Are We About to See a Deluge of Helicopter Money?
WHY YOU SHOULD CARE
Because money could start falling from the sky … figuratively.
By Andrew Hirschfeld
As the coronavirus pandemic wreaks havoc on the locked-down U.S. economy, policymakers are increasingly looking at solutions that would have seemed far-fetched just weeks ago.
There’s bipartisan support in Congress to send almost every American adult at least $1,000, a temporary version of the universal basic income popularized by presidential hopeful Andrew Yang, and not too far off from the tax rebates sent out in the Great Recession and the 2001 downturn. With the backing of President Donald Trump, a massive stimulus package with such payments could clear Congress in the coming days. (U.K. Prime Minister Boris Johnson, too, suggested universal basic income as a possible remedy in his country.)
But even if Congress swallows a $1 trillion-plus price tag, there are questions about how to pay for it and whether to go bigger. Which means pressure is increasing on the Federal Reserve and other central banks to load up their metaphorical helicopters.
“Helicopter money” is a term used to describe a large amount of new money being printed and distributed to the general public to stimulate the economy during a downturn, rather than Congress simply borrowing and spending more. The concept was coined by economist Milton Friedman in his 1969 book The Optimum Quantity of Money. “Let us suppose now that one day a helicopter flies over this community and drops an additional $1,000 in bills from the sky, which is, of course, hastily collected by members of the community. Let us suppose further that everyone is convinced that this is a unique event which will never be repeated,” Friedman wrote.
We have seen many occasions in which rules that were considered sacred have been relaxed in the face of extraordinary circumstances.
Jordi Galí, director and senior researcher, Center for Research in International Economics
Helicopter money is a consumer-focused alternative to quantitative easing (QE) by purchasing government or other financial securities. In the context of the outbreak, it would allow Americans to continue to pay rent and utilities and to keep food on the table — a bailout for the people. This could come directly from the Fed, acting independently from elected officials. Among its most prominent proponents has been former Fed Chairman Ben Bernanke.
“Helicopter money would likely be funded by the Treasury selling debt to the Fed, who holds it forever,” says economist Willem Buiter, a Columbia University professor and an adjunct senior fellow at the Council on Foreign Relations. The trade-off is increased inflation, which could erase any economic gains, but the hope is for consumers to spend the money to stimulate the economy.
Part of the reason helicopter money is on the table is that central banks have exhausted other tools to juice the pandemic-wracked economy, with interest rates low and QE already extensively deployed during the Great Recession. The Federal Reserve recently announced two rate cuts in the span of two weeks, bringing its benchmark rate to zero. This week the Fed took emergency action to prop up money market mutual funds and the dollar market, while the European Central Bank (ECB), already wrestling with the economic shock of Brexit, bought an additional 750 billion euros in bonds. The market plunge continued. “For Europe, COVID-19 is just another reminder to consider helicopter money,” Buiter says.
Pressure has been building on the Continent for years. Britain’s Labour Party leader, Jeremy Corbyn, proposed a policy called People’s Quantitative Easing in 2015, which would require the Bank of England to create money to finance government investment. The ECB flirted with unleashing helicopter money in 2016. In a 2019 report, Deutsche Bank said the policy “could be highly effective if properly deployed.” According to reports, ECB President Christine Lagarde, who took the reins in November, discussed the possibility of helicopter money with her predecessor, Mario Draghi.
The idea, in and of itself, seems nutty to many economists. But sometimes it takes a crisis to spur an unconventional response. “We have seen many occasions in which rules that were considered sacred have been relaxed in the face of extraordinary circumstances,” Jordi Galí, director and senior researcher at the Center for Research in International Economics, wrote this week. “The reliance on money financing would be strictly restricted to the duration of the emergency measures linked to the health crisis.”
It’s already being tried on a smaller scale. Hong Kong ($1,000 for all adults) and Macau ($375 spending cards) have launched their own helicopter money experiments in recent weeks to respond to the pandemic. Hong Kong had already dipped into its first recession in a decade thanks to long-running mass protests there.
It’s too early to tell how well those programs are working, but skeptics point to Japan, where a 1999 helicopter money initiative flopped. The country gave shopping vouchers to families with children and the elderly as it faced its worst recession since World War II. The coupons, limited to the local community, expired after six months. According to research from the Journal of Public Economics, the vouchers had no effect on the service sector, a group of workers disproportionately affected by the current outbreak.
“A helicopter drop is meant to stimulate economic activity by stoking demand,” says Amanda Griffiths, who works at a libertarian think tank. “For that to work, you need to have some commensurate increase in supply. But the supply chain is understandably sluggish right now. A helicopter money proposal is highly unlikely to work, and would set a dangerous precedent.”
But with the world economy shrinking fast in an extended period of “social distancing,” the unprecedented is becoming the norm.
- Andrew Hirschfeld, OZY AuthorContact Andrew Hirschfeld