The Federal Reserve should
- resist calls to create new liabilities except in exchange for securities or collateral of equivalent or greater long‐run market value.
- not rely on the Federal Reserve for funding beyond the extent provided for by the Fed’s present obligation to surrender its interest revenues net of its interest and ordinary operating expenses (“seigniorage”);
- close the “platinum coin loophole” by repealing that portion of Title 31, Section 5112 of U.S. Code authorizing the Treasury Department to mint and issue platinum bullion coins in any denominations (or by amending it to only allow the minting of platinum bullion coins of denominations below their bullion value) and by clarifying the nonlegal‐tender status of any bullion and proof coins produced by the U.S. Mint.
One of many controversial aspects of the March 27, 2020, Coronavirus Aid, Relief, and Economic Security Act is its heavy reliance on the Federal Reserve System as a source of funding for emergency relief programs. Congress allotted $454 billion of the act’s total $2.2 trillion in authorized emergency aid to the U.S. Treasury for use in covering (or “backstopping”) any losses the Fed incurs from emergency lending that it has agreed to undertake. According to Treasury Secretary Steven Mnuchin, this approach will allow the government to “lever up to $4 trillion to help everything from small businesses to big businesses.” Fed Chairman Jerome Powell has likewise stated that every dollar the Treasury supplied to it was “worth $10 worth of loans.” Thus far, the Fed has received only about $200 billion from the Treasury, and it has lent far less than 10 times that amount.
The idea that the Fed can “lever up” federal spending—turning $1 in congressionally appropriated funds into a much larger sum in fiscal relief—and the Fed’s ongoing quantitative easing have together inspired increasing calls for it to play an even more radical part in financing the government’s emergency fiscal programs by resorting to “helicopter money.” Under this plan, instead of merely “leveraging up” funds that Congress assigns to it or lending money directly to the government, the Fed would directly pay for various fiscal programs using newly created money.
Helicopter Money versus Deficit Monetization
“Helicopter money” is money a central bank creates and gives away—that is, transfers to various recipients without any prospect of repayment. This differs from central banks’ usual practice of supplying money in exchange for securities or by making loans.
Of course, helicopter money doesn’t really involve helicopters. The expression comes from Milton Friedman’s original, facetious illustration of the concept of “neutral” money creation in which he envisioned a central bank scattering fresh paper currency from helicopters so that everyone might receive an equal share of it. Today’s helicopter money proposals would instead have central banks sending checks directly to targeted members of the public, wiring funds to their bank accounts, or most commonly, crediting their governments’ central bank accounts to let them spend more without having to either borrow more (with or without central bank assistance) or raise more tax revenue. In the United States, Congress might authorize a spending program and then have the Fed credit the Treasury General Account with the requisite funds, bypassing the usual appropriations process altogether.
Helicopter money is thus distinct from deficit “monetization” as that’s usually understood. As Cato adjunct scholar and Durham University professor Kevin Dowd explains, “Debt monetization involves an explicit increase in the federal government’s indebtedness, whereas under helicopter money that same increased indebtedness is written off by the Fed.” Helicopter money involves the Fed expanding its liabilities without acquiring any offsetting, valuable assets. In this respect it also differs fundamentally from the Fed’s Treasury‐backstopped lending schemes: whereas Treasury “backstopping” of Fed lending programs is aimed at preserving the Fed’s equity or net worth, having the Fed resort to helicopter money means sacrificing some or all of its equity, which must decline as its liabilities expand with no corresponding growth in its assets. A big enough helicopter drop could even find the Fed running on negative equity capital—something no ordinary bank could long get away with.
Alternatively, as former Fed chair Ben Bernanke explains, helicopter money can be likened to an extreme version of deficit monetization in which the Treasury gets money from the Fed in exchange for a security that bears no interest and that the Fed agrees to hold on to forever. The Fed, in other words, must commit itself to permanently increase its balance sheet by the amount of its security “purchase.”
Predictably, the depths of the present economic crisis, including the remarkable flattening of interest rates since it began, have led to several calls by economists for the Fed and other central banks to ready their money choppers for a major money‐financed spending‐spree.
