Skip to main content

Helicopter money and the supply-side blockage

The camera retailing chain Jessops is one of a list of big name retailers which has closed in recent months. 187 stores have shut, with over 1300 people losing their jobs. What is left of the company will now become a mail order firm operating from a warehouse in Leicester, which takes the company back to its starting point. Jessops big expansion took place in the 1970s and it is, like many other of the big casualties, a victim of technical change. Digital cameras are now much of a muchness. People buy their cameras and share their pictures on the internet and view them on-screen. These changes have meant that Jessops has become an irrelevancy.

None of this would matter very much if the vacant premises were quickly recycled and put to a new use. Re-letting would give work for shopfitters even before the first customer came through the doors. But as we know, most of the vacant premises will not be brought into use quickly.

Landlords will prefer to wait and hold out for the absolute maximum rent they can get, and as Starbucks discovered, that rent may be more than the incoming business can stand, so that it too may end up in trouble after a few months. From the landlord’s point of view, this can make sense because the real landlord is in fact a financial institution to whom the nominal landlord is paying rent, under the form of mortgage interest. To accept a lower rent in those circumstances may crystallise a loss, which the landlord will be desperate to avoid. Thus the whole system of property ownership and finance is preventing the operation of market forces.

The same thing is going on in the industrial property sector. The only difference it that is less visible than what is happening in the high streets. The failure of rents to drop to market-clearing levels is, we would suggest, the principal reason why the UK economy continues to bump along at the bottom of the cycle, despite quantitative easing (QE).

The failure of QE is now leading to calls for helicopter money. We are not quite sure what this is, but it presumably means open inflation. Effectively, it means wage cuts and robbery of savings. Not only is it a dangerous and immoral policy which could get out of hand, but once people start to build expectations of inflation into their calculations – and that does not take long – it is a self-defeating one. In so far as it will work at all, it is because it reduces real rents without reducing nominal rents, so that landlords are thereby protected from having to crystallise their losses. So helicopter money is nothing more than featherbedding for landlords who have over-borrowed.

The alternative policy, which we advocate, would switch the UBR to an annual land value basis, raising more revenue in total and be accompanied by a raft of tax cuts. That would give a non-inflationary kick-start to the UK economy, but seemingly it is not one that either the Coalition or Labour is willing to contemplate.