It is likely to take months, possibly years, for us to fully see the damage that the Coronavirus outbreak has had on the global economy. However, experts are already considering the longer-term policy response that may be needed and we have seen the extraordinary option of helicopter money start to be considered more widely.
Since the financial crisis, central banks have pumped trillions into the economy and cut interest rates to all-time lows to stimulate global economic growth. With the advent of the Coronavirus pandemic, some believe this is the time for central banks to try something new, as monetary policy has been exhausted, quantitative easing has already driven yields in many bond markets to all-time lows, and fiscal policy is just not enough on its own.
What is helicopter money?
‘Helicopter money’ was a phrase first coined by economist Milton Friedman in 1969. It is a concept designed to stimulate spending and increase inflation to avoid a deflationary spiral. It involves printing large sums of money and distributing it to the public (with no expectation of the amount being repaid by the individuals who receive it), but of course as with all stimulus measures there is a cost which must be recouped in some way.
To explain the concept in simple terms, imagine when you wake up tomorrow, you find that you have received a cheque in the post for £1,000 from the government, and even better, it is a ‘gift’ that need not be repaid! Whilst this would be welcomed by many, the idea seems far-fetched at best and yet in these unprecedented times we again see the idea gaining traction.
Does helicopter money work?
In 2002, then Federal Reserve Chairman, Ben Bernanke, made a passing reference to helicopter money while making a speech about measures that could be used to try and combat deflation. He noted that the Japanese experience in the 1930’s had helped rescue its economy from the Great Depression, but that the later inflationary surge had proved harder to control and had been problematic for the country’s economy.
Opponents to the concept have been quick to point out that the money would not really be free! In fact, increasing the amount of money in circulation would potentially lead to inflation breaching its target range, devalue the country’s currency and hit savers.
However, advocates note the simplicity of the approach and speed with which it can be deployed – it is this speed which is of particular significance in the current crisis, which has been exceptionally fast moving. Perhaps a key difference in this Coronavirus helicopter money proposal is that it is being used primarily to prevent a further economic downturn by supporting workers most at risk of losing their jobs or defaulting on their rent and mortgages; whereas in the past it has been considered and used to stimulate demand.
Helicopter money in practice
The US helicopter money support attracted a great deal of attention, not least because it was approved by US policymakers who are often at loggerheads, but in fact Hong Kong and Singapore had already used this approach for those affected by Coronavirus in February.
In the US, the Coronavirus outbreak ended the long-lived economic expansion and low levels of unemployment in the economy. The record number of job losses across the country has been staggering and has grown week on week. Against a backdrop of millions of Americans potentially unable to meet their next rent or mortgage payment, a massive stimulus package was agreed by Congress, which saw $2 trillion of spending approved.
The stimulus not only widened unemployment benefits, targeted funds at struggling sectors, such as aviation and small businesses, but also introduced a helicopter money package. The helicopter money will see cheques of up to $1,200 being given to Americans earning less than $75,000 per annum, with an added $500 on top per child for families.
Unprecedented times call for unprecedented measures. The US has decided to take a risk in using helicopter money to help hold off further economic decline. Only time will tell if it is enough and if the risk will pay off.