Central banks must join the fight against the coronavirus pandemic. But policymakers must be cautious about using the wrong tool at the wrong time.
Frances Coppola is the author of the Coppola Comment finance and economics blog, which is a regular feature on the Financial Times’ Alphaville blog and has been cited in The Economist, the Wall Street Journal, The New York Times and The Guardian. Coppola is also Associate Editor at the online magazine Pieria and a frequent commentator on financial matters for the BBC
Cross-posted from Open Democracy
As fears grow that the coronavirus pandemic will cause a global recession, a radical proposal is gaining traction. If central banks – or governments backed by central banks – gave money directly to households, could that help to prevent a crisis turning into a depression?
The American economist Jason Furman thinks it could. He proposes that every American should be given $1000. Other economists and commentators have followed his lead. Nouriel Roubini has backed Congresswoman Tulsi Gabbard’s proposal for “helicopter drops” of $1000 to every American until the crisis is over. Harvard economist Greg Mankiw and journalist John Carney have both made a similar call. In Australia, Prime Minister Morrison proposes giving pensioners and people on certain benefits AU$750 each.
I think they are wrong. This is not the right time for helicopter money. And if helicopter money is used at the wrong time and for the wrong purpose, there is a real risk that it won’t work and will then be dismissed as useless.
On first sight, helicopter money looks like a good response to the current crisis. When fear bites due to some unforeseen catastrophe, banks stop lending, people stop spending and companies stop investing. Falling sales deprive companies of revenue, forcing them to lay off workers. As unemployment rises, people’s income falls, they cut back spending even more, and companies sell even less. In 2008, quantitative easing (QE) was supposed to break this feedback loop. But because it didn’t get banks lending, and the money didn’t go to the people most likely to spend the money, its effects were weak. Many people, including me, think a better response at that time would have been to give money directly to people. This would have kick-started the economy more effectively than any amount of QE.
Like the 2008 crisis, the pandemic is depriving people of jobs and incomes. But that is where the similarity ends. In 2008, people didn’t lose their ability to work. In contrast, the coronavirus pandemic will temporarily deprive hundreds of thousands – perhaps millions – of people of their ability to work. Furthermore, whereas in 2008 businesses failed because money stopped flowing through the economy, this time they are threatened by restrictions deliberately imposed by governments to protect people from illness and death.
But the fact that this crisis is different from the last doesn’t explain why helicopter money is the wrong medicine. After all, people still need money.
There are two specific reasons why I think helicopter money is the wrong policy for this crisis. Firstly, the amounts of money proposed by Furman, Roubini and Mankiw, and by Prime Minister Morrison in Australia, are totally inadequate. $1000 isn’t even a month’s wages for Americans, and nor is AU$750 for Australians. Those who lose their jobs, or are self-isolating, or are ill, need their incomes maintained. Unconditional basic income, not discretionary handouts, is the right solution for them.
The second reason is that spending more is actually the last thing we want people to do right now. Prime Minister Morrison’s proposal to give pensioners additional money is particularly bad. Pensioners are the highest risk group, and therefore need to retreat into their houses and protect themselves, not take the grandchildren to Disneyland. Giving them money to encourage them to spend sends completely the wrong message and is potentially dangerous for them.
But it’s not just pensioners for whom helicopter drops right now would be a bad idea. The companies worst affected by the pandemic are those that provide leisure services – airlines, cruise ships, travel companies, restaurants and bars, event organisers. These businesses all bring people together in one place for relatively long periods of time, increasing the risk of infection and potentially turning those people into disease vectors for the rest of the population. This is why countries are shutting restaurants and bars, banning events, closing borders, and advising vulnerable groups not to travel. Yet these are exactly the sort of activities on which people might want to spend their helicopter money. If they were able to do so, then helicopter money would not only be completely counterproductive, it would be dangerous.
And if people couldn’t spend the money on leisure activities, what might they do? Well, they might stockpile goods. There is already a run on loo rolls, pasta, baked beans and flour. Why do we want to fuel this?
There are other things they could do with the money, such as home improvements, though the proposed amounts wouldn’t go very far. But in my view it is more likely that people who didn’t immediately need the money would save it. They might spend it later, of course: after all, once the virus is passed, people who haven’t had an evening out for months might feel they deserve a meal at a top restaurant. But there seems no point in giving money while the virus is actively sweeping through the population. No-one will even earn any interest on that money. It will end up being just another cheap funding source for banks. And because of this, there will inevitably be complaints that helicopter money doesn’t work. Worse, politicians might use it as an excuse not to provide desperately needed income support: Prime Minister Morrison’s proposal notably doesn’t include any commitment to support those who will lose their livelihoods.
In my view it would be far better to break out the helicopters when the virus has passed and people start emerging from their cocoons. So what should governments do at the moment?
Financial markets are screaming, of course, but governments should resist the temptation to treat this as a repeat of 2008. This is a health crisis, not a financial crisis. The top priority must be healthcare, not money. Countries that don’t currently have free universal health care need to provide it. And countries whose healthcare services are underfunded and overstretched need to throw money at them. Staffing and equipment shortages urgently need to be resolved.
Countries need to cooperate to provide healthcare for all and develop a vaccine. This is no time for “America First”, or “Britain can do this all by itself,” or “no, we won’t help the feckless Italians.” The pandemic is a global crisis. It needs global solutions.
Secondly, governments need to maintain people’s incomes. Gig economy workers and the self-employed are particularly vulnerable, since they are always the first out of the door when hard times arrive and many live hand to mouth. It will be some time before the incomes of these workers recover, and many are not eligible for existing benefits, or if they are, the benefits are wholly inadequate. They need unconditional basic income.
Government also needs to support business cash flows as sales fall, so that they can continue to pay workers and maintain supply chains. Some countries are already heading in this direction: for example, Ireland is introducing a scheme to enable companies that have ceased to trade due to the pandemic to continue paying their workers at least the unemployment benefit rate, and Denmark is proposing to support workers’ wages at 75% of full pay in return for companies agreeing not to lay them off.
Maintaining people’s incomes protects landlords, banks and utility companies from defaults. And helping companies to maintain employment and supply chains should enable them to recover quickly when the virus has passed.
Of course, these measures will be expensive. Government deficits will balloon. Some would like to keep income support bills down by encouraging banks, landlords and utility companies to offer payment holidays. But the government would then have to provide compensation to avoid widespread collapses. Would we really rather bail out banks, landlords and utility companies than support people and businesses so they can keep going? I can’t believe it.
But there is no need for this fear of deficits. Helicopter money is not the right solution, but another form of “people’s QE” can help to pay for this extra spending. That is central bank financing of government spending.
The extra spending needed to support people and businesses through this crisis could be financed directly by the central bank. But since interest rates are so low, there is no need for this. The crisis is severe, but not so severe that laws against central bank financing of government need to be broken. Rather, central banks can keep government borrowing costs low by standing ready to buy government bonds if yields start to rise. Even the European Central Bank (ECB) can do this – after all, it successfully squashed Eurozone periphery yields in 2012. Central banks could usefully remind wannabe bond vigilantes that the cost of government borrowing is always and everywhere under their control.
But I don’t want to rule out helicopter money completely. After all, I believe in it. So my proposal is that central banks should use their powers to backstop fiscal authorities as they upgrade healthcare, maintain incomes and support businesses through this crisis. Then, when the storm is past, they can fire up those helicopters, and we can all go on a much-needed holiday.