What would happen if money was falling from the sky like rain? Though this sounds like the tagline for a movie, Economist and Central Bankers around the world have recently been debating a similar idea called Helicopter Money. The idea of figuratively “dropping money from the sky, onto the economy” has been gaining ground as monetary stimulus has failed to kick-start economic growth. Helicopter Money is less Robin Hood, more monetary policy. Japan has been considering similar measures as deflation has kept looming. Mario Draghi sent the media into a small frenzy when he labelled Helicopter Money ‘an interesting concept’. On the other side of the canal, Labour’s Jeremy Corbyn made vague suggestions about ‘People’s QE’. And finally, here at Rostra, Professor Westerhout recently wrote an article dismissing Helicopter Money as impossible. But “free money” does not leave the impression of being a serious nor solid economic policy. So why are economists and policymakers around the world discussing this seemingly crazy concept?
First, what exactly is Helicopter Money? The term Helicopter Money was coined by monetary economist Milton Friedman in 1969. Friedman used it to support his argument that a Central Bank could never fail to increase the amount of money in an economy. He argued that even if regular bank operations would fail, a Central Bank could always print money and literally just drop it onto the economy from the sky. Though Friedman used the term to illustrate his argument, years later, Governor of the Federal Reserve, Ben Bernanke, would go on to use the concept in several speeches. Bernanke hinted at the hypothetical possibility of using Helicopter Money as an extreme tool to counter deflation; a situation where prices in the economy keep decreasing. It turned out not everyone was equally familiar with the work of Friedman as the helicopter metaphor escaped people’s minds and earned Mr. Bernanke the nickname “Helictoper Ben”. Both Bernanke and Friedman used the term Helicopter Money to refer to any occasion where the Central Bank prints money and brings this money into the economy for “free”. As long as Central Banks are able to print money, they are able to bring it into the economy and increase the money supply. The helicopters are just theatrics; drones would be more suitable to our times.
But why would Central Banks want to go as far as to bring money into the economy for free? In general, Central Banks control the money supply in an economy to achieve price stability. For most Central Banks, this objective translates into a price inflation target of just below 2% annually. This means all Central Banks’ efforts are directed at reaching and maintaining this target. To do so they have several tools at their disposal; primarily the deposit rate which can be adjusted directly and precisely. In recent years, however, the inflation target has become increasingly difficult to reach. As a consequence, Central Banks have increasingly turned to unconventional measures such as Quantitative Easing and below zero deposit rates. In a sense, Helicopter Money is a new unconventional candidate for this list.
If inflation fails to pick up despite all the extreme measures already taken, pumping money directly into the economy might be the answer. Especially when you believe, as many economist do, that the failure of previous measures is caused by transmission channels that limit or stop their effect (an example of such transmission channels are banks). Helicopter Money avoids these channel as the printed money directly enters the economy. It can therefore be seen as a sort of last effort by Central Banks to spark inflation.
Bringing Helicopter Money into the economy can be done in three ways. The money printed by the Central Bank can be handed directly to the people as a one-time donation. The money could also be handed to the government to fund infrastructure or other government spending. A final option could be used to use the money to fund a one-time tax-cut. Theoretically, this third type is identical to the first: having an extra euro to spend is the same as having to spend a euro less. In practice, of course, they could have very different effects.
So where is the discussion about Helicopter Money coming from? In general there are two major issues with Helicopter Money policies: its implementation and its theory. How feasible is it to implement a policy that hands out free money? Giving people free money brings about a lot of questions on how much to distribute and to whom: is everyone, regardless of the size of their Bank account supposed to get the same X amount of money? Giving governments free money is also not easy. Governments are driven by politics and suffer from bureaucracy, both likely to hamper and complicate efficient spending. Furthermore governments are regulated by laws, for example within the European Union the ECB is forbidden to support national governments with money. When it comes to handing out free money there is a lot to consider, regardless of who you give it to, and practical issues tend to dominate theoretical benefits.
Aside from these practical considerations there are also serious theoretical doubts. Professor Westerhout in his article outlined two main criticisms of the Helicopter Money theory. One of his arguments states that Helicopter Money can never be a temporary or one-time policy. Any positive effect on spending would lead people to consider Helicopter Money a success, since the costs of printing the money were basically zero. As a result the policy will be repeated over and over again until it becomes permanent.
This argument is reasonable, but not entirely convincing. The goal of Helicopter Money is to push inflation towards the target level by increasing spending. From a political point of view, Helicopter Money is indeed a very tempting free stimulus of spending. But from the perspective of a Central Bank, Helicopter Money is a monetary instrument used to bring inflation back on track. Once this is achieved, the tool seizes to be of use. It even becomes damaging to the Central Bank’s objective as increases in the money supply will eventually always lead to inflation. As long as the Central Bank controls the printing press and sticks to its mandate, Helicopter Money will never be permanent. Here we clearly see the importance of Central Bank independence.
Another argument made by professor Westerhout is that handing out free money will inevitably lead to people working less. Economic experiments have confirmed that a negative income tax, which is similar to handing out free money, causes people to work less. Sounds intuitive: why work for money when you can get it for free? But there is a slight twist to Helicopter Money that makes it different from a negative income tax. This has to do with timing. As reasoned above, a Helicopter Money policy will always be temporary. A tax scheme on the other hand is likely to stay around for long or even indefinitely. The future income consumers reasonably expect from the tax scheme causes them to start working less now. However, in the case of Helicopter Money these future benefits are absent as consumers realize the policy is only temporary and things will return to normal. As a consequence, consumers are unlikely to change the hours they work in response to a Helicopter Money policy. Crucial to this is, of course, the believe that the policy will be temporary. But as shown above the Central Bank can credibly commit to this and Helicopter Money might thus not depress labour supply.
Helicopter money is an interesting concept and a logical extension to the unconventional measures already taken by Central Banks. However, when it comes to handing out free money there is a lot to consider, regardless of who you give it to, and practical issues tend to dominate theoretical benefits. Yet it would be ignorant to dismiss the possibility of Helicopter Money altogether. The discussion is relevant, see for example the blog of Helicopter Ben himself where he outlines several ways in which the FED could actually use Helicopter Money. In general, the concept remains theoretical with little to no understanding of whether it will work or how to implement it. The idea of free money being handed to people sounds extraordinary, especially to people with little understanding of monetary economics. We live, however, in extraordinary times which might just call for extraordinary measures like this. As monetary policy keeps moving deeper into unknown territory, Helicopter Money is unlikely to be the last economic oddity to be revived.