The features of helicopter money have caused most economists to generally discourage governments from resorting to it. But this hasn’t kept some experts from recommending that the Fed and other central banks consider it during emergencies, including the present crisis. As Annie Lowrey reported in The Atlantic not long after the COVID-19 pandemic was recognized as such:
Having a central bank help the government spend by magic‐wanding cash into existence has long been considered an economic‐policy taboo, a dangerous last resort for failing states. But no less an authority than Ben Bernanke has argued that it might be a government’s best option “under certain extreme circumstances.” Now many mainstream economists and Wall Street financiers are arguing that those extreme circumstances have arrived. “The risk here is metastasis into another Great Depression,” says Diane Swonk, the chief economist at Grant Thornton, an accounting and advisory firm. “It’s like a meteor hit the Earth off its axis. The Fed can’t get us back on the axis, but they’re the gravity to keep us rooted.”
As Bernanke explains elsewhere, the main potential benefit of helicopter money has to do with the fact that unlike tax or debt‐financed government spending, it can add to current incomes without also adding to the public’s present or future tax burden. Jordi Gali and David Beckworth are two other economists who, using similar reasoning, have proposed helicopter money as a means for dealing with the economic consequences of the COVID-19 crisis.
So far as the public is concerned, helicopter money resembles a windfall, except to the extent that it is expected to lead to higher inflation. But when nominal interest rates have been reduced to zero, as they have been during the current crisis, and cannot be reduced below zero for legal or other reasons (the “zero lower bound” problem), an increased expected rate of inflation is itself beneficial. The increased rate implies lower real interest rates and thus constitutes a means by which to promote more investment spending even when nominal interest rates themselves can’t be lowered any further.
So far, the potential advantage of helicopter money resembles what might be achieved by means of ordinary debt monetization combined with a commitment on the part of the central bank to let inflation rise above its usual target, such as it might make by switching from strict inflation targeting to either average inflation targeting or to national gross domestic product–level targeting.
But helicopter money dispenses with the need for any such commitment and corresponding public faith in central bankers’ promises. This is because, unlike ordinary central bank asset purchases, including large‐scale ones, helicopter money is “irreversible”: having supplied it, the Fed has no easy means for taking it back. By making an irreversible addition to the money stock, the Fed credibly commits itself to accept a higher equilibrium inflation rate. For this reason, helicopter money may be uniquely capable of overcoming the “zero lower bound” problem.
Interest on Reserves: A Fly in the Ointment
But the theoretical advantage of helicopter money is not one that the U.S. government can expect to profit from today. Though the theory assumes that something economists call “Ricardian Equivalence” holds (i.e., that the public takes account of future tax increases in adjusting its current spending), it also assumes, implausibly, that the public doesn’t also take into account future inflation and the implicit tax it imposes. Recognizing this issue, Bernanke observes that “it’s true that higher inflation acts as a de facto tax on money holdings, but that tax becomes relevant only if actual inflation rises, which would be a sign that the program is achieving its goal of stimulating spending.” That is correct. But rather than evading the issue, it only suggests, paradoxically, that precisely to the extent that forward‐looking taxpayers expect helicopter money to spur spending, it may fail to do so.
An equally serious objection to any U.S. plan for helicopter money is one that former Minneapolis Fed president Narayana Kocherlakota has pointed out: that helicopter money is unlikely to serve any useful purpose under the Fed’s current abundant reserves or “floor” operating system.
Under the floor system it established in October 2008, the Fed pays interest on banks’ excess reserves and regulates other short‐term interest rates by varying the interest rate it pays—the interest on excess reserves (IOER) rate. This operating procedure has important monetary and fiscal implications that undermine helicopter money’s theoretical advantages. First, it means that the Fed doesn’t have to sell assets to combat above‐target inflation. Instead it only has to raise the IOER rate to do so. It follows that in a floor system, resorting to helicopter money doesn’t necessarily commit the Fed to allowing either credit growth or the inflation rate to increase permanently.
Second, and just as importantly, under the floor system, helicopter money may create a debt burden no different from, and possibly even higher than, that caused by ordinary debt‐financed government spending. This is because helicopter money leads to a corresponding increase in the stock of bank reserves on which the Fed must pay interest, albeit at a variable rate that the Fed can increase to keep inflation under control. Should the Fed raise the IOER rate enough, as it might eventually be inclined to do to rein in inflation, helicopter money could actually result in a greater fiscal burden than spending financed using long‐term Treasury government securities.
