Frances Coppola on the Macroeconomics of Helicopter Drops

What Does "Quantative Easing for the People" Look Like?

Frances Coppola is a former banker, financial writer, and an author of a recent book titled, The Case for People’s Quantitative Easing, and she joins Macro Musings today to talk about it with host David Beckworth. David and Frances also discuss the overall potential effectiveness of helicopter drops, how they would be deployed during future recessions, and the criticisms and concerns that have been levied against them.

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Note: While transcripts are lightly edited, they are not rigorously proofed for accuracy. If you notice an error, please reach out to [email protected].

David Beckworth: Hey Macro Musings listeners, this is your host David Beckworth. Before we get to today’s show, I wanted to let you know that we now have a Macro Musings hotline number where you can call us with your questions. We plan to do some shows in the future where we play and answer your questions. So, if you want to be a part of the program, please call us on the hotline. The phone number is 802-466-2276, and you can also email us with your questions at [email protected]. Now, onto the show!

Beckworth: Our guest today is Frances Coppola. Frances is a former banker, financial writer, and an author of a recent book called The Case for People's Quantitative Easing. Frances joins us today to discuss this book. Frances, welcome to the show.

Frances Coppola: Hello there.

Beckworth: Well, great to have you on. Some of our listeners will know that you are a big writer, you blogged a lot during the financial crisis, you're on Twitter. We've engaged before through those mediums, and you have this great new book that's out, and really it's a book about helicopter drops, and we'll explain what that means in a minute. But tell our listeners, how did you get into this? Why write this book on people's quantitative easing?

Coppola: We'll I've been sort of following the progress of, say, [the] financial system from that awful crash in 2008 through the desperate attempts of banks to repair themselves, the central banks to repair the economy, and governments to repair their finances since then, and it seems to me that if you were to mark how we did, how we've done in that time, I would maybe give it about six or seven out of 10. I think we could have done better.

There've been things we did right, one of which actually is QE. But, we went too far with it, and we weren't creative enough about other tools, and we didn't think enough about, I guess, ordinary people and the distribution of money. And so that really is what made me want to write this book. It has a helicopter on the front cover dishing out money.

Beckworth: Yeah, it's a great picture, for sure. And you pointed out in the book that QE, to really think about it, you've got to consider the counterfactual, what if there had been no QE? Could've been really, really bad. But, it could be a lot better, and that's where your book comes into play.

Coppola: Yeah, exactly.

Beckworth: Okay. Well let's begin by starting with your first chapter in the book, and your first chapter is called The Great Experiment. Now in that chapter, you talk about helicopter drops, and let's talk about helicopter drops before we get to the great experiment, you can explain, in a minute, what the great experiment is. But how would you explain a helicopter drop? What is it and how's it different maybe than what we did?

Coppola: Well, I think Milton Friedman's wonderful image of a helicopter hovering over, but it was Wall Street, wasn't it, dropping money onto the ground, and this wonderful rush of people coming to pick it up is the kind of archetypal image of the helicopter drop. When we're talking about helicopter drops, that's the kind of thing we mean. It's where the central bank simply gives out money indiscriminately, it doesn't pick and choose who to give it to, and I think that's the important point about a helicopter drop as opposed to other forms of stimulus, where we do choose who to give it to.

So QE, for example, is buying assets, so obviously we're specifically giving money to people who have assets. Or forms of fiscal stimulus, where you might be doing targeted tax cuts or you might be doing targeted benefit increases. Both of those tend to pick and choose who to give the money to. The point about a helicopter drop is indiscriminate.

Beckworth: Okay, and it would be distributed to everyone, not just the financial sector. So there's kind of a distributional element to this.

Coppola: Yep.

Beckworth: What about the idea of it being a contribution, like a net financial asset given to the private sector, is there any merit to that?

Coppola: Well essentially it is. I mean, money is a financial asset.

Beckworth: Okay.

Coppola: So you are putting more net financial assets into the hands of the private sector. Where, one of the big criticisms here is that in a recession, people tend to save like crazy. So the private sector might just hang onto the money. But I did, in the book, produce some evidence, in fact, a significant number of people do spend it. But what you do need to make sure, and it's why this needs to be indiscriminate, is that you're not trying to guess who's going to spend the money. If you can give it to everybody, or as close to everybody as you can get it, enough people, then enough of them will spend it to make a difference to aggregate demand.

Beckworth: Yeah, and I, I think I want to stress for our listeners a point you make in the book. You're saying this is an important tool for really sharp downturns, this is not something we want to use all the time in every circumstance. Although there are some who do suggest that, you mention that in your book, *The People's Money*. But your key argument is, this is something that needs to be used, for example, in 2008 or during the Great Depression, we have a real severe crunch where traditional central bank operations maybe won't cut it. So it's a very targeted and precise tool for a specific time and place.

Coppola: Yeah, exactly. And one point I wanted to make in the book is that I think it's complementary to what we now regard as conventional QE but was of course very experimental when we first started doing it in 2008, hence the Great Experiment. That QE, conventional QE did a good job of propping up asset prices, but what it didn't do was support the spending power of ordinary people, of Main Street.

And so when you couple that with quite a tight fiscal position because of the government's need to put its finances back in order, you ended up with the central bank supporting asset prices and increasing asset prices even, doing more and more QE at the same time as Main Street was suffering from quite a severe tightening. I felt that that was, in a way, two things pulling in the wrong direction, and you need a third tool that makes it possible for you to increase aggregate demand across the whole economy, not just supporting asset prices but also supporting spending power on Main Street.

Beckworth: Frances, do we have any examples of helicopter drops, say pre-2008?

