The time may come for such a programme but it is not todayby Megan Greene / May 8, 2020 / Leave a comment
The term “helicopter money” has been bandied about a lot in recent weeks as a mechanism to pay for the expensive rescue packages that governments have launched in response to coronavirus. But helicopter money is an old concept, first mooted by famed monetarist and adviser to Ronald Reagan and Margaret Thatcher Milton Friedman in 1969, and popularised in late 2002 by then Federal Reserve Chairman Ben Bernanke as a potential solution to Japan’s lost decade of low inflation and growth. The simplified idea is for the central bank to print money and drop it out of helicopters for people to pick up and spend, generating demand, growth and inflation, though in reality helicopter money takes many other, more technical and complicated, forms. Helicopter money is not the first best solution to pay for stimulus measures in the face of coronavirus, but it is ultimately the most likely one.
The chorus of voices calling for helicopter money is deafening all of a sudden—but they are slightly misled. The traditional way to fund a big fiscal stimulus is for governments to borrow money by issuing debt. The conditions for debt financing couldn’t be better for most major developed economies. Central banks have slashed rates, promised rates will remain low for the foreseeable future and launched a veritable alphabet soup of programmes to purchase debt, sending borrowing costs plummeting. Even countries with huge debt burdens such as Japan and Italy can manage their debt load as long as debt servicing costs remain negligible.
But there are already signs that political support for debt financing is waning. In the United States, there has been a reticence to provide desperately needed federal funding to the states, for example, and in the eurozone discussions about conditions on bailout money to limit moral hazard have emerged once again.
Given these growing political headwinds, helicopter money is the most likely mechanism for kickstarting the economy once businesses are ready to invest and consumers are willing to spend again. There are two ways to carry this out—the central bank can create money and give it to governments to distribute, or give it directly to the private sector.
The former is monetary financing of governments, which is technically illegal in most countries. Even so, it is probably already…