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Close Look: September 2021

12 days ago

CLOSE LOOK
Helicopter money - what’s the big story?

The term ‘helicopter money’ has been heard many times since the Great Financial Crisis, describing a particular and unorthodox style of monetary policy. Coined by US economist Milton Friedman in the late 1960s, the term resulted from his exploration of novel ways of jolting an economy out of deflation or falling prices. Has the experiment ever been tried, and has it ever worked? We hover down and take a closer look.

The original reference to helicopter money formed part of a story or parable of a helicopter flying over an American town, dropping $1,000 bills onto the residents, as a gift from the central bank. This event would happen one time only, and no-one was to expect a repeat of the experiment. So what would the lucky recipients do with their windfall? The theory was that they would rush out and spend it, giving a big jolt to demand, creating scarcity of certain items and pushing prices higher. But would that work in practice?

While the physical dropping of paper currency has never actually been tried, there have been monetary experiments with a similar intent. In Japan in 1999, after years of a deflationary cycle, the government issued ‘shopping coupons’ valued at around $200 each, to families with children and the elderly. This was not a complete success, as it failed to take into account the cautious nature of the population. While the coupons were duly spent, an equivalent sum of money was then saved, bringing little net benefit to the local economy.

The American Families Plan, one of President Biden’s stimulus packages, contains an element akin to helicopter money. Not technically speaking of course, as the money came from the US State and not the Federal Reserve. But in the spring of 2021, each adult below a certain earnings threshold received a cheque for $1,400. The clear aim was to kick start consumer spending, held back by the pandemic. But it’s thought that a good percentage of these cheques went into financial speculation, fuelling the growth of day-trading websites such as Robinhood.

A more directed approach has recently been confirmed by the government of Northern Ireland. Each adult will receive a voucher for £100 ($137) to be spent on their local high street. Gambling and online shopping are specifically excluded. It’s a fairly small amount, but it’s closely targeted and could deliver something of a demand boost. Only time will tell if this latest version of helicopter money could finally achieve Mr Friedman’s predicted effect.

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