Coppola: Various governments have used forms of what we might call helicopter money, and in the book I do distinguish between different forms of it. But for example, in the 1930s, Japan actually, quite successfully used monetary financing of its government, very successfully, amid dire warnings from American pundits that it was all going to end in hyperinflation, and they were heading for the Weimar wheelbarrows, and they didn't. They actually came out of the Depression rather more quickly than America did.

Beckworth: So one of the questions I have about helicopter drops is how effective will they be if they're not permanent? So a helicopter drop is this net financial asset given to the private sector, but if the private sector expects it to be pulled back out soon, will it pack much punch?

Coppola: It's a fair point. My view on this is that your helicopter drop must be permanent.

Beckworth: Okay.

Coppola: If inflation takes off, you have other tools, but what you don't do is start clawing back your helicopter money. You've got to credibly convince the private sector that this money is theirs, they can do what they like with it, and it is not going to be clawed back. The moment you make it into some kind of loan or some kind of, I don't know, tax rebate or interest rate rebate, interest rebate, that can be clawed back at some point, the moment you do that, you've lost your credibility.

But if you think about it, that's been the case with everything. I mean this is, Krugman's committing to be irresponsible. That he's been calling on central banks to be all along. If your central bank is giving money with one hand and then threatening to take it back with the other, then clearly people are going to not believe it. I mean, it's the same as it is with tax authorities, temporary tax cuts don't work because people go "Yeah, we're going to have pay it back later" and save it, don't they? I mean it's just a Ricardian equivalence argument.

Beckworth: Yeah. And to me that's one of the key elements to making it work, is that it has to be credibly permanent, conditional on what you think's going to happen. And that's kind of a technical point, but I think the practical implication or the practical side of that is you've got to have some kind of level target. So listeners will know I beat this horse all the time, but if you inject this helicopter money and it starts to increase inflation and the central bank freaks out and begins to tighten to offset that, then it's really not going to matter that much, and that's why you've got to have a level target.

So when Krugman, as you mention, talked about being credibly irresponsible, committing to allowing inflation to temporarily overshoot, I think one way we can think about that is that there's got to be a level target, you've got to make up, you've got to reflate and get back to where you where, where you thought you would be.

Coppola: Yeah, I didn't cover that in the book, but that is the implication behind it, is that you've either got to have a higher inflation target, or you need a level target, as you said, which allows you to credibly overshoot on whatever your inflation target is.

Beckworth: Yes.

Coppola: Because otherwise you have got these kind of stick and carrots, saying "We're giving you some money, but as soon as inflation takes off we're going to pull it back again." Whereas the whole point of doing this is to raise inflation.

Beckworth: I think that's one of the problems we've had with QE. I mean, you've mentioned a number of problems with QE, but I think one of them is that as effectively it was viewed as temporary or it was sterilized so that it wouldn't have this effect. Now let's go back to the intellectual history. But you'd mentioned Milton Friedman, who's known for starting this idea of a helicopter drop. You also mentioned Irving Fisher in the book, John Maynard Keynes, but I want to zero in on Ben Bernanke. He became known as “Helicopter Ben”. Why is he known as “Helicopter Ben”?

Coppola: Well this goes back to his time in Japan, when we're looking at what actually in Japan has been a much longer slump than anywhere else. I mean Japan, the Japanese Central Bank has been fighting deflation for a quarter of a century. I think we sometimes forget that. So been totally unable to get inflation off the floor. Interest rates have been on the floor forever, and Bernanke's argument was that there were things you could do that would get inflation off the floor.

Now he talked about a money-financed tax cut, right, which is essentially giving money to the private sector financed by the central bank, and he said that would raise inflation if it was done credibly. And that is really why he became known as “Helicopter Ben”, was because of that. But then what he then got, of course, was the opportunity to try out some of these ideas in the aftermath of the great financial crisis when he was chairman of the Federal Reserve.

My concern is that by that time, governments had kind of decoupled themselves from this, and so it was no longer, say, a money-financed tax cut, it was asset purchases, and the government was busy tightening.

Beckworth: Yeah, Bernanke himself even once said, "Don't call this quantitative easing or monetary easing, call it credit easing." He was more concerned about changing the asset mix on the balance sheet side of banks and financial institutions to affect risk premiums, as opposed to doing the spirit of a helicopter drop. And I think he was constrained politically from doing that.

Coppola: Yeah, I agree with you. I mean, I think there has been a huge kind of dead weight on central banks for the last decade, really, which is this determination by fiscal authorities to put their finances back into order very quickly after what was, we should remember, the worst recession since the 1930s.

There's a point I make in the book when I say that 2010 really was the turning point, when fiscal authorities across the western world turned to austerity and essentially left central banks to try and keep economies afloat while they did that. Well, I don't think central banks did a bad job, I think it would've done a better job if they'd been able to do helicopter money. But you do have to start asking questions about the relationship between the central bank and the fiscal authority when they're pulling in opposite directions like that.

Beckworth: Yeah, so could've been a lot worse, there could've been no QE, could've been, maybe a repeat of the Great Depression, so we're thankful we did not go that direction, but we all know there was a very weak, mild recovery which suggests more could've been done, and of course in a very managed way. We're not suggesting a return to the 1970s here, but we're suggesting a more robust recovery, more evenly-distributed gains. I mean some of the developments we see today, populism, even the Tea Party, there's a lot of things on the left and the right that arose because of this outcome. Even if it wasn't properly understood by all, just the fact that it didn't seem fair gave rise to various populist ...

Coppola: Yeah. I think this feeling that it was so unfair that all this money was going to bankers and none was coming the way of ordinary people has been a considerable contributory factor to the rise of populism. So although we might say, "Well, it wasn't really like that" when you start digging into the figures, the counterfactual, it actually looks rather better than that.

