spending, thereby not increasing the Treasury’s debt.
Yet the term “helicopter money,” the idea of which was coined by the Nobel Prize-winning monetary economist Milton Friedman in a 1969 paper and revived by former Fed Chairman Ben Bernanke in 2002, when he was member of the board of governors, conjures up images of desperation, rescue, irresponsibility, and even debauchery. After all, what institution values money so little that it would simply dump it from the sky as if it held no value at all?
The dilemma is not dissimilar from the counterintuitive problem of inflation that remains persistently below central banks’ targets, now a pervasive issue in the world’s rich economies. Although inflation is generally seen as hurting consumers, price increases that are too anemic tend to reflect stagnant wages, a poor use of the economy’s resources, underemployment, and a deteriorating standard of living. Yellen said in her speech Friday that the Fed still sees inflation trending back toward 2 percent over the “next few years.” But that’s hardly a ringing endorsement for an inflation-targeting central bank that has missed its goal to the downside for several years running.
In their defense, Friedman and Bernanke were drawing on extreme scenarios to make the point that what at the time was seen as a highly unlikely and occasional economic outcome—deflation in the United States—would not leave the monetary authorities helpless. Indeed, Bernanke’s speech was titled “Deflation: Making Sure ‘It’ Doesn’t Happen Here,” in reference to Japan’s prolonged experience with falling prices that signaled a deeper economic malaise.
Bernanke regrets using the term. It muddled his message and eventually morphed into a rather glib nickname that stuck: Helicopter Ben.
“[U]nder certain extreme circumstances—sharply deficient aggregate demand, exhausted monetary policy, and unwillingness of the legislature to use debt-financed fiscal policies—such programs may be the best available alternative,” Bernanke wrote.
That was 14 years ago. Yet today, in the wake of the Great Recession, isn’t this just where the U.S. economy finds itself? Inflation has fallen short of the Fed’s 2 percent target for several years now while underemployment and long-term joblessness remain pervasive. The world facing American minorities is considerably, and consistently, grimmer, with black unemployment nearly double the white rate.
Bernanke’s successor, Yellen, was similarly cautious but also open to the idea of fiscal-monetary cooperation. Asked about the notion of helicopter money in a recent press conference, she said, “Normally, you would hope, in an economy with those severe downside risks, monetary and fiscal policy would not be working at cross purposes … but together. Now, whether or not in such extreme circumstances there might be a case for, let’s say, coordination—close coordination with the central bank playing a role in financing fiscal policy—this is something that academics are debating, and it is something that one might legitimately consider.”
So how to rescue the policy while jettisoning its ill-conceived name? Calling it “employment insurance” is a potential start.
So how to rescue the policy while jettisoning its ill-conceived name? Calling it “employment insurance” is a potential start. Everyone is used to the notion of unemployment insurance benefits, which workers receive for a temporary period after they lose their jobs. Why not pay people to work instead? The idea would be to create jobs that are sufficiently low-paying that they don’t compete significantly with private sector alternatives while still giving workers a means of survival and a sense of dignity during a period of transition. For those who need only part-time work, such jobs might fulfill their needs in terms of participation in the labor force. This would take away the usual bout of widespread consumer and market insecurity that comes, after all, from recessions’ impacts on labor markets. And let’s not forget which economic indicator tends to garner the biggest monthly reaction on Wall Street: jobs.
Although periodic recessions appear inevitable, U.S. authorities—in particular, the administration (with the power to take big actions) and legislators (with control over budget outlays)—have absolutely no standing arrangement for how to deal with slumps, specifically the large employment losses that always ensue.
The Great Recession of 2007-2009 was a case in point. Here was the worst downturn since the Great Depression, and one that came with a fair amount of warning given the persistent troubles in the housing and credit markets that preceded it, yet Congress and the White House had to race to scrape together a $800 billion fiscal stimulus package that was seen, rightly or wrongly, as filled with special favors and far from ideally targeted to boost growth at such a crucial time.
Importantly, spending wasn’t directly targeted at the poorest households despite widespread research showing that group would be most likely to spend the money quickly, for rather obvious reasons. The monetary stimulus, of course, was by design directed at the banks that got us into the financial mess—and that didn’t lend the money quickly but rather hoarded it away. The rich tend to save any stimulus dollars directed at them, especially when economic uncertainty is high and they can afford to wait things out. In the end, critics blamed the Fed’s stimulus policy for exacerbating inequality by boosting the prices of stocks owned primarily by rich Americans while doing little to jolt median wages out of a three-decade slumber.
All told, nearly 9 million jobs were lost during the 2007–09 slump, not counting the new jobs that were needed to keep up with population growth. The unemployment rate more than doubled to a peak of 10.2 percent in October 2009 and took seven years to get back to around 5 percent, seen as normal. Even the current 4.9 percent rate is seen as a poor depiction of the U.S. labor market’s actual ongoing weakness.
So what would a constructive pro-jobs policy of employment insurance look like? It could take many forms, and, despite any central bank role in funding the stimulus, the decision on how to spend the money would remain fully accountable to the democratic process—in the hands of elected lawmakers.
One approach might see Congress adopt a mandate similar to the one it assigned the Fed itself—to maintain low and stable prices while striving for maximum sustainable employment. Such a goal would offer clearer guidelines for when a program of budget spending aided by central bank intervention might be needed, like determining what thresholds of economic pain might trigger its launch.
Rather than relying on a spotty, limited system of jobless benefits that can leave the unemployed in or close to poverty, wouldn’t it be better to directly create government jobs in areas where the private sector appears to be falling short? Employer-of-last-resort-type policies, as proposed by the economist Hyman Minsky, where the government generates employment in socially useful sectors that are underserved by the private sector alone—including infrastructure, education, health care, child and elderly care, and the arts—could be optimal.
After all, most people would agree instinctively with Article 23 of the Universal Declaration of Human Rights, adopted by the U.N. in 1948, which states, “Everyone has the right to work, to free choice of employment, to just and favorable conditions of work and to protection against unemployment.”
A more conservative, potentially less bureaucratic, way to implement an aggressive employment insurance policy is through a negative income tax like the one proposed by Friedman himself. This would involve a significant expansion of the earned income tax credit that would guarantee a basic stream of income for those earning under a certain threshold.
Whatever the preferred approach, the benefits of an employment insurance policy are fairly clear. “[H]elicopter money of the variety proposed by Milton Friedman some three decades ago does not involve central bank asset purchases. Rather, it involves permanent central bank financing of a government cash grant to the general public,” explains Desmond Lachman, a resident fellow at the American Enterprise Institute.
This would overcome a major weakness of monetary policy, he says: “[B]y directly stimulating aggregate demand rather than by working indirectly through asset price inflation and through encouraging risk-taking … it would spare us from yet another destructive round of asset price booms to be followed by asset price busts.”
Opponents of a more active economic policy might reasonably argue that given the low level of public trust in both Congress and the Fed, it might be wishful thinking to get them working in concert. Images of corrupt, wasteful government spending and pet projects are sure to be raised.
However, an alternative view is that trust in such institutions is low exactly because they are not doing something like this—not serving constituents in any palpable way or protecting them from the vagaries of an increasingly volatile and uncertain economy. Maybe doing the right thing for once could help turn that perception around. Or, you know, we could just fund this.