HELICOPTER MONEY: Myth or not a very distant reality?

“Let us suppose now that one day a helicopter flies over this community and drops an additional $1000 in bills from the sky, which is, of course, hastily collected by members of the community. Let us suppose further that everyone is convinced that this is a unique event which will never be repeated.”
Milton Friedman,
The Optimum Quantity of Oil, 1969.

At first glance what you’ve just read may seem absurd to you, if not preposterous. Imagine a helicopter raining down money, its unimaginable, isn’t it? But this may not simply be rhetoric given that economies and distinguished economists are giving serious thought to this. At times when monetary policy has seemingly been exhausted and the interest rates are close to zero is when the concept of helicopter money gains prominence. A mixture of monetary and fiscal policy measures is sought when monetary policy seems to have been exhausted. Reluctance on the part of legislatures to use fiscal policy due to high levels of government debt is the backdrop before which Milton Friedman’s concept of “money financed” (as opposed to debt financed) tax cuts – ‘helicopter money’ has received a gush of attention.

What is helicopter money? The exciting reverie of a helicopter raining down money seems to invoke the idea of divine providence. However, on deeper thought, a ‘onetime’ distribution of money can be perceived to be equivalent to a ‘tax cut’ or an ‘increase in public spending’, financed by a permanent increase in the money stock. In essence, it is an expansionary fiscal policy.

Assume now that the Indian economy is operating well below its inflation target and monetary policy isn’t being able to combat the situation. In the face of such a calamity if the Parliament approves an increase in public spending to the tune of Rs.100 crores, half as increased public expenditure and the other half as a tax rebate, and unlike the usual fiscal policy this increase in public spending isn’t proposed to be financed by public debt but by printing money to the exact same figure. That is the RBI prints money to the tune of Rs.100 crores. Alternatively, the government could increase its debt by Rs.100 crores which the RBI purchases and decides to hold.

Zero coupon perpetual bonds or consols have come into the limelight in the literature regarding helicopter money as an instrument to achieve a money-financed fiscal policy. Such a bond offers no coupon/interest payment and is irredeemable. This effectively means that the central bank would hold such bonds, which can never be redeemed and offer no interest payment ever as collateral to approve a loan for the increase in public spending.

Such an effort should theoretically affect the economy via a number of channels. According to Ben Bernanke, former two-term chairman of the Federal Reserve such an approach would possibly affect the economy via the following channels:

1. The direct effects of the increased public spending on GDP, jobs and income.
2. The increase in household income accruing from the tax rebate, which should theoretically induce greater spending by the consumers.
3. An increase in the level of inflation owing to the increased stock of money supply in the economy. Assuming that the interest rate is grounded close to the zero mark, an increase in inflation would cause the real interest rate to dip in the negative, providing impetus to capital investments and other spending due to a reduction of costs.
4. The fact that money-financed fiscal policy does not have future implications of a tax burden as opposed to debt-financed fiscal measures is reassuring.

Standard debt-financed fiscal policy measures work through the channels 1 & 2 but the expectations of future tax burdens dampens the policy from impacting the economy in full measure. Money financed policies seemingly are free from such expectations.

Increased inflation and increased aggregate demand as pointed out by channel 3 are desirable since the economy is operating below its inflation target and increased investment is also the need of the hour because of its repercussions on employment and jobs.

However, as sugar coated and attractive the concept of helicopter money may seem, it comes with obstacles in its implementation. The first obstacle that warrants attention is whether the central bank is legally permitted to follow such a policy? Such a policy, which is effectively a tax rebate requires legal legislative approval prior to its implementation which is definitely beyond the scope of the RBI sans the consent of the Parliament. The second obstacle is the problem of governance, such a policy is desirable only in conditions when the economy has slowed down significantly, something of a last resort. Improper use of such a policy by legislatures for political popularity during inappropriate conditions is another downside.

Money financed fiscal programs colloquially known as ‘helicopter money’ is unlikely to be used in India at the present moment, needless to mention because the economic condition of India is exactly opposite to that needed for its implementation. We are enjoying a healthy rate of inflation and good rates of growth. However, Japan amidst a deflation and an economic slowdown has in as recently as July, 2016 looked into the feasibility of such a policy. Though finally deciding against the use of such a policy, even serious consideration of the use of such a policy warrants us to not discard it as a possibility, if not now maybe a decade down the line or a score if need be.

Worsening economic conditions in Europe and Japan which are experiencing economic slowdowns have dabbled in tools such as ‘close to zero interest rates’, ‘negative interest rates’ and the day may not be far when ‘helicopter money’ may just find its calling and be granted a fair shot. After all the history of the world will never fail to surprise you with the kind of absurd and appalling things that have happened in the past, and upon proper scrutiny, which has been presented in the above literature, ‘helicopter money’ already sounds less appalling than what the term warrants.