The Resolution Foundation in the UK just in the last week or so has published a report which actually says monetary policy did a pretty damn good job. But it's not the popular perception, and I think sometimes you need to sort of have an eye to how ordinary people feel about this, because in the end they vote. And central banks are only independent if politicians allow them to be, and if politicians start thinking that central banks are not acting in the interest of their electorate, they pull back quite fast on central bank independence.

Beckworth: Yep, absolutely. And we're seeing that now, I think, even the ...

Coppola: Indeed.

Beckworth: Environment we're in. And this kind of touches on chapter one, The Great Experiment. You talked in there about TARP, the Troubled Asset Relief Program where the US government effectively bought capital or helped bail out banks, but also corporations. General Motors, Chrysler, the General Motors financing arm, GMAC, and so that was directed towards either finance or big business corporations, and then QE, I mean, you could tell a similar story. QE, you talk about how really it helped and supported banks and financial firms, but the way it was done, it kind of stopped there, it didn't go beyond that. So talk us through this in terms of your analogy, what went wrong with the helicopter drop? You have a great way of illustrating this.

Coppola: Yeah, essentially the helicopters flew over Wall Street, because they were being flown only by central banks, and central banks as they are at the moment really only influence Wall Street. They don't have a direct connection to Main Street. They rely on banks, and in America, to a considerable amount of financial markets as well, not so much in Europe, in Europe it's much more banks, to get the effects of monetary policy out to the wider economy.

When that transmission mechanism is broken, as it was after the financial crisis, the helicopters can only fly over Wall Street, and what you need is somebody to fly them over Main Street. So at the same time as you'd got a lot of money, really, going into Wall Street one way or another, hoovering up assets and replacing it with money, you've got Main Street suffering from thirst.

Beckworth: Yeah, so helicopters flew in the wrong direction is what you say ...

Coppola: Yeah.

Beckworth: And it was a great experiment that, again, looking at how bad it could've been, it was definitely a great decision to make to pursue this, but it could've been so much better is the key insight of your book. Now what-

Coppola: And I think it's, if I can just jump in for a minute-

Beckworth: ... Yes, yeah.

Coppola: ... I think it's important to remember how very experimental this was. Now, we are now more than a decade on and we've got used to QE, and we think, we talk about conventional QE. Conventional QE wasn't conventional at all, QE was incredibly experimental. And actually, central banks didn't know what it did. They didn't know how it works, they were terrified that it would work too well, which is why they were so keen to limit it. They were doing very limited amounts of it and announcing that they were only going to do limited amounts of it and for a short period of time.

Because they were absolutely terrified that it would work all too well and inflation would take off and they wouldn't be able to control it. And there were all these dire warnings in the press about Weimar wheelbarrows and that kind of stuff at the time. And now it's very easy to forget that, I think.

Beckworth: Yeah, it was very radical at the time, you're right.

Coppola: Yeah.

Beckworth: So Bernanke and the Fed faced external pressure from Congress and the public. I did a study where I was looking at what were the big concerns during this time, and it's shocking how, in 2008 and in 2009, now in 2008, there was high inflation, at least through the middle of the year, commodity prices were up. But high inflation was a top concern in 2008. You could rationalize that away given the commodity concerns, but in 2009 it was an even higher concern in the US, which is, looking back, it seems a little confused, right? Why would you be so concerned about inflation in 2009?

But I think the reason being is these programs were new, they were radical, I think both QE but also the big fiscal stimulus, it just seemed really radical at the time. But in-

Coppola: I think also everybody underestimated how bad the recession was.

Beckworth: Right.

Coppola: And you have to remember that nobody really, much in living memory had really experienced a recession like that, because the last big slump we had like that was in the early 1930s, and not that many people are alive now who even remember that. So, and there are all kinds of myths that have grown up around it. There's also been some very good studies about it as well, which is I think why we've actually managed to avoid having such disaster again, except in Greece, where we've made all the same mistakes again.

But because of that, I think everybody was sort of rubberbanding back to a time that they did remember, which was the 1970s and thinking it was like that, when you had stagflation, so you had high unemployment but you also had high inflation. And this combination of monetary and fiscal looseness really contributing to a fairly out of control financial environment. And I think everybody was thinking of it like that, rather than thinking of it being like the disastrous deflationary slump of the 1930s.

Beckworth: Let's talk about a few of the other specific problems QE created, in addition to the fact that it didn't give us a robust recovery. And you've mentioned several of these. One of them is that it took safe assets out of circulation, so explain that problem to us.

Coppola: Okay. US treasuries particularly, and also other types of safe assets, government debt of other reserve currency issuers like the UK and Germany, because of the euro, and so forth, Japan. The debt of those governments is regarded as safe assets, it's a safe form of savings, and widely used in the world as a way of saving money and building assets in a way that preserves and that keeps them safe for the future.

And also importantly, short-term debt, and particularly US T bills are used as collateral for borrowing on financial markets. So government debt, particularly US government debt, serves two functions. It serves this kind of safe assets function for long-term saving by people all over the world, and it also enables people to obtain dollars that they need for transactions all over the world, because of course the dollar is the most widely used currency in the world by a long way and it has become more so since the financial crisis, actually.

So when you take government debt out of circulation, you've actually made it more expensive for people to obtain the assets they want to save in, and even more importantly you've made it more expensive for banks and financial market actors to obtain the collateral they need for borrowing, and at times, that shortage has been very severe. This is what is driving down interest rates, there's actually a really critical shortage of safe savings products and collateral, not only in the US, I mean in fact the shortage has been eased a bit in the US by the US treasury recently, because of the increase in the deficit. But they've been increasing the debt issuance at the short end rather than at the long end, and now the Fed has stopped unwinding its balance sheet, we've now got a shortage in long-term US treasuries.

But of course in Europe, we've got this ridiculous fiscal tightness, we've got governments trying to cut back on debt issuance across the board, and bond markets crying out for more government debt because they need it. And QE, then that makes that worse, because it withdraws even more government debt from circulation, and therefore creates even more stress for global financial markets and investors.

