I’m afraid I have now come upon the definitive evidence that economists have no idea how an economy works. It’s from The Economist last month, it’s titled, “Money from Heaven”, but it is the subtitle that provides all the evidence that economic theory is lost in the forest and is unlikely to find its way out any time soon: To get out of a slump, the world’s central banks consider handing out cash.
“HELICOPTER money” sounds like an item on an expense claim at a hedge fund. In fact, it is shorthand for a daring [!!!] approach to monetary policy: printing money to fund government spending or to give people cash. Some central bankers seem to be preparing their whirlybirds (and their printing presses). In March Mario Draghi, the president of the European Central Bank, described helicopter money as a “very interesting concept”. Ardent supporters see it as a foolproof way to perk up slumping economies.
The notion has as much potential to drive recovery as the NBN or Building the Education Revolution. It continues to believe that public sector waste in the form of fake versions of productive investment (green energy, crony capitalist enterprises, rail and roads) will make an economy grow. No modern economics text so far as I know even discusses the notion of value added outside of the national accounts, which means economists grow up without knowing the single most important part of what causes growth. It is never part of the equation. Seriously, how could any self-respecting economist endorse this?
Advocates of helicopter money do not really intend to throw money out of aircraft. Broadly speaking, they argue for fiscal stimulus—in the form of government spending, tax cuts or direct payments to citizens—financed with newly printed money rather than through borrowing or taxation. QE qualifies, so long as the central bank buying the government bonds promises to hold them to maturity, with interest payments and principal remitted back to the government like most central-bank profits. (The central banks now buying government bonds insist they will sell them at some point.) Bolder versions of the strategy make the central bank’s largesse more explicit. It could, for instance, hand newly printed money directly to citizens. Jeremy Corbyn, leader of Britain’s Labour Party, has proposed “people’s QE” of this sort.
The advantages of helicopter money are clear. Unlike changes to interest rates, stimulus paid for by the central bank does not rely on increased borrowing to work. This reduces the risk that central banks help inflate new bubbles, and adds to their potency when crisis or uncertainty make the banking system unreliable. Fiscal stimulus financed by borrowing provides similar benefits, but these could be blunted if consumers think taxes must eventually go up to pay off the accumulated debts—a problem helicopter money flies around.
Haven’t these people ever heard of Venezuela? Do they really not understand that growth comes from value adding production and can come from nothing else. Do they not understand that for a project to be value adding, the value of what is produced must be greater than value of the resources used up. Loss making enterprises cannot cause growth. If this is really what economist think, economics is beyond a pseudo-science and into the region of crackpot.
Law of Markets 