The Helicopter Money Policy
Milton Friedman is one of the great economists who has lived during the 20th century. Many modern-day economic policies are derived from the Monetary School of Economics which was founded by Milton Friedman in Chicago. During his discussions in one of his classrooms, Milton Friedman had mentioned the idea of helicopter money policy.
When Friedman had mentioned the idea, he was making only hypothetical statements. Little did Milton Friedman know that his hypothetical ideas would later be seriously considered by policymakers. Policy makers in Japan as well as in Australia have been toying with the idea of using helicopter money monetary policy. The idea was also actively considered by United States Federal Reserve Chief Ben Bernanke during the 2001 dot com bubble.
Ideas that would have sounded insane a couple of decades ago are now being seriously considered. In this article, we will have a closer look at the helicopter money policy as well as its pros and cons.
What is Helicopter Money?
The idea of helicopter money came from the analogy used by Milton Friedman. Friedman explained the policy by providing details about what would happen if the government just printed a lot of money and air-dropped it into the house of different beneficiaries using helicopters. The helicopters were an obvious analogy. The basic idea was that the government has to create money by printing it and provide it to certain beneficiaries. It is unlikely that helicopters would ever be used to make the delivery. Instead, the delivery can be made by electronic transfers, mailing checks or even via tax refunds. However, nonetheless, since the helicopter analogy was attractive, it caught on, and now the policy is known as helicopter money policy
How is Helicopter Money Different?
Helicopter money is one of the many unconventional monetary policies that economists have been perusing in recent years. Other similar policies include quantitative easing as well as debt monetization. It is important to understand the differences between helicopter money and other monetary policies.
- In the case of quantitative easing, the government does create a lot of money by printing it. However, it is spent on purchasing financial assets. Hence, the newly created money which is spent by the government ends up in the hands of financial institutions like banks. Later on, banks may use this money to lend to the general public. Hence, banks are the beneficiaries of money which has been created by the government. In the aftermath of the subprime mortgage crisis, quantitative easing was used to recapitalize the banks.
- Debt monetization is also a policy where the central bank creates new money. This newly created money is then lent out to the government as the central bank uses the money to purchase debt securities issued by it. This money is later used by the government to implement different forms of fiscal schemes. In many cases, the public itself may be the beneficiary of such schemes. However, once again, they are not the direct beneficiaries.
The difference between helicopter money and other schemes is that in the case of helicopter money, the people are the direct beneficiaries of the newly created money. There are no intermediaries in this policy.
There are many criticisms which have been levelled against the helicopter money policy. Some of the most important ones have been listed below.
Redistributive In Nature
Firstly, the helicopter money policy is redistributive in nature. This is because when the government prints money, the existing stock of money loses its value. Hence, when free money is being given out to the beneficiaries, they are the recipients of free value. However, at the same time, value is being stolen from people who always held this currency. This is the reason why helicopter money is said to be redistributive in nature. It takes value away from people who have it and gives it to others. The middle class and the poor are usually the ones who are hit hardest as a result of this redistribution of wealth.
Negative Capital and Infinite Leverage
Helicopter money is capable of creating some strange situations. For instance, it is capable of creating a situation where the liabilities of the central bank will exceed its assets. This is because the assets of the banks will remain the same whereas it will keep printing and distributing more and more liabilities. As a result, it is possible that a situation may arise whereby banks may end up having negative capital or zero capital. Also, since leverage is calculated in relation to capital, the central bank may end up having infinite leverage. This would end up creating bizarre situations which would be difficult to manage.
Poor Precedent and Lobbying
Lastly, helicopter money will create a poor precedent. It will send a message to people that if they can apply enough pressure on the government, they too can be recipients of free money. This will increase unnecessary lobbying with the government as different groups will try to hold the government at ransom and extract benefits from it.
Authorship/Referencing - About the Author(s)
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- Quantitative Easing Tapering
- Advantages of Quantitative Easing
- Disadvantages of Quantitative Easing
- Effect of Quantitative Easing on Stock Markets
- Quantitative Easing and the Bond Market
- Quantitative Easing and Gold
- Quantitative Easing and the Forex Market
- Quantitative Easing and Interest Rates
- Alternatives to Quantitative Easing
- Quantitative Easing (QE): Major Instances
- Effect of Quantitative Easing on Emerging Markets
- Impact of QE Tapering on Various Stakeholders
- The Helicopter Money Policy