Beckworth: Yeah, so interest rates are really, really low today because there's this huge appetite for safe stores of value, which happen to be US treasuries or other government safe assets, and it creates this irony or this tension maybe if you want to call it, that the world wants us to produce more debt, maybe we don't want to produce more debt, we think that's too much, but the world says "No, it's not enough actually, and if we go down you're going down with us."

So we see this. Negative interest rates are more and more common around the world, it's pulling down US interest rates, and it wouldn't be surprising in another year or two if the 10 year treasury's close to zero percent. And this is what concerns me about going back to QE as they did it last time, is QE's just going to take more of those treasuries out of circulation and further depress these yields.

And that's part of the goal is it's to lower long-term interest rates, but the problem is we will already be there, we'll be probably close to zero, and there's not much more the Fed can do with it. And if they can do more, it's just going to further lower rates to the point where we have the drag of negative interest rates across the globe.

Coppola: Absolutely.

Beckworth: So to me, I see QE, and it's funny, you mentioned conventional QE, which wasn't conventional so long ago, but conventional QE is running out of ammunition too, I mean it's not going to be a very effective tool in the next recession.

Coppola: Yeah, exactly. Unless governments issue an awful lot more debt, which lots of them don't seem to do, it's going to be, QE, I think, conventional QE as we've come to call it now, QE for the banks, as I call it in the book, is going to become counterproductive.

Now, I think it's already becoming counterproductive in Europe, because I mean it's part of the Great Experiment, it's another extension of the Great Experiment is to experiment with negative interest rates, which we don't understand at all. But my take on them, as I've been looking at them now for a few years, my take on them is that negative interest rates, unless there's a very strong multiplier effect, and I don't see why there should be, are contractionary. I mean they're actually counterproductive. Why are we doing this?

Beckworth: Well interestingly enough, today is September 12th, and the European Central Bank just announced it's going to cut rates a little bit more negative, more QE.

Coppola: Do some more QE.

Beckworth: Yes. And the intention is well, and I think they're forced into a corner where they have to do something. But I do think our financial system isn't geared for negative interest rates. Now, in theory, you could tell a story, well, if all interest rates move down together evenly so that interest rates spreads were maintained so banks could still be profitable, that's great, but that doesn't seem to happen in practice.

Coppola: Well that doesn’t seem to happen, but also you should remember that even if all interests rates move down evenly together, it's still a tax on saving. And in an aging world, I talk about this a little at the end of the book, when you impose a tax on retirement savings, which is what it will be, because it's going to hit pension funds, then you just force people to save more, or you force them out into riskier asset classes, where if they're close to retirement, they shouldn't be. Part of the point of QE was to force people into riskier asset classes, that was the idea. And it did succeed. But then we get into this kind of reach for yield thing, and a great deal of instability really in international financial markets, because when people are forced out into riskier asset classes they don't want to be in, they become very sensitive, so they'll run at the drop of a hat, and that's not very good for places like emerging markets.

But also, you're actually, in a way, encouraging people to do kind of the opposite of what you want. If people want to save, then taxing their savings, it's actual capital erosion, it's not just taxing the interests on their savings, it's actually taxing the savings themselves. It's just going to want to make them save more, in which case how are you achieving anything in terms of aggregate demand? I'm not getting it.

Beckworth: Well I guess this speaks to the uncertainty we have about negative interest rates. I think a Miles Kimball, just to play devil's advocate, he would say in reply to your point, you're right if we were to stay down there for a long, long time in negative rates, but his view is we would go down really deep, really sharp, really quick, and boom, a recovery would start, and rates would actually jump back up and be positive and all will be well. But I know that's maybe a tough story to accept, and one we haven't seen play out, so ...

Coppola: No, that's another great experiment, it's another one of these kind of untried policy prescriptions that somebody'll probably try it at some point.

Beckworth: Well I think that's why it's not going to work, I think negative rates really is not a very practical tool, even if you can tell a theoretical story, I think practically it's not on the table. I don't think QE's on the table next recession, negative interest rates. I think yield curve control probably won't be very useful, even though that's talked about, forward guidance. All the tools central banks have, the now conventional unconventional tools, I don't think they're going to make much difference next go-round if we continue to see these rates march down, which they have been. And so that leaves us, or pushes us into a corner where fiscal policy will be more readily used. I think if we get to the point where the Fed and the ECB and the Bank of Japan can't do the stimulus that it needs to do in the next recession because of the situation, fiscal policy will step forward.

And my fear is that fiscal policy will be throwing things against the wall hoping that it sticks, and it'll be very ad hoc, very make it up as we go along. And I think it behooves us to think through a more systematic, rules-based, predictable way of doing fiscal policy, and I think what you're suggesting is the way to do it.

Coppola: See, my argument has been, really, with the various forms of helicopter money that I describe in the book is that they all require this cooperation between monetary and fiscal, which actually we haven't really seen, not in that way. We've seen monetary authorities trying to offset the tightening that fiscal authorities are doing, and we've seen fiscal authorities using loose monetary policy as a shield for their fiscal tightening. We have not seen this kind of coordinated activity between managing fiscal authorities, except in Japan, where it was moderately successful and then they listened to the IMF and raised taxes, which was a very silly idea.

Beckworth: That was second round of QE they've done, Abenomics. They also had the 2001-2006 period where they ran up the central bank's balance sheet, and then it came back down. That speaks to the whole temporary versus permanent point we talked about earlier, or the importance of having a level target. So they ran up the central bank's balance sheet pretty dramatically during that period, and they also ran big budget deficits. They were doing, effectively helicopter drops, but they were temporary in nature, and I think it completely undermines the whole point of doing them.

