Milton Friedman's 'Helicopter Money' Is Looking Less Crazy
Increasingly, central bankers, economists and market watchers are discussing the pros and cons of what's called helicopter money, a 47-year old idea that posits a way to kickstart an economy through dropping money on its citizens. Peter Praet of the European Central Bank, for example, said in an interview published last week that "all central banks can do it" if needed; his ECB colleague Jens Weidmann warned that such a move "would rip huge holes in central bank balance sheets." Helicopter money feels very much like an idea whose time may be coming.
Given all the interest, it's worth asking whether Milton Friedman, who came up with the concept, would support or oppose such an unorthodox policy if he were writing today. Friedman's 1969 essay on "The Optimum Quantity of Money" runs to 50 pages and opens a book that's almost 300 pages long and contains 13 articles.
Friedman's thought experiment is designed to answer the question hinted at in the title: How much money would a perfectly balanced economy have in circulation to guarantee a community's ability to buy goods and services? He includes the important proviso that the money drop is a one-time, never-to-be-repeated event:
In the absence of that assumption, the appearance of the helicopter might increase the degree of uncertainty anticipated by members of the community, which, in turn, might change the demand for real cash balances.
His one-off proviso suggests he might oppose putting his idea into practice. The existing unconventional policy known as quantitative easing started with the Federal Reserve buying $1.75 trillion of bonds in 2009; it followed with $600 billion more in 2010, and by 2012 it had shifted to an open-ended program at $85 billion per month -- which was slimmed down from December 2013 but didn't end until October 2014. The QE narrative suggests that the temptation to follow a first helicopter drop would be all but irresistible.
Friedman's essay doesn't just cover how helicopter money would work in practice; he also examines the reverse proposition of how a "furnace" might influence financial behavior:
Let us introduce a government which imposes a tax on all individuals and burns up the proceeds, engaging in no other functions. Let the tax be altered continuously to yield an amount that will produce a steady decline in the quantity of money at the rate of, say, 10 percent a year.
That strikes me as mirroring the way euro zone governments have failed to take advantage of the ECB's relaxed monetary regime, squandering money on social expenditure instead of making productive investments. As Bloomberg View contributor Jean-Michel Paul pointed out in November, infrastructure investment in countries including France and Italy has plummeted in recent years, while spending on pensions and healthcare has climbed.
One argument for helicopter money that might find favor with Friedman, at least in Europe, is the accusation that the ECB is almost out of ammunition, and that its recent expansion of QE yields diminishing returns. In a separate essay on "The Role of Monetary Policy," Friedman compared what was happening in the 1970s to the 1920s, in an essay that chimes with where we are now:
I fear that, now as then, the pendulum may well have swung too far, that, now as then, we are in danger of assigning to monetary policy a larger role than it can perform, in danger of asking it to accomplish tasks that it cannot achieve and, as a result, in danger of preventing it for making the contributions that it is capable of making.
Friedman's words presage the complaint central bankers make today, that there's only so much monetary policy can do to revive animal spirits in the absence of a fiscal boost from governments. Previously unorthodox policies are increasingly the norm -- the Fed's James Bullard used a speech in Frankfurt last week to discuss the argument that low interest rates fuel slower, not faster, inflation, while the claim of Modern Money Theory that governments shouldn't be afraid of deficit spending is gaining traction with some of the smartest people in the financial room.
Friedman describes money as "an extraordinarily efficient machine," akin to tractors and factories in making the economy more efficient and productive. He also notes, however, that it has more potential to wreak havoc:
But money has one feature that these other machines do not share. Because it is so pervasive, when it gets out of order, it throws a monkey wrench into the operation of all the other machines.
Zero or negative interest rates are failing to stir consumer prices, while the Fed's attempt to normalize monetary policy looks likely to backfire embarrassingly. Because the money-machine isn't doing what the rule book suggests it should, the engines of economic growth continue to splutter and misfire. So the argument that might in the end have the most appeal for Friedman is the one that, intellectually at least, appears to be the weakest: If everything else is failing, why not try helicopter money?
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