Late economist Milton Friedman coined the concept of “helicopter money” a few decades ago. Describing a type of monetary policy where central banks create money and distribute it to all the population as a citizens’ dividend. This was originally meant as a metaphor of how the government could always create inflation by printing enough money. As people spent the money, the nominal gross domestic product (GDP) would rise, either through the production of more goods and services or by higher prices or both. Recently, economists have increasingly discussed the concept as a viable policy proposal. Proponents of the concept say that helicopter money would be an efficient way of increasing inflation.
Helicopter Money vs. Quantitative Easing
Helicopter money, also called monetary finance in its more practical forms, is used to purchase goods and services. Quantitative Easing (QE), similar to helicopter money, is a monetary policy used by central banks to stimulate the economy when standard monetary policy is no longer effective. Central banks have been using QE recently, using the newly created money to buy government bonds. This pushes down bond yields, which should make consumers borrow and spend more. But if people were risk-averse, they would prefer to hold Treasury bills or cash with no returns rather than spend.
With traditional fiscal stimulus, the government would sell bonds to the public and use the proceeds to directly stimulate demand by, for example, building highways or hiring teachers. Eventually increased government borrowing would push up interest rates, thus hurting private investments. Households, expecting their taxes to rise, may spend less.
Helicopter money is different. It merges QE and fiscal policy. The government issues bonds to the central bank, which pays for them with newly created money. The government uses that money to invest, hire, cut taxes, thus guaranteeing that total spending will go up. Because the central bank is buying the bonds, private investment is not crowded out. Unlike with QE, the central bank doesn’t sell the bonds or withdraw the money it created from circulation; rather it returns the interest earned on the bonds to the government. Thus, consumers won’t expect their taxes to go up to repay the bonds and they do expect prices to increase. As spending and prices rise, nominal GDP also increases, so the debt-to-GDP ratio remains stable.
Today, governments are trying to raise the inflation. But QE and deficit spending have not yet accomplished this. Economists are questioning if a practical application of helicopter money would. According to Richard Clarida, an economist at Columbia University, for helicopter money to have the desired outcome, central banks and governments must coordinate at the outset by promising to hold their bonds forever. Otherwise, households and firms would expect a future tax increase and this would stifle consumption.
“We will see a variant of helicopter money (perhaps thinly disguised) in the next 10 years if not the next five.” ~Richard Clarida, Economist at Columbia University
One of the biggest concerns with monetary finance is that inflation is an arbitrary tax on bondholders. Another obstacle is the institutional separation between fiscal and monetary policy.
Impact on Global Economy
Economic growth is sluggish throughout the world. Economic slowdowns in Europe and Japan have the potential to also impact U.S. Central banks in those regions, which have already adopted negative interest rates. This raises the question of how long the U.S. can continue to move in a direction opposite to other major global central banks. The Organization for Economic Co-operation and Development has warned that the global economy is unlikely to expand faster in 2016 than in 2015. And the International Monetary Fund believes that the world’s biggest economies need to find new ways to support demand within a worsening outlook for global growth. Some economists are floating the idea that helicopter money might be the only way to bring an end to global financial stagnation.
Recently, 19 economists published a letter in the Financial Times calling for an alternative quantitative easing program (dubbed “QE for people”), which would distribute cash directly to consumers. They argued that conventional QE has done little to boost growth and employment, and there was no point injecting more money into financial markets with low interest rates. Rather, fresh money printed by central banks could be used to finance government spending or given to citizens every month to pay existing debt or spend. This “QE for people” campaign is gaining momentum, with advocates invited to present their case to the European Parliament in February 2016. Critics argue that such policies will create hyperinflation and fuel price pressure.