Australia's Reserve Bank is fast running out of monetary ammunition as it follows other central banks in lowering official interest rates towards zero. What happens, then, if our economy is hit by a new external shock of the magnitude of the Global Financial Crisis? What tools are available in the macroeconomic kitbag to help save us from recession? We should be designing them now instead of waiting for a crisis.
A new fiscal stimulus could be deployed, modelled on the Rudd government's 2008 cash payments to households. But with government debt climbing and no early return to surplus in prospect, this would kick the debt can down the road for future generations to pick up and pay off. Some cash payments might be justified, but sole reliance on them would suggest no thought had been given to options offering a long-term pay-off.
Unlike Europe, Japan and the US, Australia has not engaged in quantitative easing. This practice of printing money to buy commercial and Treasury bonds brings an intermediary – commercial banks – into play. While the principle behind quantitative easing is to increase the amount of cash that commercial banks hold, encouraging them to lend for productive purposes, the practice has been that the extra cash has been used mainly to inflate housing and stock market prices. Quantitative easing has failed to stimulate investment in the real economy and there is mounting evidence it has fuelled economic inequality – itself a contributor to the present economic torpor and the rise of protectionist sentiment.
These limitations have given rise to calls for the creation of helicopter money. Here's where fiscal and monetary policy converge into a single instrument – a fiscal stimulus achieved through monetary expansion. The central bank prints money and transfers it into the bank accounts of householders to do with as they see fit. The hope is that they will spend rather than saving it, thereby stimulating jobs and growth.
Printing money has not been a popular western-world macroeconomic policy instrument since the hyper-inflationary experiences of the Weimar Republic in the 1920s and more recently of Zimbabwe and Argentina. But with inflation stubbornly low and fears rising that the world might be on the edge of a deflationary era, helicopter money is being seriously contemplated by former Federal Reserve chairman Ben Bernanke and president of the European Central Bank, Mario Draghi.
But would householders spend the money descending from the sky? They might be so freaked out that such drastic measures have been deemed necessary that they decide to save most of it, together with most of their other discretionary income.
There might be a better way for debt-laden governments to manage the next crisis. Governments would create an autonomous infrastructure authority – a public corporation – with the same high degree of independence as the country's central bank. Its role would be to facilitate a suite of public infrastructure projects with measurable economic returns. It would undertake arm's length cost-benefit analyses of various projects, some of them major but also shovel-ready smaller ones.
The government would tick off these projects in advance but it could not insist on the inclusion of politically appealing projects that failed the cost-benefit analysis. By tapping long debt markets and private equity participants, the authority would manage projects through the construction and early operation phase. A pipeline of assets would then by created for institutional investors to purchase.
In a crisis, the central bank could tap into this pipeline by transferring created funds to the infrastructure authority. The quantum of the stimulus would be determined independently by the central bank, just as it determines the degree of monetary expansion now. The only drawback of this approach is the optics issue; that markets and especially ratings agencies might view the monetisation of debt as an effective tax on holders of money and sovereign debt.
The solution might be for the infrastructure authority to work with superannuation funds on public-private infrastructure projects. Promising projects that did not fully achieve a superannuation fund's risk-return profile could be supported not entirely or even mainly by central bank fund transfers but by the underwriting of passenger patronage or other key variables for, say, the project's first 10 years of operation.
This approach would resemble the operation of Australia's Export Finance and Insurance Corporation. The independence of the authority would ensure it was free of political meddling. The proposed approach would result in both economic stimulus and productivity-raising infrastructure investment.