Coppola: Yeah, exactly. It's got to be credible, and if the whole thing is “as soon as we get inflation off the floor we're clamping back down again”, then no one's going to believe it, are they?

Beckworth: Right.

Coppola: And that was kind of the message that's being sent. There was also a kind of a, the inflation expectations thing, that they talk about inflation expectations becoming unanchored, by which they mean, people don't believe the central bank anymore. And that very definitely happened in Japan. So there was Japan, the Japanese Central Bank saying "Oh, we want to get inflation up to one percent" and investors go and pull the other one. It honestly was like that, they didn't believe that, they'd kind of got used to zero inflation, and that had become normal. And so trying to raise it, they just, yeah, in a way the economy itself kind of resisted, and that was also partly to do with the demographics and so forth as well.

Beckworth: Let's move to chapter two in your book. In chapter two you talk about money, understanding money, what it is, because it helps us understand QE versus people's QE and helps us make sense of what can be done in a recession. So tell us about that chapter, what are you trying to get across to us as readers?

Coppola: Well when I was writing this, I was just going to kind of sort of take QE as read and then move on to discussing other ways of doing things. Then you realize, actually, out there, there's not a great deal of understanding even of what QE is, or even of how money works, what money is and how money works and how money is created in our economy.

And so I backtracked a bit and said let's establish some basics, here. Let's talk about how we measure money, because that's actually really important, and how we account for money, and this thing about how banks create money, which actually is awfully important, because QE was to some extent substituting for the money creation that commercial banks normally do in the course of lending, unless you actually go through “this is how it works, this is how it’s done”, people don't get that.

So I did a chapter on this is how we measure money, this is how we define money, this is how we measure it, this is how money is created normally, and then a discussion about what QE does and how it creates money and how it substitutes for the missing money, the money that is lost in a recession because banks stop lending and people pay off debts.

Beckworth: Yes.

Coppola: Which destroys money.

Beckworth: So your point, one of your key points from that chapter is most money is created by the banking system, called inside money.

Coppola: Yep.

Beckworth: So most money's created when, for example, I take out a loan for an automobile, I get that loan, I go pay the person who sold me the car, now that person has that money in their checking account. So that's, right there, some money creation. And that happens with mortgages and all kinds of different credit and financing arrangements.

And what happens during a financial crisis is that all kind of dries up quickly, people pay off their loans. So that kind of money created from the banking system dries up quickly. And what the helicopter drop does is trying to offset that, is that the point you're making?

Coppola: That's exactly it. That if we look at this from a strict money supply point of view, to go back to Friedman saying one of the big problems in the Great Depression was the collapse in the stock of money, then what both QE and a helicopter drop would do is replace the money that is lost, that disappears from the economy when people pay off their debts or default on them, because we get lots of that as well in recessions, and banks stop lending, whether because banks themselves are damaged, as happened in 2008, of course, but also because people won't borrow. No, if they've just paid off their debts or defaulted on them, they're not going to borrow any more, are they?

So that's been one of the big, big problems is our whole money supply to a large extent depends upon this continual creation of new debt. And when that stops and people pay off debts or default on them and banks stop lending and people stop borrowing, then your money supply dries up really quite quickly. And so the central bank, what we've done in 2008 and what I think we could've done even more of, is create money and put it directly into the economy to substitute for the missing bank-created money.

Beckworth: Yes, and I think a point I would stress here is that central banks are always creating some helicopter money over time, so as currency demand growth takes place over time, they're increasing the amount of banknotes out in circulation. It's kind of like a mini helicopter drop every year, they're handing out this money.

Coppola: Yeah.

Beckworth: And from a consolidated balance sheet, it is, it's a net liability to government net financial asset to the public. So you can think of a central bank and treasury working together every year to accommodate the growth of currency demand, kind of a mini helicopter drop. And what happens during a recession is just that that demand in money spikes.

Coppola: Absolutely.

Beckworth: And so what you're suggesting is really just an extension of what happens in practice anyway. So in some way, a helicopter drop is not that radical, it's what happens kind of on a trend basis, but sometimes there's these spikes, and if you don't respond to the spikes then the economy falls apart.

Now, one question that comes up, and you touch on it briefly, but you kind of, I think, fly by on it, is some people will say "Hey, wait a minute, why don't we do this on a permanent basis? Why don't we just permanently inject money through helicopter drops versus relying on the banking system to do that?" And I'm curious to hear where you come down on that discussion.

Coppola: I do regard helicopter drops as exceptional, I've said that already I think.

Beckworth: Yep.

Coppola: And that's because actually, if you rely on your central bank entirely to create all the money in the economy, you're effectively saying that your central bank has to make all lending decisions. You can't have kind of demand-led money creation very easily, because your central bank is a little bit, unless your central bank ends up kind of making lending decisions, you're a little bit removed from the actual activity of the economy, which banks are actually directly involved in it.

So banks are creating money as part of the demand for lending in the economy. The moment you take that away from banks and give it to the central bank, you're basically saying that some committee somewhere has got to decide how much money the economy needs and put it in.

Beckworth: Yeah, and that seems like a very impossible task.

Coppola: Yeah. And I did look at this a while ... it's been suggested a few times. I mean, I did it the first time, the first big suggestion I think was the Chicago Plan.

Beckworth: Right.

Coppola: Irving Fisher, which was kind of in the aftermath of the Great Depression. But there have been other suggestions since, interestingly, since the financial crisis. It's interesting that these kind of ideas always come up after a crisis. So we had the Chicago Plan revisited by a couple of researchers back in about 2012, ‘13? And we've had other suggestions since for various forms of full reserve banking and sovereign money creation. And it always, for me, founders on the same thing, which is that how can a committee of people that are removed from the real economy and only have models to go on, really, decide how much money the economy needs? They're not even stunningly good at deciding even what interest rates should be, are they?

