Imagine waking one morning to find extra cash in your account, a gift from your country's central bank. That might sound outlandish -- even some proponents of the idea admit it's unlikely. But the concept of so-called helicopter money is being seriously debated by economists. The trillions of dollars, euros, yen and pounds that central banks have pumped into the global financial system since the 2008 credit crisis have failed to ignite global growth. Helicopter money handed directly to consumers, the theory goes, would send us scurrying to the shops to spend our windfalls, boosting confidence in the economy. That increased demand would allow prices to rise again, a crucial step because a slide in prices, known as deflation, is often a prelude to extended stagnation. This renewed interest in an idea that's almost half a century old is evidence that measures previously regarded as daring have become commonplace -- and increasingly ineffective.
In 2016, market luminaries including Nobel prize-winning economist Paul Krugman, former Bank of England economist Tony Yates, and former chairman of the U.K. Financial Services Authority Adair Turner have all spoken out on the pros and cons of direct money transfers. European Central Bank President Mario Draghi in March called helicopter money a “very interesting concept.” A Japanese minister moved the yen in July by denying a newspaper report that the government was considering helicopter money; the head of the Bank of Japan has said it would be illegal and unnecessary. The debate has been fueled by worries about low inflation, particularly in Europe and Japan. The world's major central banks, led by the U.S. Federal Reserve, have tried to boost prices by buying government bonds in what's known as quantitative easing, or QE. The guardians of monetary stability turned to QE to drive down borrowing costs after cutting the interest rates they control -- the conventional method of monetary stimulus -- didn't do the trick, even when they were pushed down all the way to zero. Some central banks have gone beyond QE and introduced negative interest rates, in effect levying a charge on banks that keep cash on deposit to encourage them to lend it out instead of hoarding it. At the same time, the U.S. and most European governments have been unwilling or unable to pursue fiscal stimulus by lowering taxes or increasing spending. That's putting pressure on central banks to reach deeper into their toolkits for ever-more unconventional policy tools.
Milton Friedman came up with the concept of helicopter money in 1969. The Nobel Prize-winning economist envisaged a whirlybird flying over a community dropping paper money from the sky, as a thought experiment to see what a never-to-be-repeated increase in the money supply would do to spending and saving. The idea was made famous by Ben Bernanke in 2002 when, as a Federal Reserve governor, he referred to it while arguing that a central bank can always stoke inflation if needed. The nickname "Helicopter Ben" stuck, even though the playbook Bernanke followed as Fed chairman during the recession that followed the financial crisis stopped short of printing money and handing it out to consumers. In an April 2016 blog post, however, Bernanke said helicopter money may be "the best available alternative" under some "extreme circumstances." In today's debates, it's envisaged that helicopter money would be distributed either by crediting people's bank balances or as a tax rebate. The key is that it comes from a one-time creation of money by the central bank, rather than being borrowed by the government or coming out of existing spending.
Supporters of helicopter money argue that it’s the financial equivalent of injecting adrenaline into the heart of a patient in cardiac arrest. They say it may also be less risky than quantitative easing, which has been blamed for fueling what some see as a bubble in global stock and bond markets. It's also possible its benefits would be spread more broadly. Opponents point out that helicopter money isn't really free. Printing more money devalues the buying power of what savers have in their accounts, in the same way that a company selling new shares dilutes the holdings of its existing stockholders. Others say helicopter money is an overly complicated substitute for the fiscal stimulus governments should be providing. There's also the danger that helicopter money could trigger much higher inflation than the 2 percent that's currently deemed desirable, if people thought banks or governments might get addicted to its boost. And it might fail anyway: Given that nothing in economics is currently working out the way the textbooks promised, people might just save the windfall instead.
The Reference Shelf
- Milton Friedman's 1968 address on "The Role of Monetary Policy."
- Ben Bernanke's 2002 speech on how to defeat deflation.
- Bernanke's April 2016 blog post on helicopter money.
- Adair Turner's paper arguing in favor of the policy.
- Paul Krugman's argument that "helicopters don't help."
First published April 29, 2016
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