In July, the U.S. Federal Reserve cut interest rates for the first time in more than a decade and is poised to continue driving borrowing costs down as the outlook for global growth dims. With Germany’s central bank warning that the euro zone’s biggest economy could sink into recession this year, the European Central Bank is also expected to ease monetary policy. Since most governments are unwilling or unable to pursue fiscal stimulus by lowering taxes or increasing spending, there’s pressure on central banks to reach deeper into their toolkits for ever-more unconventional policy tools. Helicopter money is back on the agenda because massive central bank purchases of government bonds — a policy known as quantitative easing — have already driven yields in several bond markets to record lows, so the scope for stimulating the economy by pushing borrowing costs even lower is limited.
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 would come from a one-time creation of money by the central bank, rather than being borrowed by the government or coming out of existing spending.
“Monetary policy is exhausted and fiscal policy alone is not enough,” is how three former central bankers — ex-Swiss central bank chief Philipp Hildebrand, former Federal Reserve and Bank of Israel staffer Stanley Fischer, and Jean Boivin, ex-deputy governor of the Bank of Canada — made the case in August. Central banks, the trio wrote in an article for their current employer, BlackRock Inc., need to put money “directly in the hands of public and private sector spenders,” though they advocated a more cautious approach than an unlimited helicopter program. Other supporters of helicopter money argue that it may 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% 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 of spending it.
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First published April 28, 2016