Beckworth: Right, right. Yeah, that's a great point, I mean it's the knowledge problem, they simply don't know enough to make a good decision.

Coppola: Exactly.

Beckworth: Whereas if you're on the ground, if you're a local bank making a lending decision, you have a feel for what's going on, you can see, you can assess. So it makes sense to keep it that way for most circumstances, only these extreme, exceptional environments where you have a deep recession would you want the helicopter money to step in. But again, I like chapter two because the point you make, the big point at least in my view is, helicopter money is always ongoing at some level. The central bank is accommodating currency demand growth, and banks normally accommodate other money demand growth, and in these exceptional moments where banks can't function and where money demand spikes, then you simply have the central bank step in and fill this role, kind of fill this gap until things return to normal. So it's a nice-

Coppola: Yeah, exactly.

Beckworth: ... way of framing this in terms of money demand, money supply, so it's really nice, elegant, so great job on that chapter. Let's move to chapter three where you get into the details of QE for the people or how to do helicopter drops, and you present two versions of helicopter drop, so talk us through them.

Coppola: Okay. The first one is what we actually might, is what's most often thought of as helicopter money, which is where the central bank simply creates money and puts it into the economy, not by buying assets, simply by distributing it. And there are a few different versions of that because it can do it by actually directly distributing it itself, which is Milton Friedman, break out of helicopters, drop some greenbacks somewhere.

Or, these days, your helicopters tend to be electronic, so you need to think about how a central bank would distribute money to absolutely everybody, and you end up with, you'd need some help from the fiscal authorities because the central bank just doesn't have the information. But then it raises questions about should ordinary people have accounts at the central bank for transactions, that kind of thing.

And there are a number of ways of doing it that I discussed in the book, cash cards and things like that, Gazelle money, which is timestamped money given to people. Another way of doing it, which actually has been suggested recently by BlackRock, is actually for the central bank to create money according to what it thinks the money need is and give it to the fiscal authority to distribute as it sees fit, which obviously is a very considerable form of monetary and fiscal cooperation that kind of potentially preserves a little bit of independence, so it's not just saying, “right, government, over to you, you can do what you like,” it's basically saying, “we'll give you this much money and you can distribute it according to what you see fit.”

My main concern with that is that it just removes the central bank a little bit from the macroeconomic effects of the helicopter drop itself, because distribution matters. So although I've said in the book that to some extent, exactly where the money goes doesn't matter hugely as long as it goes to enough people, there will be an effect on aggregate demand. Clearly the impact on aggregate demand does depend, to some extent, on where it goes. So if the central bank is a little bit removed from that decision, then you could find your helicopter effect diluted, and you could also mean that the central bank's reaction function is a bit diluted as well.

Beckworth: Okay. Now you also mention in this first version of helicopter drops, debt jubilees. It's also mentioned earlier in the book. What are the problems with [a] debt jubilee?

Coppola: Okay, full-blown debt jubilee, as has been outlined by quite a number of people, which basically means you pay off all private sector debt with central bank money. And there are a couple of things that spring to mind. The first is that it's really a handout to people who have assets. I know this is going to sound weird, but actually the people who are the most indebted in our society are people who own big houses and have big mortgages, and they tend to be people who have other assets, and then they have a big asset as well.

So the people who benefit the most from a debt jubilee are actually people who are quite well off, which again is back to the, it doesn't seem fair thing. What about the people who are too poor to have debt?

Beckworth: Right, or the people who've been saving and been very, very responsible and don't want to accrue debt, I mean ...

Coppola: Well, exactly, it's a bit of a kick in the teeth to people who tried to, in their eyes, act prudently and not take on huge amounts of debt. So there is a huge kind of political economy problem with debt jubilees, in the way I see it, from full-blown ones. I am quite keen on partial ones, by which I mean an amount of money which is given to everybody, and it's the same amount to everybody. Because the problem with a debt jubilee that pays off all debt is it's not giving the same amount of money to everybody.

Beckworth: Right, right.

Coppola: Yeah? But a partial one, where it gives the same amount of money to everybody and people can then choose what to do with that money, and they may use it to pay off debt, I think it's reasonable. And one of the things I say in the book is that I sometimes see people say with helicopter money "Of course you don't want to use it to pay off debt," and I go "Well why not?"

Because actually if people can partially or completely pay off their debt, and actually if they haven't got very much, if they're actually able to pay off their debt fully with a relatively small helicopter drop, they're probably quite poor, then it frees up disposable income because they're not having to service those debts anymore. And you also potentially have wealth effects, and you have, because I feel a bit richer, from not having quite so big a mortgage any more, put more equity in the house, you've got wealth effects, and you've removed from this kind of sort of, the burden of debt, the psychological burden of debt. It just weighs down on you, and they can feel a bit freer.

So there is a case for saying, a helicopter drop that results in people partially or completely paying off their debt is actually quite a good idea. I just balk at the idea of paying off all debt, because I just think it's so, it's unfair to the prudent and the poor.

Beckworth: And this gets us back to the basic helicopter drop, just send them the money, let the people decide how they want to use it, if they want to pay off their debts, if they want to buy something. I think keep it simple is a nice principle here.

And also again, going back to kind of a money supply money demand framework, look, if they want to pay off their debt, if they're not going to spend it, fine, you keep doing a helicopter drop until they do. I mean that's why you tie it to some kind of target, tie it to a price level target or a nominal GDP level target. If they've got debts to pay off, if they're still going to be hoarding the money, fine, then you continue doing the helicopter drops. To me that's almost a trivial issue because it's something that can be fixed with this, but it's something that comes up, because I've heard it too as well. And I know, you've mentioned a famous economist in your book who stresses this point. Let's go into the second form of helicopter drops, how does that one differ?

