Photo: Bloomberg
Photo: Bloomberg

Helicopter money might be closer

The Alice-in-Wonderland world we currently live in means no policy is too outlandish to contemplate

Central bankers, it may soon be time to don your flying suits. There’s a growing suspicion that quantitative easing and zero/negative interest rates have lost any power they might have had to kick-start the economy. So, Milton Friedman’s famous “helicopter money" is back on the radar. With governments still unwilling to flex their fiscal muscles to boost the world economy, Friedman’s idea—easy to articulate, devilishly hard to envisage in practice—is very much in vogue. Here’s how he described it in The Optimum Quantity of Money, a collection of papers published in 1969:

“Let us suppose now that one day a helicopter flies over this community and drops an additional $1,000 in bills from the sky, which is, of course, hastily collected by members of the community."

The hope would be that putting more money directly into consumers’ pockets would send them scurrying to the shops to spend their windfalls. The ensuing surge in demand would revitalize animal spirits, averting the threat of deflation by persuading retailers to raise their prices. Inflation rates would make their way back to the 2% targets many countries have adopted as a safe pace of acceleration for consumer prices. In practice, a central bank wishing to drop money on its constituents would probably either just add money to their bank accounts, or move in tandem with the government to fund a national tax cut.

Friedman appended an important caveat to his thought experiment: “Let us suppose further that everyone is convinced that this is a unique event which will never be repeated." The truth is no one would regard a helicopter drop as a one-time event. Once the whirlybirds are in the air, they would likely fly again and again. Moreover, if the money drops had the desired effect of reviving inflation, it’s entirely unclear how you would go about taking stimulus back out of the economy if prices spiral dangerously higher.

So, this sounds like a crazy plan, right? So did quantitative easing (QE) and negative interest rates until the very recent past. As Jim Reid at Deutsche Bank has argued, a compelling feature of the post-crisis environment is how quickly radicalism becomes orthodoxy: “Throughout the modern history of monetary economics, one policy has been put forward as a monetary ‘super drug’ (or deadly poison depending on your view). That is ‘helicopter money’. It has long been seen as being too powerful to control and thus beyond the scope of contemplation. However, in the past decade, such policy has slowly emerged from the shadow of heterodoxy."

Reid wrote that way back in September 2013, when the hopes of the world still believed in quantitative easing as a cure for deflation. After all, Ben Bernanke had assured us in 2002 that the existence of the printing press meant “a determined government can always generate higher spending and hence positive inflation".

Trillions of dollars of QE later, and it’s not so clear that Bernanke’s assertion that “sufficient injections of money will ultimately always reverse a deflation".

Concern that the deflation demon is still lurking explains why helicopter money—an idea that’s almost half-a-century old and never attempted—is subject of blog postings from serious market watchers including Nobel prize-winning economist Paul Krugman, former Bank of England economist Tony Yates and former chairman of the UK Financial Services Authority Adair Turner.

While the list of objections to the idea of helicopter money is a long one, the Alice-in-Wonderland world we currently live in means no policy is too outlandish to contemplate.

Bank of Japan governor Haruhiko Kuroda said on Monday that he’s opposed to helicopter money and would never countenance printing money to fund either the government deficit or to finance public spending. To paraphrase from Hamlet, the central banker doth protest too much, methinks.

The fact that helicopter money is being discussed at all should be fair warning that the whirlybirds are warming up. And, let’s be honest, any central banker looking out at the economic horizon must be close enough to despair to feel that something, anything, everything, is worth a shot now. BLOOMBERG

Mark Gilbert is a Bloomberg View columnist.

Comments are welcome at otherviews@livemint.com

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