Against Helicopter Money.

• Author: Dowd, Kevin
• Position: Essay

Back in 1969, Milton Friedman proposed an interesting thought experiment that has since become famous:

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. Let us suppose further that everyone is convinced that this is a unique event which will never be repeated [Friedman 1969]. Friedman did not intend his suggestion as a serious policy proposal. Instead, he intended it as a classroom device to illustrate the consequences of changes in the stock of base money. The idea then stayed in the classroom for many years, virtually unknown to all except academic monetary economists.

In the late 1990s, it began to be reinvented as a serious policy proposal. People first began to think it might be a useful instrument to combat deflation in Japan. The idea then hit the headlines in 2002 when then-Fed governor Ben Bernanke suggested that it might be used to combat possible deflation in die United States too:

The U.S. government has a technology, called a printing press (or, today, its electronic equivalent), that allows it to produce as many U.S. dollars as it wishes at essentially no cost. By increasing the number of U.S. dollars in circulation, or even by credibly threatening to do so, the U.S. government can also reduce the value of a dollar in terms of goods and services, which is equivalent to raising the prices in dollars of those goods and services. We conclude that, under a papermoney system, a determined government can always generate higher spending and hence positive inflation [Bernanke 2002]. He went on to make a passing reference to Friedman's helicopter money idea: "A money-financed tax cut is essentially equivalent to Milton Friedman's 'helicopter drop' of money," he said. That passing reference was enough to saddle him with a nickname--"Helicopter Ben"--which he has been stuck with ever since. (1)

The attraction of die idea to its proponents is the promise of being able to deliver monetary stimulus in circumstances in which interest rates are low or zero and in which the traditional tools of monetary stimulus might be ineffective or infeasible.

Then came the financial crisis, and one unconventional stimulus policy after another--quantitative easing (QE), zero interest rate policy, and, in some countries, negative interest rate policy--failed to deliver the desired results. As a consequence, helicopter money is enjoying a new revival.

For some of its advocates, the core argument is that we have tried everything else to boost die economy and helicopter money is or might be die only instrument of stimulus left in die central bank's toolbox (see, e.g., Perotti 2014; Turner 2015). Others argue that helicopter money should be considered if fiscal stimulus is politically inexpedient (e.g., Britten 2012), as a tool to counter income inequality (Muellbauer 2014) or a blocked transmission mechanism (see Durden 2015), or to pull the economy out of deflation (eg Bernanke 2002; Selgin 2016), secular stagnation (e.g., Buiter' Rahbari, and Seydl 2015), or a liquidity trap (e.g., Caballero 2010)' Some advocates of helicopter money combine a number of these arguments. A prominent example is financial journalist Martin Wolf, who suggests that in the absence of more fiscal stimulus, which would be politically problematic, "central banks are the only players'" left:

policymakers must prepare for a new "new normal" in which policy becomes more uncomfortable, more unconventional, or both. Can the world escape from the chronic demand weakness? Absolutely, yes. Will it? That demands greater boldness. When one has exhausted the just about possible, what remains, however improbable, must be the answer [Wolf 2016]. The "what remains" he had in mind is helicopter money. Yet the idea appalls critics. Helicopter money breaks the ultimate monetary taboo against the wanton overissue of base money. It harnesses central bankers' most primitive power, their unique ability to create base money at will and at negligible cost, and proposes to create as much base money as it takes to achieve the desired boost to spending. It is the monetary weapon of last resort--a weapon so potent that central bankers have traditionally feared to deploy it lest it destroy the currency and potentially much else besides. To quote the British journalist Ambrose Evans-Pritchard (2013): "A great many readers in Britain and the U.S. will be horrified that this helicopter debate is taking place at all, as if the QE virus is mutating into ever more deadly strains."

I begin this article by explaining how helicopter money should be accounted for on the central bank's balance sheet. I then explain the basics of helicopter money and compare it to some alternatives. After that, I give some examples of helicopter money, explain how it impacts the central bank's balance sheet, and point out that--appearances notwithstanding--helicopter money is not a "free lunch." Finally, I discuss the (significant) problems entailed by helicopter money, concluding drat traditional monetary economists were right to warn against it.

Accounting for Helicopter Money

We should first consider how to account for helicopter money on the central bank's balance sheet. In conducting helicopter money operations, the central bank issues additional base money that it gives away: it increases its liabilities without receiving any valuable asset in return. At the same time, its balance sheet must always balance. So how do we reconcile these statements? The most natural way to do so is to imagine that in conducting helicopter money operations the central bank receives a hypothetical asset that has a book value equal to the amount of newly issued base money but that has a market value of zero.

An asset that meets these requirements is a perpetual bond with a zero coupon. Perpetual means that the bond will never mature, and the zero coupon implies that there will be no regular coupon payments that is, the bond promises no payments at all. The book-value of the bond must be equal to the amount of newly issued base money in order for the central bank balance sheet to balance, but its market value will be zero because no one would pay anything for a bond that offers no future payments.

We can then think of helicopter money as an operation in which the central bank issues additional base money in return for which it receives a zero-coupon perpetual bond, and it helps to think of this bond as being issued by or on behalf of the recipients of the central bank's newly issued base money. Of course, such a bond is a fiction, but it is an illuminating one as we shall see.

The Basics of Helicopter Money

Helicopter money is often described as the central bank "printing" money and giving it away. This description captures the essence of the idea but is a little misleading. Most proposals would involve the central bank issuing and giving away not physical cash, but a digital equivalent. The central bank might issue every citizen with the digital or credit equivalent of $500 or whatever, which might be delivered directly to individuals' bank accounts. The key point is that the newly issued base money would be issued directly to the beneficiaries.

Those beneficiaries might be members of the public, but under some helicopter money proposals the "helicopter drops" might be targeted toward approved projects--in infrastructure, for example.

From the beneficiaries' perspective, the payments are free and therefore naturally welcome. However, decisions need to be made over who the beneficiaries should be and how much they should be paid. These considerations imply that helicopter money has a redistributive element, but redistribution is traditionally regarded as falling under the domain of fiscal policy. I will return to this issue below. I

In its typical forms, helicopter money works to increase aggregate demand: people pick up the dollar bills and spend some of them. We should not assume, however, that all the helicoptered money would be spent: according to standard models of consumption and saving, individuals' marginal propensities to spend will typically be less than 100 percent, and will also depend on factors such as their expectations of future income and inflation. The likely impact would then be some increase in aggregate demand, which would produce some increase in output and some increase in prices. In the longer term, the output stimulus is likely to wear off and the long-run outcome would be a higher price level. Repeated helicopter money operations would then take us into the familiar world of the expectations-augmented Philips curve set out by Friedman (1968) in his presidential address to the American Economic Association.

The success or otherwise of helicopter money operations depends, therefore, on their purpose. If their purpose is to stimulate output, they would likely only have some short-term success. But if their purpose is to increase aggregate demand or prices (or, if applied in repeated doses, inflation), then helicopter money could be a potent monetary policy instrument--for better or for worse. To illustrate: Willem Buiter (2014: 2) demonstrates that under very general conditions, including a permanent liquidity trap and even Ricardian Equivalence,

there always exists a combined monetary and fiscal policy action that boosts private demand--in principle without limit. Deflation, inflation below target, "lowflation," "subflation" and the deficient demand-driven version of secular stagnation are therefore unnecessary. They are policy choices. This effectiveness result holds when the economy is away from the zero lower bound (ZLB), at the ZLB for a limited time period or at the ZLB forever. This suggests that the policy question is not whether helicopter money would increase demand or prices, but instead whether we should ever want to use it to achieve...