Helicopter money can be described as a monetary policy in which the government distributes a large amount of money to the public to stimulate the economy in times of recession. As explained by Prof. Marc De Clercq in Unbox Unscripted, the name 'helicopter money' was originally invented by Milton Friedman - who referred to the concept as the government distributing money by throwing it out a helicopter. This article will elaborate on why this policy is controversial and set up to defeat its purpose.
1. Helicopter money is intended to stimulate the economy through increased household spending
The sole purpose of helicopter money is to be spent. That way, the economy gets its much-needed impulse during a recession. But here's problem number one. The government provides money to households with the hope that they will spend it. However, what do you do when you don't know what is coming? You save the money, of course, because you might need it later. As a consequence, helicopter money ends up piling up in savings accounts.
2. Support businesses instead of consumers
During a recession, economic support should end up with (local) businesses instead of staying in the savings accounts of consumers. Why is that? Put, money left in a savings account does nothing towards economic stimulation. Surprisingly, individuals are reluctant to spend during a crisis and save disproportionately. However, this behavior completely defeats the purpose of stimulus money, which is meant to be re-injected directly into the economy for the most vulnerable entities in the market, namely small local businesses.
3. Helicopter money to fight inequality
Helicopter money is also often referred to as a means to fight inequality. But how can it be? Let's take the US stimulus program as an example: giving all US citizens $1000. Part of the population doesn't need that money and will either save it or invest it, which means it is not spent directly on the economy. People who do not need the money can invest it wisely, increasing the inequality gap.
4. Control of spending
Handing out blank cheques to entire (groups of) populations also means giving away all control and transparency on what happens with the money. Do people go out and buy consumer goods (as is intended)? Or do they go out and buy drugs? We realize this might be an extreme example, but the logic holds, and it is an example of 'spray and pray.' Spray money and pray for the best.
5. Budgetary deficits and inflation consequences
"There ain't such a thing as a free lunch." It's a well-known advertisement, but it couldn't be more relevant. People who argue that helicopter money is free money say that we can conjure something out of thin air. To quote John Kay: "For every credit, there is a corresponding debit; for every financial asset, there is a corresponding liability. Schemes which purport to fund government spending or tax cuts at no cost to present or future taxpayers are necessarily fatally flawed, even if it requires a little effort to work out the flaw." On top of this, helicopter money also poses a significant risk for inflation.
In conclusion, we can agree that helicopter money is generally not an effective monetary policy. But as Bart Vancraeynest, Chief Economist at Voka, says: "It's like a nuclear option; helicopter money should only be used as a last resort if all else fails."
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