Helicopter Money, Economy, Government

“It’s not raining money”, a phrase that I have heard my parents say several times in my childhood whenever I went out of bounds to buy something expensive. I teach the same to my kids today! The implied meaning is simple – we work day in and day out to earn money and it is not easy to earn money, although spending it is the opposite. Life would have been so easier if the earning was equally simpler as spending and much better if it rained money every monsoon! As hilarious as that idea seems, it is a real and an accepted monetary measure aimed at improving the economic conditions of the country. American Economist and Statistician, Milton Friedman who also received the Noble Memorial Prize in Economic Sciences for his research work first introduced the concept to the world in 1969 through his famous paper ‘The Optimum Quality of Money’. Helicopter money is an unconventional monetary policy tool that involves printing large sums of money and distributing it to the public to spur economic growth. Of course, the money isn’t exactly dropped from the helicopter, however, when a helicopter drop does happen, the money is given for free to all citizens without any expectations in return. Fascinating, isn’t it?

We are in the middle of the biggest pandemic that we might see in our lifetime and it is not surprising that the economies around the world aren’t stable. When people are in fear, especially fear of life, owing to war, famine, floods, earthquakes, or pandemics like the one we are experiencing, the demand and consumption automatically fall as people aren’t purchasing things. Lockdowns make the situation worse as it further makes it mandatory even for the suppliers to shut down and stop selling entirely. In such situations, the flow of money in the economy is at its lowest levels and this impedes the economic growth of the economy or it is rather fair to say it rolls back the progress made in the past. In such situations, it is important to boost consumer confidence and increase demand and consumption, which in turn would increase the flow of money in the economy.

When economies are in a dire state, the Governments have a key role to play here. Unlike retail consumers, when Government buys, it can buy in huge amounts i.e. place large orders, owing to the purchasing power of the Government. Say, if the Government decides to construct roads or even improve the existing ones, it would automatically give employment to many workers, business to many contractors and profits to corporations selling the materials who also have employees at their factory producing the required products. Thus, many people are employed who in turn, save some money and spend the rest and the cycle goes on. The economy is up and running to some extent. This is how the Government routinely increases the economic flow of money during recessionary times and decreases the flow by spending less, amongst other measures.

Quantitative Easing

For increasing the demand and boosting the economy, the money that the Government requires for its spending plans is borrowed from the Reserve Bank who accepts deposits from the commercial banks apart from its reserves. The Reserve Bank lends money to the Government by purchasing securities issued by the Government. The money received in exchange for the securities such as bonds is then used for spending by the Government, as there is enough liquid money available in its hands. This is a usual method and known as ‘Quantitative Easing’ in economic terms. The important note here is that the total flow of the money in the economy is still the same i.e. no new money is created. When there’s no demand, the money is lying idle in the bank accounts and there are no loans required. The money lying idle with the banks goes back to Reserve Bank who in turn gives it to the Government and the spending plans of the Government distributes it back to the public, except that the Government is creating demand while circulating the money back in the economy.

Helicopter Money or also referred to as ‘Helicopter Drop’ tries to solve the same problem but in an unorthodox manner. Firstly, similar to quantitative easing, the helicopter drop involves boosting the circulation of money, however, the money here isn’t being spent on infrastructure projects or other government assets, instead, it is directly given to the general public by way of subsidies, grants, incentives or simply a gift. Yeah, it is raining money! The government simply announces a scheme such that maximum people are covered by it and targets citizens who might benefit from the receipt and would also necessarily spend it when received, as boosting spending is the aim here. Secondly, the money is received from Reserve Bank, however, the central bank isn’t using the money deposited by commercial banks, but instead, printing the money – new currency notes. This means that the total currency notes in the economy are increasing. The money received is distributed amongst the public without any expectation –a literal ‘reverse tax’.

Implementation

Although the helicopter money describes a situation where the Government or central banks distribute cash directly to individuals, the implementation usually involves granting a universal tax rebate to all households, financed by the central bank. The United States did the same during the Economic Stimulus after the global recession in 2008. This is also the reason why the Helicopter drop is as a fiscal stimulus rather than a monetary policy tool. The most important part of implementing helicopter drop is identifying or deciding the target public and the means of reaching out to them. In a country like India where until recently many people didn’t have bank accounts, a direct transfer is rather feasible. Indian Government’s rebate to the farmers can be an example of a helicopter drop, as it involves giving money directly to the farmers for no consideration, merely to support them. In 2016, the European Central Bank (ECB) launched a TLTRO programme lending money to banks at negative interest rates. The use of TLTROs is believed by economists to provide a legal and administratively tractable means of introducing transfers to households.

The Criticisms

As fascinating as the idea might be, Helicopter drop is a risky and rarely used concept – or may be used, yet not expressly spoken about in the public. Various criticisms surround the helicopter drop, as against quantitative easing. Firstly, helicopter money is irreversible – Money directly provided to the citizens, as opposed to quantitative easing, makes it irreversible. Economists argue that helicopter money is not a suitable long-term solution to spur economic growth. Quantitative easing involves the issue of Government securities that can be mature, redeem or can be bought back to reduce the flow of money in the economy.

Helicopter money can also lead to hyperinflation as it undermines the value of the local currency. Consumers would lose the sense of what the currency is worth and may result in over-inflation. The idea involves the printing of money which in today’s world isn’t backed by any asset, but merely dependent on the demand and supply to derive its value. Thus, if currency notes are printed, the supply of money increases and this results in reducing the value of money. Similarly, if currency notes are scrapped, the supply of money decreases and this boosts the value of money. However, while circulating new money in the economy is easier, scrapping it later is usually difficult. Thereby, the value of the currency decreases. And thus, there’s no free lunch!

Helicopter drop also devalues the domestic currency against the foreign currencies as more of the domestic currency is printed, the value of the domestic currency could decrease significantly. This may discourage the purchase of domestic currency by currency speculators.

Another major argument that doesn’t go in favour of helicopter drop is that there is no surety that the money distributed would be spent or spent in entirety since it is the general tendency of the people to save money. And thus, it’s a full circle – it ain’t raining money, and even if it rains, we may not spend it.

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