Helicopter money: Yet another unconventional monetary policy tool Global Economic Outlook, Q4 2016
Helicopter money joins other unorthodox policies, such as negative interest rates, being floated to encourage economic growth. In theory, helicopter money could provide a better alternative to quantitative easing.
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If you find the idea of helicopters dropping dollar bills fanciful, think again. Since the Great Recession, many an unorthodox idea has been floated to encourage economic growth and counter deflation. Recently, central banks were buying government debt and even taking interest rates into negative territory. And it’s been happening across continents—North America, Europe, and Asia—as policy makers desperately try to revive their economies. It comes as no surprise, then, that yet another unconventional idea is being discussed: helicopter money.
Choppers full of money? Not really
Helicopter money literally means dropping money from helicopters for people to pick up and spend. The idea is that if people get unexpected one-time cash rewards, they will spend more, and the economy will revive. The concept was first discussed about five decades ago by Noble Prize winner Milton Friedman in The Optimum Quantity of Money.1 Over the years, however, as monetary policy developed into an orthodox discipline, Friedman’s idea was lost in the annals of policy-making debate, until recently when former US Federal Reserve (Fed) chairman Ben Bernanke talked about it.2
Although money dropped from the air seems exciting, especially if a big bag of greenbacks lands in your backyard, it is not the literal translation that economists are talking about—it’s about printing money and giving it to economic agents to spend. One way that could happen is if central banks put money directly into people’s bank accounts. The idea of central banks dealing directly with spending decisions, however, runs counter to modern-day practices where it is the fiscal authority that is responsible.3 So for a helicopter money mechanism, there has to be a “monetary plus fiscal” approach.4
Although money dropped from the air seems exciting, it is not the literal translation that economists are talking about—it’s about printing money and giving it to economic agents to spend.
Central banks can, instead, lend to the Treasury through a zero-coupon perpetual bond. The government can then spend that money on, say, infrastructure, or transfer it to the people, or do a bit of both.5 Such a framework keeps the essential components of a helicopter money mechanism intact: Consumers and the government can use the money for spending, and neither the borrower pays interest, nor is there a rise in the debt burden.6 The government, however, has to bear the burden of deciding who gets what if they transfer money to consumers. If it is an equal transfer, for example, then it will be regressive in the same way equal taxes are, thereby proving controversial.7 Apart from a mechanism to solve such problems—both ethical and operational—any helicopter money framework (figure 1) will also require strong oversight to maintain accountability.
Helicopter money is different from quantitative easing
Unlike quantitative easing (QE), helicopter money is direct lending by the central bank to the government. In QE, the central bank buys government debt from the market. Unlike QE, helicopter money has no interest to be paid and principal to be repaid. QE’s focus is to put money into banks by buying bonds and other assets from them. Banks can then lend part of that money to consumers and businesses, and hence, through a multiplier effect, push up economic growth. Unfortunately, banks have been reluctant to lend more, thereby denting credit creation. So, despite years of strong monetary easing, credit growth has been slow, especially in the Eurozone and Japan (figure 2).
Banks have been reluctant to lend more, thereby denting credit creation. So, despite years of strong monetary easing, credit growth has been slow, especially in the Eurozone and Japan.
Helicopter money provides a better alternative, in theory, as money goes directly into people’s savings accounts or to the government to spend. As a result, the impact on economic growth and deflation is likely to be higher. Also, helicopter money does not increase the government’s debt burden as the lending is in the form of a perpetual bond with zero coupon. Thus the argument that governments will spend now and tax later—as happens in a fiscal stimulus—is not valid. Moreover, unlike QE, where it is hoped that consumer spending will rise, due indirectly to asset values rising, helicopter money puts money directly into consumers’ hands.
Why all the clamor for the helicopter?
Recent discussion about helicopter money is not surprising given that policy makers across advanced economies are struggling to get their economies back on track. In the Eurozone, for example, GDP is just 1.4 percent higher than its Q1 2008 peak before the global financial crisis—some economies within the region have fared even worse.8 While the United States has done better, GDP growth is still lower than pre-2007 highs (figure 3), with the Fed yet to get interest rates back to normal. And in Japan, deflationary pressures are back despite QE and negative interest rates.9
The surge of unorthodox policy, including recent debates about helicopter money, is also a continuation of a trend of overreliance on monetary policy.10 Despite initial attempts at fiscal stimulus, utilizing government spending has faded in advanced economies, especially the United States and the Eurozone.11 In the United States, as recent debt ceiling crises have shown, disagreements over debt levels have hurt any efforts at using the current environment of low interest rates to stimulate the economy through, say, higher spending on infrastructure.12
In Europe, fiscal efforts to spruce up growth have been severely hampered by the sovereign debt crisis. With public debt at record-high levels (figure 4), governments have leaned heavily on central banks. Strong disagreements among major economies in the Eurozone on fiscal measures—Germany is pro-austerity, while Italy is not—have also dented coordinated fiscal measures.13 Most importantly, in many of these economies, structural reforms have been slow as they are deeply unpopular, especially amid continued fiscal austerity. Politicians, as a result, have passed on the baton to central bankers.
Strong disagreements among major economies in the Eurozone on fiscal measures—Germany is pro-austerity, while Italy is not—have also dented coordinated fiscal measures.
Helicopter money will not be easy to implement
There are, however, a number of practical difficulties in implementing helicopter money. First, helicopter money translates to some form of monetization of government debt, which is a strict no-no in traditional central banking.14 In many economies, memories of high inflation from monetization efforts are still fresh. Do you remember the value of 1 million Zimbabwe dollar some years ago? Back in early 2000, Argentina suffered a similar fate, as is Venezuela currently. In emerging economies such as India, strengthening the tenets of orthodox central banking has aided growth and improved confidence in the economy.15 Helicopter money will be a step back from that.
Second, helicopter money envisages strong cooperation between the central bank and the fiscal authority, which will be a challenge.16 In the Eurozone, economies such as Germany are likely to oppose any form of monetization of government debt; it was difficult to get them on board with QE in the first place.17 Also, in an era where central bank independence is widely coveted, getting central banks and fiscal authorities to come closer raises fears about undue influence on monetary policy.18
Finally, even though rules can be created for a smooth process, those rules might also be changed later, especially related to spending (such as before elections). Most importantly, coordination between fiscal and monetary policy once does not ensure coordination every time.
For some, it may be worth keeping a chopper handy
Apart from the practical implementation of helicopter money, there is also the question of whether we need such a monetary policy tool in the first place. Key indicators in the United States, for example, have been improving: The labor market is strong, consumer spending surged in Q2, and economic growth has been higher than in the Eurozone and Japan.19 Thus helicopter money is likely to be discussed in the United States as a last-resort, counter-deflationary weapon rather than one for immediate use.20 In the Eurozone, where QE is in force and interest rates are negative, it is probably better for central banks to defer any decision on helicopter money because it leaves them some ammunition for any future crisis. Yet another unorthodox policy is not likely to help the European Central Bank’s credibility, given the weaker-than-expected impact of a swathe of tools already in place.21
If at all helicopter money sees the light of day in the near term, in all likelihood it will be in Japan. With government debt now amounting to more than 250 percent of GDP and the Bank of Japan’s 38 percent share of that debt, it is likely that the bank may change its share or some part of it into zero-coupon perpetual bonds.22 While this may not be helicopter money in its purest form, it is still a close approximation.