Let Wages Take Off, Not 'Helicopter Money'
Helicopter money is back in the headlines amid speculation that Japan may turn in desperation to the final chapter of the handbook of unconventional monetary policy. But there's an alternative to handing consumers a one-time payment in the hopes they'll spend it: Give them a permanent wage hike instead.
Milton Friedman's thought experiment about whirlybirds dropping cash from the sky continues to be debated because the quantitative easing programs central banks have introduced all around the world aren't working. Deflation is still a threat, incomes remain stagnant and record-low (and negative) bond yields dominate the landscape of global borrowing costs.
Instead of relying on yet more bond buying and ever-lower interest rates from their central banks, governments could combat the economic drag from the lack of post-crisis wage growth by giving public sector workers pay increases, which would also spur wage growth in the private sector.
Boosting wages has advantages over other potential fiscal measures. Wage increases are quantifiable and immediate, unlike infrastructure projects with their long time horizons and a seemingly insatiable capacity for waste, misallocation and corruption. Wage hikes go directly into the economy via people's pockets. And it's a gift that keeps on giving. An economic theory called the permanent income hypothesis -- also from Friedman -- suggests recipients who know that the increase will be repeated are more likely to spend it than those who receive a one-off dollop of helicopter money.
Stagnant wages -- along with stagnant productivity -- are holding back the global economy. U.S. incomes still haven't recovered from the slump they suffered in the wake of the financial crisis. This chart, courtesy of the Brookings Institution, shows that both the top 1 percent of earners and the bottom 90 percent are worse off than they were in 2007:
There's a similar picture in Japan, where monthly incomes tumbled at the end of 2007 and haven't recovered:
There is case to be made that wage hikes will also help unlock productivity improvements as companies look for ways to get the most of out of their higher paid workforce. We may soon find out how this works in practice.
While Bank of Japan Governor Haruhiko Kuroda has ruled out helicopter money as "forbidden," Japan's Nikkei newspaper reported this week that the government is considering distributing vouchers worth as much as $140 to people on low incomes, as well as increasing the nation's minimum wage.
Japanese Prime Minister Shinzo Abe said on Wednesday that he's planning a stimulus package worth more than 28 trillion yen ($265 billion) including 13 trillion yen of "fiscal measures." No details were given, and it's not clear how much will be net new spending in addition to previously announced plans. (The Bank of Japan meets on Friday, and economists interpreted Abe's announcement as designed to pressure the central bank into stepping up its efforts to boost growth.)
That kind of stimulus got the endorsement of the International Monetary Fund, which said in a June report that the government should force companies to hand out pay increases, as well as lifting the incomes of government employees:
The government can introduce a 'comply or explain' mechanism for profitable companies to ensure that they raise base wages by at least three per cent (the inflation target plus average productivity growth) and back this up by stronger tax incentives or -- as a last resort -- penalties, given that the latter would be contractionary if they failed to trigger higher wages. In addition, the government can commit to raising all administratively controlled wages annually and ensure this is followed at the prefectural level. These measures can be supported by calling for supplementary wage rounds and conversion of bonuses to base pay.
The IMF might have added that its prescription ought to be considered outside of Japan too. At least one big company thinks so: "A pay increase is the right thing to do," JPMorgan Chief Executive Officer Jamie Dimon said earlier this month, announcing a bump in minimum pay for 18,000 of his workers. "Above all, it enables more people to begin to share in the rewards of economic growth."
Former U.S. Secretary of the Treasury Larry Summers has also endorsed putting more money into people's pockets. Writing for the Washington Post earlier this month, the Harvard professor suggested that policies that have driven interest rates to record lows are inappropriate for the current environment:
There is, in fact, a case for strengthening entitlement benefits so as to promote current demand. The key point is that the traditional OECD-type recommendations cannot be right as both a response to inflationary pressures and deflationary pressures. They were more right historically than they are today.
The IMF idea of forcing businesses to pay their workers will be far too interventionist for many. What's to stop a government from then telling companies where to invest? But governments can raise public-sector wages and other state benefits without dictating private sector wage policy. Higher pay for government employees would likely prompt the private sector to offer better salaries to compete for staff, especially with unemployment rates declining in the U.S., U.K., Japan and even the euro zone. Maybe the helicopters should stay on the tarmac for a while longer.
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