What’s more, it’s precisely in the sorts of extreme crises, such as the current one, in which helicopter money is most likely to be proposed that this last scenario is most likely to come into play. The Federal Reserve’s IOER rate has for some months now been set at 10 basis points (or 0.1 percent). As of September 23, 2020, the three‐month Treasury‐bill rate is also 10 basis points, while the four‐week rate is 8 basis points. Though rates on longer‐maturity Treasurys are above the IOER (the one‐year bond rate is 12 basis points, while the coupon on two‐year notes is 13 basis points), there is no reason to assume that these longer‐term fixed rates are any less a bargain than the floating IOER alternative.
While it’s highly doubtful that helicopter money would offer any advantages over other monetary policy strategies in the United States today, its potential costs are more certain. As Bernanke observes, helicopter money might further reduce the Fed’s already limited political independence, particularly by serving “as a ‘slippery slope’ for legislators, who might be tempted to use it to facilitate spending or tax cuts when such actions no longer make macroeconomic sense.” It could, in other words, end up becoming a particularly dangerous version of what I’ve elsewhere named “fiscal QE,” meaning quantitative easing that’s resorted to not as a means for achieving the Fed’s macroeconomic goals but simply to enable large‐scale “backdoor” government spending.
More generally, helicopter money smudges the line separating fiscal from monetary policy along with the separation of powers that line is supposed to protect. That this is bad becomes most evident in pondering the question, “whose responsibility is helicopter money?” If the government is to take the initiative, then the central bank must be made subservient to it, risking the undermining of its monetary control while opening the floodgates to fiscal QE. If, on the other hand, the central bank is to take charge, the government must arrange its spending plans in accordance with the central bank’s wishes. Neither prospect seems appealing. Call it the “helicopter money dilemma.”
Passing the Fiscal Policy Buck
But a helicopter money dilemma exists only if helicopter money can achieve something that can’t be achieved through a combination of ordinary bond‐financed deficit spending and responsible monetary policy. As we’ve seen, that isn’t the case in the United States today. Instead, it makes more fiscal sense for the Treasury to simply borrow more on the securities market while leaving the Fed free to pursue its monetary policy objectives by resorting to “old fashioned” QE or otherwise. As Bernanke observes, several conditions must hold for helicopter money to be necessary, including the “unwillingness of the legislature to use debt‐financed fiscal policies.” In the United States today, resorting to helicopter money, far from illustrating Congress’s willingness to make use of a tool of enlightened monetary or fiscal policy, would be nothing more than a symptom of its failure to do its job.
The Platinum Coin Loophole
For the moment, the Fed has shown no appetite for helicopter money, in part no doubt because it recognizes how its involvement in any such scheme could undermine its independence while further entangling it in the politics of fiscal policy. The greater danger is that the Fed might be compelled to give money to the Treasury.
Although existing laws appear to prevent either Congress or the Treasury from compelling the Fed to resort to helicopter money, the Treasury might attempt to get around them by taking advantage of a 1996 Appropriations Act granting the Treasury secretary the right to “mint and issue platinum bullion coins and proof platinum coins” in such “varieties, quantities, denominations, and inscriptions as the Secretary, in the Secretary’s discretion, may prescribe from time to time.” Although the coins provision was never intended for the purpose, some (including a former U.S. Mint director who helped write the 1996 provision) claim it would allow the Treasury to produce one or more “trillion dollar” platinum coins, made using far less than that value in platinum, which it could then compel the Fed to accept at face value, thereby increasing its Treasury General Account balance by a like amount and realizing a profit equal to the difference between the coin’s nominal and bullion and minting cost.
While it is doubtful that any responsible Treasury secretary would resort to this platinum coin gambit, the idea has long been favored by modern monetary theorists, whose ideas have become immensely popular lately and whose influence in government is also growing. It would therefore be imprudent of Congress to leave that carelessly open‐ended dangerous platinum coin provision on the books. Instead Congress should act quickly to amend the law to limit platinum coins to modest denominations not in excess of their bullion value while also specifying the nonlegal tender status of these and other bullion and proof coins.
“Helicopter money” is a fascinating theoretical construct that has proven useful in advancing economists’ understanding of various subtle points of monetary theory. But it is a poor alternative to established forms of expansionary fiscal and monetary policy. So long as bank reserves bear interest, helicopter money cannot be said to involve a lower fiscal burden than ordinary debt‐financed government expenditures. Yet it risks undermining both Congress’s power of the purse and the Federal Reserve System’s already tenuous independence.