Coppola: Okay, we do hear a lot of this one, and that's the idea of money financing of government investment, in various forms. So direct central bank financing of government investment is actually illegal in a lot of places, including the United States. But you can get round that by using something like a state investment bank or something like that, so your state investment bank might issue some bonds and the central bank might buy them.

It's a form of helicopter money, it depends whether it's directed. So really you can say this is a form of central bank QE, right, where you've got a state investment bank that's basically buying up yet another form of government debt, but it's doing so maybe even on primary issue, maybe on secondary issue, but kind of hoover them up, hoover them up the moment they're issued. But these are bonds that are specifically used for investment. There's been a lot of talk of this around a Green New Deal, about a way of financing a Green New Deal would be using the central bank to essentially buy up bonds created by a green investment bank or whatever.

Beckworth: Yeah, this second approach makes me a little more nervous, because I can see it opening a whole Pandora's box of "Well we got this special project and I got this special project, and we can't touch that project because they're too politically incorrect," as opposed to the first approach is just give people the money and let them spend it. But once you start directing it, it's going to get very political.

Coppola: Well, I do raise that issue in the book, and you probably got the impression that I am more skeptical about this kind of helicopter money, of people's QE, than I am about pure helicopter drops. For precisely that reason, that it's too easy for, then, the central bank to become politicized.

Now, from a pure monetary stimulus point of view, buying up investment bonds is no different from buying up government debt. So if what you want to do is some conventional QE, why not? Where I start to get nervous is when I see the idea, as has been mooted by some people, that the central bank should be directed to purchase these bonds, or that these bonds would be issued in a way that in a way forces the central bank to stabilize the price of them. And if that were the case, they potentially would have to buy these bonds and hold them on their balance sheet to maturity in order that the investment project doesn't suffer a sudden spike in financing, regardless of what is going on in the rest of the economy. And that, actually, they have to do that enough, that actually could seriously interfere with the central bank's ability to control inflation, so I actually have a bit of an issue with that. But the idea that you could have a green investment bank that is issuing bonds and the central bank will buy them as part of a conventional QE program, I don't have a problem with that.

Beckworth: Okay. Well let's move to chapter four, and that chapter is titled “Some Weak Objections to QE for the People”, or just objections to helicopter drops.

Coppola: Yeah.

Beckworth: So the first one we've touched on a little bit, and that is inflation. And again, I think there's ways to address that concern that we've touched on, you tie helicopter drops to some kind of target, some kind of rule, level target or price level or nominal GDP level target. So let's go to the second concern which I think is really worth vetting, and that's central bank independence. So tell us about that.

Coppola: Whenever I hear people talking about helicopter drops, they point out this is government deficit financing, and because the central bank really has to work in cooperation with the fiscal authorities to do helicopter drops, it'd be quite difficult for a central bank to do it wholly on its own. It seems to be lack of information if nothing else. Then you can see that the central bank actually has to compromise its absolute independence to some degree to be able to do a helicopter drop.

The question is how much it has to compromise it. So I discuss sort of various forms of very mild compromise of independence which didn't make any significant difference to the central bank doing its job, through to a full blown fiscal authority, the central bank might create the money but the fiscal authority wholly decides what is done with it, which as I said earlier could seriously compromise the central bank's ability to control inflation.

Beckworth: Yes, and the point that you bring up I think's very interesting is that the central bank may lose its independence if it doesn't deliver the goods.

Coppola: Absolutely.

Beckworth: So if we have a slow recovery or if there's no recovery, if the central bank can't hit its own inflation target, it creates unease out there, the economic angst that can give rise to calls for helicopter drops. So in some ways you could argue we're at this very point, we're having this discussion because central bank independence hasn't been used effectively.

Coppola: Yeah, I think we are there in a way, because we haven't managed to create the recovery that was really needed, and to my mind that's actually because central banks have been, I think antagonistic in some cases to fiscal authorities and vice versa. There's independence and there's antagonism and they're not the same thing. And to me, independence does not mean not cooperating. You can be two independent bodies, but you can still cooperate.

We have this idea that if a monetary authority cooperates with a fiscal authority then immediately the fiscal authority's in control, but there's no particular reason for that. It's just cooperation. But I do see the risk of a ratchet effect here, whereby you have a little bit of compromise of independence, enough to do an indiscriminate helicopter drop, and then the politicians come along and say "Well that's not fair, because we should give more money to them, and less money to them, and it's not fair to give money to the rich" and so forth, and so you end up with the fiscal authority gradually taking over more, and the helicopter drop becoming less of a monetary operation designed to raise aggregate demand without really directing who gets the money, just to get enough people getting some spending power that aggregate demand comes up as an aggregate, through to if we can't target it here it'll work better, and if we take it away from them, that's fair, isn't it? And it suddenly becomes a fiscal operation. I do think there's a danger of a ratchet effect.

Beckworth: Nice segue to the last chapter in the time we have left, and that is what to do in the next recession or depression with helicopter drops. And you just presented a concern, this ratcheting effect where maybe you open the Pandora's box for fiscal takeover, fiscal dominance. And so you want to be careful, you want to avoid that. And so my question to you is how do we set this up? How do we do helicopter drops in such a way that it's systematic, it's predictable, maybe even rules-based so that there's a specific time it's turned off, and it's just understood and orderly. How do we do that?

Coppola: I actually think there are two key parts to this. One is this whole question of credibility and openness and trust and democratic accountability, which kind of underpins all of this, the whole political economy question. Because I think there's a perception, isn't there, that central banks have become a bit distant and a bit unaccountable, and they're run by economists who are in ivory towers and don't understand ordinary people. And we have to recover that, I think, and actually say, well really, central banks are just an arm of government and they need to be clearly democratically accountable in some way, and there's a number of models you can use for that and different jurisdictions will decide for themselves what the best model is.

