With no quick escape in sight for COVID ravaged economies, governments around the world are going back to the drawing board to find strategies to deal with this crisis. One such strategy being debated upon is ‘helicopter money’. It basically means non-repayable money transfer from the central bank to the government. It seeks to lure people into spending more and thereby boost the sagging economy.
What exactly is Helicopter Money?
Imagine a helicopter is flying over a community and drops a load of money. People scramble to pick up as much of it as they can. What will they do with that extra money? They will spend it, in turn boosting the economy and stimulating inflation.
Helicopter drop is an expansionary fiscal policy that is financed by an increase in an economy’s money supply. It could be an increase in spending or a tax cut, but it involves printing large sums of money and distributing it to the public in order to stimulate the economy.
Mostly, the term ‘helicopter drop’ is largely a metaphor for unconventional measures to revive the economy during deflationary periods.
The Background
The name “helicopter money” was first coined in 1969 by Milton Friedman, when he wrote a parable of dropping money from a helicopter to illustrate the effects of monetary expansion.
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 in 2002 by Ben Bernanke when, as the Federal Reserve Governor, he referred to it while arguing that a central bank can always stoke inflation if needed. In today’s debates, it is believed that helicopter money would be distributed either by crediting people’s bank balances or as a tax rebate. The key is that it would come as a result of a one-time creation of money by the central bank, rather than being borrowed by the government or coming out of existing spending.
Helicopter Money Vs Quantitative Easing
Like all expansionary monetary policies in general, quantitative easing (QE) and helicopter money involves money creation by central banks to expand the money supply. However, the effect on the central bank’s balance sheet of helicopter money is different than with QE. Under QE, central banks create reserves by purchasing bonds or other financial assets, conducting an ‘asset swap’. The swap is reversible. On the other hand, with helicopter money, central banks give away the money created, without increasing assets on their balance sheet.
The Argument
Friedman used the helicopter as a metaphor to argue that the central bank could always create inflation by printing enough money. As people spend the money, the nominal GDP would rise, either through the production of more goods and services or higher prices, or both.
Another argument in favour of helicopter money is that it would enable the central bank to inject money directly into the real economy in order to overcome the deflationary phase that has prevailed since the financial crisis.
Moving on to the other side of the coin, helicopter money would nourish the illusion that central banks could simply print more and more money for their citizens in order to solve their problems.
People would learn that they would not have to earn money through work, and in the next crisis voters (or politicians) would demand that the central bank once again fire up the rotors.
Several prominent economists such as Raghuram Rajan are against helicopter money on the grounds that it would be ineffective because people would not spend
Another range of critics involve the idea that there cannot be such a thing as “free money” or as economists say “there is no such thing as a free lunch.” They believe that helicopter drops to citizens would necessarily involve the central bank to pay interests on the extra reserves being supplied.
There is a good reason why the issue of paper money has traditionally been subject to tight constraints: it is a dangerous power that once unleashed can easily get out of control.
History teaches that we ignore that lesson at our peril, but that from time to time we do so all the same.
