JARGONALERT Helicopter Money BY ERIC L a ROSE

ince the global financial crisis, central bankers around helicopter money is quite similar — some supporters call it the world have considered and sometimes used a “QE for the people.” Many believe that QE failed, however; Snumber of unusual policy tools, including quantitative they argue that banks did not increase lending to consumers easing (QE) and negative interest rates, in an attempt to in response to this massive liquidity increase, blunting its stimulate economies and fight deflationary pressures. Now effects. In contrast, helicopter money could get around this some economists and policymakers are thinking about add- problem by eliminating the middleman and putting money ing another item to this toolbox: helicopter money. right in the hands of consumers, possibly providing stron- No, the use of helicopter money wouldn’t involve money ger stimulus than QE. As Columbia University economist actually falling from the sky. But it would involve a much Michael Woodford put it, “the fact people get an immediate more direct method of getting money into the hands of transfer should lead them to believe that they can afford to citizens than central banks have used before. Under tradi- spend more.” tional expansionary , the Fed attempts to The primary argument against the use of helicopter money stimulate the economy indirectly by lowering the interest is perhaps as much about politics as economics. Helicopter rates faced by banks, causing them to money is essentially a merging of fiscal and borrow and make more loans. In turn, monetary policy, because new money is the interest rates faced by businesses being created by central banks but distrib- and consumers decrease, providing eco- uted in the form of fiscal transfers. Central nomic stimulus. In contrast, helicopter banks lack the authority to cut taxes or money would consist of the increase government spending. In this creating money and then distributing it regard, helicopter money could threaten directly to the public through fiscal trans- the independence of central banks by fer payments — for instance, by financing giving politicians some control over the a government spending increase or tax money supply and the ability to finance cut or, more drastically, by mailing a increased government spending by print- check directly to each household. ing money rather than with present or The idea of helicopter money stems future tax hikes. Even if helicopter money from a 1969 essay by , were promised as a one-time occurrence, who envisioned a hypothetical scenario in which a helicop- politicians could always come back for seconds. Any short-run ter drops $1,000 on a community in a one-time event that benefits of helicopter money could be greatly outweighed by doubles every individual’s cash balances. In the long run, the long-run harm of reduced monetary independence, which Friedman concluded, this event would do nothing more than most economists strongly agree makes monetary policy less double the nominal price level. But in the short run, Friedman effective over time and creates inflationary pressures. believed the “helicopter drop” could increase real output, Additionally, helicopter money’s effects may be hard to since prices would take time to adjust and firms might initially predict because its success depends largely on its ability to mistake inflation for real price increases. shape consumer behavior and inflation expectations. If con- Economic events over the past quarter-century have sumers see such a policy as a sign of desperation, they may caused the idea to be taken more seriously as a possible tool to actually lose faith in the ability of central banks to conduct increase both output and inflation. In the mid-1990s, Japan effective monetary policy, leading them to save the money began experiencing deflation, and in a famous 2002 speech, instead of spending it — making helicopter money a failure. mentioned helicopter money as a possible last On the other hand, helicopter money, through its effects resort for the Fed to fight deflation should it ever reach the on expectations, could end up raising inflation well beyond United States. Over the past few years, more figures have pub- annual 2 percent inflation targets. licly discussed the idea as near-zero interest rates have weak- Some politicians and economists in Europe and Japan are ened the ability of conventional monetary policy to further pushing to make Friedman’s thought experiment a reality, stimulate aggregate demand. Although a close aide to Japan’s and time will tell whether the and prime minister has opposed it, many experts speculate that the heed their advice. But in the United the Bank of Japan may pursue this policy in the coming years. States, at least, it’s doubtful that the Fed will begin coordi- In addition to lowered interest rates, the Great nating policy with Congress anytime soon — in June, Fed saw the use of QE, in which central banks use newly created Chair said it might be considered only in a “very money to buy assets from financial institutions. Conceptually, abnormal, extreme situation.” EF ILLUSTRATION: TIMOTHY COOK

8 E CON F OCUS | S ECOND Q UARTER | 2016