Theresa May, the UK prime minister, has all but repudiated the economic policies of the previous chancellor of the exchequer, George Osborne. She has promised an “industrial strategy to get the whole economy moving”. What form should a renovated economic strategy take?
The immediate problem to overcome is the uncertainty engendered by the Brexit vote. What weapons exist to fight it? Mr Osborne’s target of eliminating the budget deficit by 2019-20 has already been abandoned, but adding to the national debt by issuing government bonds for an infrastructure programme is likely to unsettle the financial markets. The Bank of England’s base rate is already close to zero, and judging by Thursday’s announcement we should not expect a rise any time soon. Quantitative easing — the central bank buying bonds for cash — mainly works by enriching those who already own assets. So the standard expansionist tools to cope with a likely recession are blunt or unusable.
It is not surprising, therefore, that interest should turn to hitherto untried devices like so-called helicopter money. “Let us suppose that one day a helicopter flies over this community and drops $1,000 bills from the sky,” mused Milton Friedman in 1968.
Believers in sound money will regard the suggestion of gifts of newly minted money from the central bank as crazy. But the main problem with it is that there is no assurance that a lot of such helicopter money would not be hoarded, just as much of the cash already issued under QE lies idle.
That is why contemporary advocates of helicopter money like Willem Buiter and Adair Turner see it mainly in terms of monetary financing of additional government spending. The government should pay for, say, an investment programme not by issuing debt to the public but by borrowing from the central bank. This will increase the government’s deficit, but not the national debt, since a loan by the central bank to the government is not intended to be repaid. Thus the government acquires an asset but no corresponding liability.
However, this is only one possible form of helicopter money. Another way of achieving the desired increase in spending was suggested by the Swiss businessman, Silvio Gesell, in 1906. His idea was to give cash directly to households. But to give people an incentive to spend the money and not hoard it, there had to be a cost to holding on to it. In his scheme, unspent currency notes would have to be stamped each month by the post office, with a charge to the holder for stamping them.
How can this be done today? You could create smart cards with £1,000 for each person on the electoral register. The cards could be programmed to reduce the value of the balance automatically each week. There are 46m voters on the register in the UK. Thus £46bn of new money might be injected into the economy. Since the pattern of spending will be determined by individual recipients, the effect on sales and prices would be widespread.
The tax on hoarding Gesell money would boost its multiplier effect. John Maynard Keynes’ advocacy of a public works programmes was similarly based on the idea of getting money into the pockets of workers who would be guaranteed to spend most of what they received from the jobs created and thus generate further spending. The tax on Gessell money does the same.
However, I would not advise Philip Hammond, chancellor, to put all his eggs in the Gesell basket. There is a strong argument that the prolonged recession and mediocre recovery has destroyed a great deal of industrial capacity. If this has left us with no spare capacity, then to increase consumer demand without at the same time increasing the economy’s capacity to meet that demand would simply invite inflation. The issuing of Gesell money to consumers should, therefore, be done in parallel with the monetary financing of a public investment programme. For example, a £50bn programme of transport, housing, hospital, and school-building would not just restore capacity in the construction industry, it would simultaneously increase demand in the retail sector. If you build a new school or hospital you set up a demand for all the equipment needed for them to work.
To limit the leakage of the extra spending power into imports, the government should give preference to British firms. An infrastructure programme financed by borrowing from the Bank of England that gives preference to British manufacturers would give Mrs May the industrial policy she is looking for.
The investment programme and Gesell money initiative together spread over, say, two to three years, would inject a total of £100bn of extra spending power into the economy — £50bn on consumer goods, £50bn on producer goods. Here is a two-pronged strategy both for fighting the next recession and for rebalancing the British economy. And if it is a step too far for a Treasury still mired in Osbornian austerity thinking, it should be taken up by the Labour party. That way we may still turn Brexit to our advantage.