Helicopter Money — The Economic Policy That Could Define the 2020s
WHY YOU SHOULD CARE
Because at some point, policymakers will need to pull out the last trick in the book.
By James Watkins
Pity the central bankers. As global growth sputters, inflation slows and emerging markets fail to emerge, their long cherished monetary tools are losing their luster. In September, OECD chief Ángel Gurría suggested that his brethren policymakers give up the ghost — and “stop pretending that an economy can be controlled.” That same month, top IMF economists were forced to release a memo to try to calm policymakers’ fears, insisting that there remain some possible policy options. But what on earth do we do if, or when, they’re proved wrong?
Enter helicopter money, also known as monetary finance. The term comes from Milton Friedman, who somewhat lightheartedly suggested that newly printed banknotes be thrown out of a helicopter for citizens to gather up and spend. Sound crazy? Well, some serious names in the world of central banking back the policy, including former Federal Reserve Chairman Ben Bernanke and Lord Adair Turner, who some have named as a potential future Bank of England governor. Now, helicopter money is poised to be to the 2020s what quantitative easing was to the 2010s: That thing that everybody has heard of but nobody really understands.
A primer: Helicopter money is like the strange lovechild of monetary and fiscal policy. It’s government spending, but financed by new money, instead of the issuing of debt. In its 21st-century incarnation, it essentially involves central banks creating new money to directly inject into the economy, perhaps by financing government spending or via tax rebates, or even by depositing $1,000 into every checking account in the country.
Helicopter money could take the form of central bank–funded investments in public education or infrastructure, tax cuts for the poor or even just free cash.
The crucial issue is that we’ve reached the edge of use for traditional macroeconomic policy tools — as legions in the U.S. could attest, having watched the Fed flirt with interest hikes every quarter, only to demur. Near- or below-zero interest rates mean that there’s little room for further flexibility in monetary policy — read: interest rates can’t get much lower. Already, unprecedented levels of liquidity in the economy might now be counterproductive and having unplanned distributary consequences, warns Turner. At the same time, governments around the world are facing pressure to reduce deficits and run down debt, explains John Muellbauer, professor of economics at Oxford University, so fiscal policy seems to be off the cards too. Meanwhile, helicopter money is the elephant in the room: “There are some people who say we’re out of ammunition, that that’s all we can do. And they’re always wrong, because the tool that is there if you want it is monetary finance,” says Turner.
If monetary finance sounds a little familiar, it’s probably because it’s the not-too-distant cousin of another unconventional policy: quantitative easing (QE). It may sound harebrained, but monetary finance is only a technical hop away from QE, which was used to extraordinary levels after the 2007 financial crisis. While QE involves (stay with me here) central banks buying government bonds from financial institutions, in order to flood the financial system with new money and push down long-term interest rates, helicopter money involves central banks buying bonds directly from the government — and with no expectation that the debt will ever be repaid.
This could inject money into the economy in a more direct and targeted way. Instead of crossing fingers that liquidity filters through the financial system to reduce interest rates for everyone, helicopter money could take the form of central bank–funded investments in public education or infrastructure, tax cuts for the poor or even just free cash. Indeed, some have called the policy “people’s QE” (with the subtext that its parent should rightly be called “bankers’ QE”). And the stimulus could benefit from the famous Keynesian “multiplier effect,” whereby the injected money gets recycled several times through the economy for a multiplied economic boost. “This is a tool that will always work” to increase nominal demand, says Turner.
Of course, some economists question whether this supposed magic bullet is too good to be true. For Professor Tony Yates at the University of Birmingham in the U.K., allowing this sort of policy could represent a dangerous “slippery slope” — analogous approaches of printing money to fund government spending led to hyperinflation in 1920s Germany and 2000s Zimbabwe. Indeed, established conventions, or in some cases explicit legal structures, forbid this sort of action in most advanced economies such as the United States and the eurozone for that very reason. Advocates say that the policy can still fit around the principle of central bank independence by allowing only the banks — not the politicians — to decide when the helicopters should be deployed. Critics also have technical concerns that it may not work as desired, or even work too much. But even for skeptic Yates, “if I were the Bank of Japan, I would be contemplating it right now,” because of the country’s seemingly inescapable deflationary quagmire. Indeed, “in Japan’s case, it’s not when they do it, but when they admit that they’re already doing it,” says Turner.
In most of the rest of the world, economies are just about muddling through. But know that if things take a turn for the worse, there’s only one unplayed card in policymakers’ hands. Better start loading up the helicopters.