Of Helicopters and "Helicopter Money"
What an irony that news reports this morning about the Bank of England's proposal to enlarge the money supply, or "Quantitative Easing," were almost immediately followed by the story that the House of Commons Public Accounts Committee has criticised the government for inefficent procurement of helicopters.
The reason it is ironic is that what is now called "Quantitative Easing" is extremely similar to what used to be called "Helicopter Money."
An earlier advocate of spending your way out of a recession, the economist John Maynard Keynes, suggested that the government could print large sums of money and bury it down mine shafts. The hope was that intrepid citizens would go and get the buried banknotes and then spend the money, injecting cash into the economy. There were no helicopters at the time he was writing, but his later "Neo-Keynsian" acolytes suggested you could give an equivalent boost to the economy in times of recession by sending helicopters to scatter tenners and fivers from the skies into the high streets of Britain.
Because this was such a striking mental image, the term "Helicopter Money" became economists' shorthand for pumping cash and hence demand into the economy.
And as the Bank of England prepares to issue "helicopter money", our troops in Afghanistan and Iraq are finding their job made more difficult through a shortage of real helicopters. While a number of Chinook helicopters bought ten years ago have been sitting in hangars, unable to be used because of poor procurement practice.
If the government wants to inject some "Helicopter Money" into the economy, one quite useful way of doing it might be to buy a few real helicopters, making sure all the right procedures are followed so they can be deployed, and send them to British forces in Afghanistan.
Some loosening of monetary policy is undoubtedly appropriate: I am not suggesting that no action should be taken to get Britain out of recession. The Conservatives have put forward a number of positive steps, listed here, to get Britain moving.
And I would rather see any stimulus managed by the Bank of England rather than the treasury.
But there is a need to keep an eye on the balance of the economy. Whether the method used is government fiscal policy as described in Jim Callaghan's famous speech of 1976, or a monetary stimulous by printing money as agreed today, the long term effect of pumping too much money into the economy can be harmful. To quote from that speech, made when Callaghan was a Labour prime minister,
“We used to think that you could spend your way out of a recession and increase employment by cutting taxes and boosting government spending. I tell you in all candour that that option no longer exists, and in so far as it ever did exist, it only worked on each occasion since the war by injecting a bigger dose of inflation into the economy, followed by a higher level of unemployment as the next step.
Higher inflation followed by higher unemployment: that is the history of the last twenty years."
The reason it is ironic is that what is now called "Quantitative Easing" is extremely similar to what used to be called "Helicopter Money."
An earlier advocate of spending your way out of a recession, the economist John Maynard Keynes, suggested that the government could print large sums of money and bury it down mine shafts. The hope was that intrepid citizens would go and get the buried banknotes and then spend the money, injecting cash into the economy. There were no helicopters at the time he was writing, but his later "Neo-Keynsian" acolytes suggested you could give an equivalent boost to the economy in times of recession by sending helicopters to scatter tenners and fivers from the skies into the high streets of Britain.
Because this was such a striking mental image, the term "Helicopter Money" became economists' shorthand for pumping cash and hence demand into the economy.
And as the Bank of England prepares to issue "helicopter money", our troops in Afghanistan and Iraq are finding their job made more difficult through a shortage of real helicopters. While a number of Chinook helicopters bought ten years ago have been sitting in hangars, unable to be used because of poor procurement practice.
If the government wants to inject some "Helicopter Money" into the economy, one quite useful way of doing it might be to buy a few real helicopters, making sure all the right procedures are followed so they can be deployed, and send them to British forces in Afghanistan.
Some loosening of monetary policy is undoubtedly appropriate: I am not suggesting that no action should be taken to get Britain out of recession. The Conservatives have put forward a number of positive steps, listed here, to get Britain moving.
And I would rather see any stimulus managed by the Bank of England rather than the treasury.
But there is a need to keep an eye on the balance of the economy. Whether the method used is government fiscal policy as described in Jim Callaghan's famous speech of 1976, or a monetary stimulous by printing money as agreed today, the long term effect of pumping too much money into the economy can be harmful. To quote from that speech, made when Callaghan was a Labour prime minister,
“We used to think that you could spend your way out of a recession and increase employment by cutting taxes and boosting government spending. I tell you in all candour that that option no longer exists, and in so far as it ever did exist, it only worked on each occasion since the war by injecting a bigger dose of inflation into the economy, followed by a higher level of unemployment as the next step.
Higher inflation followed by higher unemployment: that is the history of the last twenty years."
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