Can “helicopter money” save the global economy?

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 being practised in the US, UK, eurozone and Japan in the form of quantitative easing (QE) and, in the UK’s case, the Treasury borrowing directly from the Bank of England’s Ways and Means Account. All of these programmes are in theory meant to be temporary, in which case they do not constitute helicopter money because eventually the money is returned as central bank balance sheets are unwound. But the Fed is the only central bank that has managed to try to shrink its balance sheet, and it had to reverse course as rates spiked last September. The European Central Bank (ECB) has already had its QE programme questioned by the German constitutional court and we could expect further legal challenges if it becomes clear that ECB QE will never be unwound.

Monetary financing of governments also poses a serious threat to central bank independence. If governments get used to being able to issue debt and sell it to the central bank in order to finance whatever they want, the lines between fiscal and monetary policy will be blurred even more than they already are. Central banks could increasingly come under pressure to run the printing presses for reasons having nothing to do with sound monetary policy.

Having central banks distribute helicopter money directly to the private sector is also problematic. Central bankers, who are unelected officials, should not be making decisions about how to distribute money in an economy, creating winners and losers. But the reality is that all central bank actions have a distributive effect. By simply moving rates up and down, for example, central banks have to decide whether they are going to benefit savers or borrowers.

One practical way to distribute money to the private sector is to give cash to all individuals in a country, for example through an electronic transfer of money to everyone’s personal bank account. The problem is that not everyone has a bank account and governments do not have access to all personal bank account details. A more inclusive option could be to link cash transfers to utility bills, though this solution will also miss some individuals and details could be hard to procure from private utility companies.

Another solution is to let the banks manage the distribution of cash, given banks are already in the business of extending loans. The ECB is already doing this with its Targeted Longer-Term Refinancing Operations (TLTROs) and its new Pandemic Emergency Longer-Term Refinancing Operations (PELTROs). Under the latest TLTROs, banks are paid 100 basis points if they borrow from the ECB and lend the money on to small- and medium-sized enterprises, which they could do at negative interest rates—paying firms to borrow from them—and still pocket the spread. Under the PELTROs, banks are paid 25 basis points to borrow from the ECB, with no real constraints on what the money is used for, though one option is to buy sovereign debt. Both programmes are a direct subsidy to the banks to distribute the money to businesses and governments.

Beyond the political and practical challenges of implementing helicopter money, there is an economic risk. In normal times, injecting loads of cash into society should create a lot of immediate demand and with it, inflation. Indeed, that is one of the goals of helicopter money, but some worry that it will create runaway inflation. This is not something that keeps me up at night. First, there is likely to be scarring among firms and individuals following the coronavirus crisis that naturally mutes demand and inflation, much like there was following the global financial crisis. Second, most major central banks should celebrate the generation of some inflation given that they have by and large missed their inflation targets for most of the last decade. Third, one way to whittle down a huge debt burden is to inflate your way out of it, so inflation could make debt servicing easier. Finally, central banks are better equipped to fight inflation than they are deflation, which is currently the more likely scenario given the collapse in demand in the global economy.

But while helicopter money is the most likely mechanism for providing a stimulus to kickstart the economy, timing is everything. And this is not the right time. The global economy has been deliberately put on ice until the virus is contained, at which point we can defrost the economy and hope that businesses and consumers go back to some semblance of “normal.” It does not make sense to drop a massive stimulus while also telling everyone to stay home. First, we need economies to open up and confidence to return. Otherwise it does not matter how much money you drop on me, I am still not getting on a plane and going on holiday. But now is the right time to consider the theoretical, political and practical challenges of implementing helicopter money, so when a recovery finally does take hold, this mechanism can really help.