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Economic Insights

With other measures to lift growth proving ineffective, developed economies, especially Japan, may be considering monetary financed fiscal programs.

 

In Brief

  • The concept of “helicopter money”—i.e., fiscal spending financed by a permanent increase in the money supply—is drawing increased attention as economies across the globe struggle to boost growth.
  • Helicopter money is not borrowed but created under a monetary financed fiscal program. A potential consequence from taking such an approach would be an increase in inflation.
  • If this policy were attempted in the United States, however, it would require a high level of cooperation among Congress, the executive branch, and the U.S. Federal Reserve.
  • Meanwhile, Japan, with its moribund economy, a lack of inflation, and greater coordination of fiscal and monetary policies may instead be a better candidate for a helicopter money program.
  • The key takeaway—Given the lack of success of other stimulus approaches in developed economies, any potential effort along those lines by Japan will be closely watched by policymakers elsewhere.

 

With global economies struggling to gain traction, the vision of “helicopter money” is certainly appealing: the metaphor denoting large denominations of paper currency distributed from the sky by central bankers to promote immediate lending and spending in order to boost economic growth. Is such a swift, and dramatic, form of economic stimulus then the next policy move after apparent failure of fiscal, monetary and structural shifts among developed countries globally? References to the concept by policymakers in Japan, the eurozone, and even the United States suggest that helicopter money has at least been discussed, if not considered.

No need to watch the skies, though. A “helicopter drop” vividly describes policies that have a direct stimulus on the economy, yet without the baggage of accompanying debt that at some point must be repaid. The late economist Milton Friedman used the phrase in 1969—not though as a policy proposal but instead as an illustration of the effects of monetary policy on inflation. Former U.S. Federal Reserve (Fed) chairman Ben Bernanke referred to Friedman’s “helicopter drop of money” in a 2002 speech on preventing deflation. That speech earned him the nickname “Helicopter Ben.” 

The term has evolved to refer to a long-lasting cash infusion into the economy. In policy-speak, it is fiscal spending financed by a permanent increase in the money supply. Whether the infusion is executed in the form of a direct money transfer, a tax refund, infrastructure spending, or some other program, the key difference with other fiscal policies is that the money is not borrowed, but created. Instead of debt-financed fiscal spending, it is a monetary financed fiscal program (MFFP). 

Inflation Boost
A helicopter drop or MFFP may succeed in ways that debt-financed spending does not. The immediate net increase in money supply associated with MFFP should lead to higher expected inflation than debt-financed policies. Historically, the push toward higher inflation would be a problem. Today, however, higher expected inflation would be welcomed in most developed countries’ economies, including those of Japan, Europe, and the United States. In addition, monetary financed spending avoids an increase in government debt and potential future tax payments. Instead of financing spending with debt, money-financed spending allows recipients greater economic freedom to spend the stimulus without fear of some future burden.

Such benefits seem to characterize a helicopter drop as the ideal solution for an economy such as that of the United States, which needs an injection of growth and higher inflation, yet wants to avoid a larger budget deficit. Why not then load up every available craft that we have and send them flying?  

The perception that MFFP could be launched with no obvious drawbacks suggests that this kind of policy prescription could quickly become addictive. The consequences then become obvious. Suppose, for example, that the Fed were to ready up the helicopters in an attempt to goose up growth back to above 3%. As MFFP expands, though, inflation could quickly exceed intentions. It could be that a central bank acts judiciously to avoid excessive inflation. But if the central bank controls inflation and money supply, it then will, under MFFP, also now control the fiscal program—that is, how the money is distributed or spent. The Fed has no such power in its charter. Even if this were legal, the Fed would quickly attract the ire of budget hawks in Congress as well as incur new legislation that would curtail even the Fed’s current power over financial institutions and the supply of money. U.S. fiscal policy is within the realm of Congress and the White House, not the Fed.

Policy Co-Pilots
If MFFP is viewed as fiscal policy, somehow Congress and the executive branch need to find the ability to create money in order for MFFP to work. Since neither branch has the ability to create money, an MFFP could not be implemented by Congress and the White House without the help of the central bank. 

The solution would be cooperation between fiscal policy and monetary policy. However, both sets of policymakers have worked more at cross-purposes than in tandem. In addition, formal joint policy could quickly compromise some of the Fed’s prized independence, which may be a dangerous path for the legislative branches to pursue.

Yet from an operational standpoint, a solution can be crafted. Bernanke provided an example in his  comments in a Brookings Institution blog post, on April 11, 2016. Congress could authorize the Fed to create money in a special account. The Fed could determine the appropriate amount, up to a limit. The special account could be controlled by Congress and the White House, and the money could be spent as a direct transfer, a tax rebate, or something like a public works program. The Fed controls the money supply and its impact on inflation. Congress and the administration direct the spending. Such a program has the potential to make a meaningful impact on growth. But there are two potential problems: first, an MFFP launch might be difficult to curtail, and second, it could wind up compromising the independence of the Fed.

Japan’s Flight Plan?
While the immediate benefits of economic stimulus, and a boost to inflation without an adverse budget impact, look tempting, the structure and control of monetary financing fiscal stimulus make it an unlikely policy in the United States. Similarly, the multiple fiscal policies at work in the eurozone, working with a single central bank, the European Central Bank, make coordination of fiscal and monetary policies there at least as difficult as in the United States. At issue in the eurozone would be how much stimulus to drop into each country.

As it stands now, Japan may present a better opportunity for the first experiment with helicopter money.  So far, officials there have denied a need for such policy, claiming that existing policies of quantitative easing and a negative interest-rate regime can yet be successful. However, the moribund state of its economy, the lack of inflation, and the existing cooperation between Japan’s fiscal and monetary policies suggest that conditions may be ripe for a helicopter drop. A recent visit to Japan by “Helicopter Ben” himself has fueled speculation. 

Given the lack of success of other policies, what started out as a visually appealing notion in 1969, may indeed take flight in Japan, the world’s third-largest economy—and the world will be watching.

 

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