The European Central Bank’s Quantitative Easing programme is risky and ineffective. Helicopter money is a much more popular, effective and less risky where central banks would transfer money directly to people.
Since the inception of the European Central Bank’s Quantitative Easing (QE) programme, much has been made of its ability to maintain economic stability in the aftermath of the financial crisis. The ECB claims QE is a success. However, as we said very early on, QE for People is sceptical about this claim for several reasons. The first is is the Eurozone’s stagnant inflation rate that has yet to reach the ECB’s target of 2%. Secondly, quantitative easing has arguably contributed to the rise in wealth inequality and asset bubbles and it benefits primarily large corporations. Finally, QE was prevented from working successfully because member states embarked on fiscal tightening strategies while quantitative easing was in fact supportive of fiscal spending.
In essence, the main pitfall of quantitative easing is that it is a money creation operation intermediated by the financial sector. Under quantitative easing, the ECB purchases financial assets (bonds) from the financial industry, in the hope that the latter will lend more money to the real economy. This “trickle down” approach is unsuccessful because quantitative easing can only work through banks and financial corporations, only if households, businesses or governments borrow money from them. This also means that if QE were to work, the subsequent economic recovery would be fragile because of the underlying levels of debt it requires.
What if the ECB distributed money directly to citizens instead of to the financial sector? This solution, known as “helicopter money” or “monetary dividend” means that the ECB could make lump sum transfers to all citizens in order to boost consumption, growth and ultimately inflation.
Back in 2015, the QE for People campaign was born in anticipation to the failure of quantitative easing. We proposed helicopter money as a way to improve the ECB’s attempt to address the key problem of Eurozone economy: the lack of demand.
Why do we think helicopter money is a superior solution than quantitative easing?
1. It is fairer than QE
The ECB’s current QE programme has unequal effects across Europe. QE mostly benefits the rich, or those who can afford to borrow money at the current cheap rates to a bank to invest in real estate. Most people with precarious work situations or low capital are very unlikely to do so. Moreover, Greece’s exclusion from the QE programme also means that the one government that needs it most does not benefit from it. Helicopter money would do the exact opposite by ensuring that every individual in the Eurozone receives equal amounts of money to spend as they wish. By doing so the ECB would not be accused of privileging some people over others.
2. It would help reduce poverty and inequality
For decades, poverty and unemployment has been on the rise in Europe, leading to rising inequality too. In addition, house prices have boomed pricing out first time buyers and those on low income. As a result, it is harder for young people to access decent housing. Furthermore, household debt is soaring particularly in western parts of Europe. Although modest in its size (from 500 to 4000 EUR), money transfers from the ECB would help ease the burden of those saddled with large amounts of debt or very low incomes. Helicopter money would contribute to softening inequality (though it would not be enough on its own!).
3. It is more effective than QE
Lower-income households would provide a boost to spending due to higher rates of consumption. As pointed out by several economists (Eric Lonergan, Willem Buiter, Romain Baeswyl, Mark Blyth, Simon Wren-Lewis), helicopter money is almost certain to boost spending (and therefore boost inflation). Helicopter money’s effectiveness is guaranteed by the “marginal propensity to consume”, a well known economic phenomenon describing the likeliness of someone spending extra money he or she gets. According to a survey, this propensity to consume ranges around 50%, thus ensuring that a large portion of the money injected under helicopter money would be spent on the short term.
For example, according to a report by ING, such a measure might have resulted in a boost of at least 2 percent of eurozone GDP. Last but not least helicopter money would require much less money than quantitative easing does to be effective: “Print Less but Transfer More.”
4. It is more transparent than QE
In contrast, the effectiveness of QE is far from clear. The ECB itself is having a hard time evaluating how much of the new growth and inflation is attributable to quantitative easing. Again, this is because QE works in convoluted ways, through the financial sector. It is so complicated to measure the effectiveness of QE that the ECB does not do really it. Instead, they merely rely on own model-based calculations such as this one.
In contrast, a helicopter money policy would be far more transparent and easy to evaluate. We could look at tax revenues to evaluate the additional spending, or simply carry out polls across the population to check how much of the stimulus programme did effectively work. However imperfect, these data collection methods would be far more representative of what is really going on in the real economy. At least in contrast from the ECB economic models which are based on abstract data and assumptions.
Having evidence-based analysis of the ECB’s monetary policy would be helpful for society to have a more appropriate discussion on the future path monetary policy should take.
5. It can be implemented quickly
Monetary stimulus measures such as QE or helicopter money are required when the economy is edging towards deflation. In these situations, institutions such as central banks must act very fast to boost spending and avoid a downward spiral. Standard monetary policy measures or quantitative easing are limited in that respect because they take several months before they take effect in the real economy.
Some suggest this is why fiscal policies should be used instead. But central banks can act faster than governments, the latter of which often require sluggish paced legislative processes to push through fiscal policies that are often delayed. Central banks are not restricted in this fashion, as they can roll out helicopter money at the touch of a non-nuclear button. Additionally helicopter money would not violate EU laws as it bypasses governments’ treasuries, and is therefore not legally prohibited under the monetary financing rule (Art. 123 of the EU Lisbon Treaty).
6. It is less risky than boosting financial markets
The ECB has flooded financial markets with €2.5 trillion through its QE programme. Yet its only real achievement is fuelling asset bubbles which could trigger another financial crash. The risk associated with helicopter money is low. Individuals would most likely spend the money on local goods and services instead of unstable stocks and shares.
7. It would boost people’s confidence in the EU
As Brexit has shown, the European Union is facing an existential crisis due to growing euroscepticism. One key factor of the criticism against the EU has been the mismanagement of the crisis by EU policymakers and their inability to deliver tangible improvements for people’s lives.
For once, a measure like helicopter money would kill two birds with one stone. It would allow the EU to boost the economy while supporting people’s most essential needs. Such a fair and effective policy instrument is likely to spur more confidence in the EU as a whole. A study shows 54% of people favour the ECB directing cash injections directly into citizens bank accounts, while only 14% would oppose it. Another survey also showed that helicopter money would inspire more trust towards the ECB than QE! In rolling out a popular policy measure of cash transferrals to all adult Eurozone citizens without condition, this is one step towards restoring public trust in the European project.
Today, the economy is slowly recovering, meaning the opportunity for the ECB to implement helicopter money has arguably passed. However there is still room for helicopter money to be implemented in the future, especially in the event of a new crisis.
The ECB President Mario Draghi has been wise enough to not rule it out as an option. He is well aware that central banks might eventually need to make use of it. All EU policymakers should also consider carefully studying the idea and make sure it can be enacted in case of a new crisis. As helicopter money enters more into public consciousness the more attractive and feasible it becomes as a public policy measure.
This article was originally published on the QE for People campaign website. As we are gradually phasing out the QE for People campaign, we are archiving this publication here. For more information, read the history of Positive Money Europe.