Last week, the Deep End featured Anatole Kaletsky’s argument that money created through Quantitative Easing (QE) should be given directly to the general public. Since then, Simon Jenkins, writing for the Guardian, has added his voice to this call:
- “British economic policy is like the Olympic Park without the athletes. It is barren of activity and incident. More than £325bn has been "injected into the economy" by the Bank of England, money that has gone nowhere near the economy. It is sitting in a bank vault. My Olympics legacy would be to get it out and inject it properly…
- “The best Olympic legacy would be to return to taxpayers the cash Coe demanded they give him seven years ago on which he promised "a profit". It would take the form of the Bank of England creating £1,000 for every family and injecting it into bank balances this autumn, with an order to go out and spend it before Christmas. Such "unconventional monetarism" is now gaining traction.”
“Unconventional monetarism” is an interesting form of words – and, presumably, a nod to the economic theories of Milton Friedman. Believing that inflation is always and everywhere a monetary problem, Friedman famously made the case for monetary tightening (higher interest rates) as a solution to the inflationary problem. However, if the problem is deflation (i.e. negative inflation), then, by the same logic, monetary policy should be loosened. As a metaphor for this process, Friedman conjured up the image of government helicopters dropping banknotes on a grateful population.
This is how Simon Jenkins envisages such a policy:
- “…so-called helicopter money is daring and eccentric. It would require the printing of some £20bn of new money, not far off what the Olympics probably cost in spending and lost economic activity. But it would feed directly into the economy where it's most needed: in boosting high street spending. It would aid a demand-starved economy, and certainly keep that Olympic smile on every face.”
But spot the difference: While the purpose of Friedman’s helicopter money is to stop deflation, the purpose of Jenkins’ scheme is to boost economic growth. These ends are not necessarily one and the same. Right now, growth is stalling, but the inflation rate – though not out of control – is still decidedly positive. Creating money for consumers to spend could add to inflationary pressures. Alternatively, it might be used to pay off consumer debt instead, thus defeating the object in a different way.
The only way of avoiding these pitfalls is if the additional spending were to be directed at areas of under-utilised productive capacity, such as the construction sector. However, helicopter money (along with most tax cuts and most forms of current public expenditure) is unlikely to allow demand to be directed with the precision required.
And there’s something else. Jenkins introduces his article by demolishing the notion that London 2012 might somehow produce a permanent lift for the British economy:
- “There is no external benefit from sporting success, even in football-mad cities. Time passes. Ardour cools. Even the media, which left its collective brain in volleyball sand for the duration, will revert to type.”
If the ephemeral nature of such a boost is true of the Olympics then wouldn’t it also apply to something as fleeting as a helicopter drop of made-up money?