The Covid-19 pandemic that is ravaging lives and livelihoods around the world has also claimed a more subtle victim: conventional taboos in economic policy thinking are swiftly being swept away.
Economic proposals that a week ago looked radical now appear timid. Fiscal packages bigger than anything seen in years are considered too small only a few days after they were announced.
Robert Chote, the head of the watchdog charged with monitoring UK fiscal discipline, said this week the government should not worry about short-term deficits because it was facing something like a “wartime situation”.
“This is not a time to be squeamish about one-off additions to the public debt,” he told MPs.
There has been a “recognition that this shock is absolutely different” from previous crises, says Beatrice Weder di Mauro, an economics professor and president of the Centre for Economic Policy Research. “Things are moving very fast, and minds are too.”
The result is that a series of policy ideas which were once the province of a small number of mavericks and limited to purely theoretical discussions are taking centre stage.
The most important of those unorthodox approaches is the “helicopter drop” — printing money and handing it out to everyone, with no strings attached.
Ms Weder di Mauro has co-edited two ebooks on the economics of the virus crisis in as many weeks. She observes that the mainstream of economics has moved very fast towards the view that the best policy would assure that “nobody should lose their job or their income because of the virus”.
Even supporters of this once unthinkable approach acknowledge it will be expensive. “We have to be willing to accept fiscal deficits on the scale of 2009,” says Adair Turner, the former head of the UK’s Financial Services Authority.
Given the need for large fiscal deficits, the debate about helicopter money really involves two separate policy questions, he says. The first is how to finance the stimulus — should the central bank pay for it through direct monetary financing, effectively printing money, or should governments borrow in the usual way? The second is how the money is then distributed, whether through cash handouts or other government spending.
As it is, economists and policymakers are warming to radical answers to both questions.
Central banks have not yet explicitly offered to monetise deficits, but they have opened the taps on big new asset purchase programmes to buy the glut of bonds governments will soon issue. In the eurozone, there are live discussions about issuing a joint “corona bond” or ramping up credit lines from the European Stability Mechanism, the monetary union’s rescue fund for sovereigns, in the expectation that the European Central Bank would keep the cost of such borrowing low.
Some economists now call openly for explicit helicopter money in the sense that central banks should directly fund government deficits. “I do think the time is right for monetary finance,” says Lord Turner. “There would be a clarity of assuring people that there is no limit on the money available.”
Monetary finance was popularised as a theoretical possibility by Ben Bernanke, former US Federal Reserve chair. Since leaving the Fed, Mr Bernanke has publicly argued that “under certain extreme circumstances” monetary financing of fiscal deficit spending “may be the best available alternative”.
This had long been an unacceptable view among economists, who were scarred by the stagflationary 1970s and worried about the dangers of hyperinflation that had ravaged countries in interwar Europe and more recently in the developing world. This changed with the global financial crisis, when central banks engaged in massive money creation without inflationary effects. Warnings about hyperinflation lost their bite.
As for direct cash handouts, they are already happening. In February, the government of Hong Kong decided to transfer HK$10,000 ($1,270) to all residents financially affected by the virus outbreak. Singapore’s latest budget, too, provides for small cash payments to all adult Singaporeans.
In the US, support is building for sending cheques directly to all Americans. Former economic advisers to presidents Barack Obama and George W Bush support the idea. President Donald Trump and his Treasury secretary Steven Mnuchin have proposed it, and senators have included it in the stimulus bill currently going through Congress.
One reason why these unconventional ideas are gaining traction is because the financial crisis, growing inequality and the fear of technological automation causing unemployment had already triggered growing interest in new policy approaches. “There is a bit of ‘I always wanted this’,” says Ms Weder di Mauro.
Betsey Stevenson, an economics professor at the University of Michigan and a former economic adviser at the Obama White House, points to the broad coalition of people all supporting cash handouts: “People on the left . . . saying this is great, people on the right . . . wanting to help the middle class; those who like the administrative simplicity of it; and then people who realise time is of the essence.”
A second factor behind the interest in these ideas is that they are not entirely without precedent. The financial crisis and its aftermath forced central banks to take actions that brought them closer to monetary financing.
Helicopter money is already here in the sense that “a central bank gives transfers to the private sector”, says Eric Lonergan, a macro fund manager. He adds that the ECB now offers loans to banks at a lower interest rate, under certain conditions, than banks receive on reserves held on deposit with the ECB. That margin is an outright money-financed fiscal transfer. Mr Lonergan argues this can be expanded and tied to conditions that in effect would transfer the subsidy to individuals.
Lord Turner says that there is no hard distinction between outright monetary financing and central banks’ existing practice of buying government bonds. “Every year the Bank of Japan buys Japanese government debt equal to the government deficit. So the volume of bonds owned by the private sector does not rise. That is permanent monetary finance,” he argues.
Governments have also sent no-strings-attached cheques to all citizens before. “[President George W] Bush did direct cash handouts,” says Ms Stevenson. The difference is that in the 2001 and 2008 recessions the intention was to stimulate demand, today it is to “put money in the hands of people who will lose their jobs” and prevent a “cascading economic downturn”.
Aside from precedent, the most important reason for the interest in helicopter drops — both as monetary finance and as direct cash payments — is the scale of the economic challenge.
“If anybody had told you at Christmas that this year would be one [with] an enormous symmetric shock hitting all the advanced countries and that this would cost something like 50 per cent of GDP for a few months or maybe longer
. . . the kind of thing that happens in a war, everybody would have said you are crazy,” says Ms Weder di Mauro. “There was no imagination to see where something like this could come from.”
Governments now find themselves needing to spend much more, and to do so much faster, than they are accustomed to. “The attitude should be we’re at war with this pandemic, we’re going to win this war,” and double-digit deficits are a price worth paying, says Ms Stevenson. “If we win the war, we can recoup that money.”
Ms Weder di Mauro says “our institutions are not built for this”. For good reason, governments have designed systems to direct spending to those who need it the most and to avoid “moral hazard”, where individuals or companies receiving public money are rewarded for poor behaviour.
In the current crisis, however, these disciplines have become obstacles to pursuing the right policy. One case for direct cash payments is that it will reach more people faster than the existing benefit system. Ms Stevenson says the US’s state-level unemployment insurance system will struggle with the flood of claims about to hit it.
“It is quite possible they will have to process 1m [claims] a week, but they are not staffed up to process that,” she says. “It’s too hard to figure out who really needs it. Get money into everybody’s hands, then we can clean it all up later.”
There are some countries where direct cash handouts are considered less important because they have more sophisticated and generous benefit systems. Germany and other countries have had success with subsidising Kurzarbeit, where employers are paid to keep employees on their payroll while temporarily cutting their shifts. Yet even in a country like Norway, some economists have called for universal cash payouts to avoid convoluted processes of means-testing.
As for helicopter money, governments and central banks are not quite there yet. It could even be that faced with the prospect of outright monetary finance, the more hawkish eurozone leaders will prefer joint guaranteed borrowing — through a eurobond — which they have previously opposed but may consider a lesser evil. Either way, past taboos are rapidly evaporating.
“The fiscal-monetary distinction may break down” if the crisis is long-lasting, says Ms Weder di Mauro. “In wartime, all sorts of distinctions break down.”
But, she adds: “The instruments still have to be adjusted to how severe the problem turns out to be. Whatever it takes doesn’t mean you shoot everything you have in the beginning.”