Although the term helicopter money was coined by Milton Friedman in 1969, it only became popular around 2008-2009 due to then Fed Chair Ben Bernanke’s repeated use of the phrase. After entering the public consciousness the expression became a mainstay of modern economic discourse. It refers to the direct injection of capital from the central government budget to impoverished communities and individuals. In effect it’s gift money that can be freely spent on consumer goods by those who previously couldn’t afford them.
The reason it’s worth talking about at this particular point in time is the recent quantitative easing plan proposed by German Finance Minister Olaf Scholz to help prevent the German economy from sinking into a recession. Many political leaders across the world still vividly remember the difficult aftermath of the subprime mortgage crisis. It’s for that reason that preventing any potential negative tendencies suggested by macroeconomic indicators is of high priority to them. Central Banks seem to be mostly out of ideas by now so many are instead looking to government solutions instead.
Until now having central banks increase the supply of money through quantitative easing appeared to be the only viable option. Over the past ten years the economic growth of most developed countries has effectively been running on life support in the form of central bank monetary policies. Now even that’s proving insufficient. European Central Bank President Mario Draghi has often emphasized that the bulk purchase of corporate and government bonds is a futile effort, since that money doesn’t directly flow into the real economy, but rather other financial assets. This ultimately means that central banks may not necessarily have the tools required to prevent another financial crisis from happening.
This brings us back to the idea of helicopter money. The basic concept is that the government releases bonds that get purchased by the country’s central bank. The government then distributes the profits acquired this way in the form of social benefits. These benefits are primarily aimed at the segments of the population who don’t have enough disposable income to spend on consumer goods. The idea is that giving those funds to people on the lower end of the income spectrum makes it more likely that it ends up spent rather than saved. In theory that spending would boost retail sails and thus allow businesses to grow. In a sense this expands the economic life support provided by central banks from just companies to the general population as well.
The German plan is to distribute 50 billion Euros (approx. 55 billion US dollars) among the population. That amount matches the German government’s budget surplus, so they’d be redistributing said surplus among domestic market consumers. At first glance it seems like a sustainable solution, however, in practice it would likely do very little to stop an actual recession. This inadequacy has politicians exploring the possibilities of other stimulus options. One of these options that’s been getting a lot of attention is an upgraded version of helicopter money called universal basic income. One of the main proponents of that proposal is the economist Stephanie Kelton, notable for her work on Modern Monetary Theory. She also serves as an economic adviser to congressional and house representatives. Although the concept of a universal basic income is controversial at best and a pipe dream at worst, the list of potential tools to prevent a recession is so short that universal basic income still hasn’t been fully dismissed yet.
Rapid technological development could also present a possible alternative. The rising popularity and spread of block-chain based systems and digital currencies has not only caught the attention of banks and large corporations, but that of many people in positions of governmental power as well. China is one of the countries closely examining the prospect of introducing a national digital currency. This is relevant to the concept of helicopter money because if one wanted to make a serious suggestion for universal basic income, one option for realizing it would be a digital solution instead of real currency. On paper this version could at least be implemented without the obvious cash-flow issues the plan would suffer otherwise. Releasing a digital currency could also keep the costs financing of national debt at a manageable level because it has a lower risk of inflating the national currency. Inflation also poses the risk of devaluing savings.
There’s still a great deal of groundwork to be done before such a proposal could even remotely be considered. Until that happens political leaders are left with classic methods of recession prevention. President Trump for example has previously suggested a reducing payroll taxes. Meanwhile Germany announced that they plan on lowering corporate taxes. Japan also has another alternative solution that could almost be considered a hybrid system. The Bank of Japan supports governmental spending with their constant purchase of government bonds as a means of injecting liquidity. In practice their solution is a centralized economic stimulus system alongside a negative base interest rate, meaning that government bonds actually pay out less money on expiry than what they were purchased for. This helps them keep inflation low and it also means that the government debt is 240% of GDP. According to conventional economic theories Japan is a country on the brink of bankruptcy, however, that doesn’t actually seem to be the case in reality.
Should we maybe start preparing for a new economic and political system where government bonds aren’t the baseline for a safe investment, interest rates start with a minus and central banks encourage us to spend by printing money endlessly? Time will tell.