But I think there has to be some kind of accountability for the decisions that central banks make. That doesn't mean that they necessarily have to be subject to the whims of the political cycle. And so at the same time as I think they do have to have some democratic accountability, I think we also have to create really strong institutions that can, to some degree, protect them by, in a way, as a civil service does, saying well the business of coordinated monetary and fiscal policy goes on regardless of who is in power, and it is accountable to whoever the elected authorities are. But even if you don't have a government for six months or your government is in disarray like it is in the UK right now that the work still goes on.

Central banks do that quite effectively, but I think there's work to be done on making aspects of fiscal policy work similarly. I know we've been working with fiscal councils and things like the UK's OBR, we need more of that kind of intermediate institution, I think, which is trusted and open and democratically accountable but is maybe a little bit separate from the actual political cycle.

Beckworth: Okay. Well let me throw you the way I would do it and you critique it for me, okay?

Coppola: Okay.

Beckworth: So here's how I would set it up in a way to try to keep it orderly, predictable, rules-based, and all that. First, you want to keep a body around that deals narrowly with cyclical issues, that deals with the business cycle. So you want a nimble organization that can respond in real time to the swings of the economy, and that's the Federal Reserve, that's what it's done so far, so I would still stick with the Federal Reserve, but you would empower it with helicopter drops under certain conditions.

And this is how I would set it up, I would do it kind of a two-step approach. One, the Fed would follow some kind of rule, let's call it a Taylor Rule to keep it simple, most people know what a Taylor Rule is. But it follows a Taylor Rule that's tied to a level target, and I'm going to go ahead and say nominal GDP level target, because everybody knows that's what I'm a fan of. So think of a Taylor Rule that looks at a nominal GDP level target, and that is used to guide policy as long as interest rates are positive, as long as the overnight targeted interest rate is positive.

Once you hit the zero lower bound, then automatically a helicopter drop kicks in via a new rule that adjusts the monetary base, so electronic money's being sent out-

Coppola: Electronic money, yeah.

Beckworth: ... and that rule is tied also to the level target. So it's the same target, you still have a nominal GDP level target in both cases that hits when conventional monetary policy runs out, then the helicopter drop kicks in. And you would have to have a process set up where when this happens, the treasury would automatically deposit a bond on the Fed's balance sheets so the Fed could send out the liability, maybe you have the treasury secretary sign off that this is truly a zero lower bound environment, but you have these rules in place so that it's very methodical, proper. And my hope is that if you had them very clearly stated and everyone understood them, there would be limited resort to the helicopter drop in the first place, just because you know there'd be that credible threat back there. But this way it would be very transparent, rules-based, and predictable. So tell me about that, is that too weak of a version for you or do you think it would work?

Coppola: No, I quite like that version. I mean, this is what I'm saying about strong institutions, and I think having a rule-based thing that people can understand, and you'd need to communicate that, because I think sometimes we haven't been very good about communicating things either. This idea that actually the zero lower bound really is a problem and negative interest rates are not good for the economy, basically, we don't want to do that. So we want to find other ways of doing monetary stimulus, and obviously we have governments with limited room for maneuver on the debt side as well, so we might want to say we want to be able to do a combined monetary and fiscal stimulus without upsetting the apple cart on either side of the fence.

Beckworth: Right, right.

Coppola: So actually setting that up as something that, A, is set up beforehand, a bit like, a lot of this is actually about having things prepared, isn't it?

Beckworth: Exactly.

Coppola: With the financial crisis, we were flying by the seat of our pants so much. But even ridiculous things like the failure of Northern Rock in the UK when the Bank of England didn't have a discount window. I mean how absurd is that?

Beckworth: Right.

Coppola: So now you look at the Sterling Monetary Framework in the UK, obviously I talk about the UK but it's similar in the US, they're saying like, you set it up in advance, you pre-position collateral, so that when you need money you can just go and get it, you don't need to start kind of sorting out your books and trying to find some bonds and stuff like that. It's actually having things set up beforehand so all you need to do is say "Right, we've hit the point, this is what we need to do," and it's already set up. And I think that would be really good, and if that was then communicated, I think that people would understand it and that would make a lot of difference.

That would set people's minds at rest, because I think people sometimes feel very uneasy about central banks and fiscal authorities that appear to be kind of inventing what can we do next to try to sort out this mess?

Beckworth: Yes, I think that is key, setting people's minds at ease. I mean that's kind of the whole point, you're making a credible threat by setting up the institution before you actually need it, and maybe you will never need it because it's there in the first place. And that's the whole point of your book, I believe, is to get us ready, prepared for the next crisis, should there be one, by having this tool in place.

Coppola: Absolutely, absolutely. And if you think about it, David, I mean even, the version of helicopter money, of people's QE that we were perhaps less comfortable with, which is the idea that you can use the central bank to support the price of bonds that have been issued for long-term infrastructure development, even that can be kind of set up, as something that if the price falls, you can [be sure] the central bank will immediately kick in and buy the bonds.

Beckworth: Yep.

Coppola: You can set that up, and subject to the wider macroeconomic consideration, where we are with inflation, where we are with NGDP. It's just the central bank's decision, but the setup is already in place, and people know, if you like, what the reaction function is.

Beckworth: Yep, absolutely. Well with that our time is up. Our guest today has been Frances Coppola. Her book is The Case for People's Quantitative Easing. Frances, thank you for coming on the show.

Coppola: Pleasure.

Beckworth: Macro Musings is produced by the Mercatus Center at George Mason University. If you haven't already, please subscribe via iTunes or your favorite podcast app. And while you're there, please consider rating us and leaving a review. This helps other thoughtful people like you find the podcast. Thanks for listening.

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About Macro Musings

Hosted by Senior Research Fellow David Beckworth, the Macro Musings podcast pulls back the curtain on the important macroeconomic issues of the past, present, and future.