Why Helicopter Drops Would Work

Here’s John Kay in the FT arguing that helicopter drops don’t work. He says:

“even if the lucky recipients of the helicopter drop went straight down to the pub to celebrate their good fortune, the publican would return the cash to the banking system by the end of the day, and the notes would end up back in the vaults of the central bank. The helicopter drop does not give households reason to hold additional notes in their wallets, shops to keep more cash in their tills, or banks to hold more currency in their branches.”

He further adds that this sort of money issuance would be viewed as fiscal policy which would be untenable in the current environment.

And here’s Eric Lonergan arguing that Kay is wrong:

“The policy is extremely simple: central banks should print money and transfer it to households. All the empirical evidence on similar policies suggests that this raises spending. It logically follows that deflation should never be a sustained threat in economies that can create money at will.

Mr Kay instead follows a convoluted line of reasoning, arguing that money is a liability of the state because we pay taxes with it — that is semantic confusion.”

I think they’re both right for different reasons. Eric has the operations right. And John has the politics right. Here’s how I think of things:

• In general, spending is a function of current income relative to desired saving.
• The reason QE hasn’t worked is because it doesn’t significantly impact either the saving or the income of the private sector. That is, because it’s an asset swap of a bond for cash it changes the composition of the private sector’s assets, but it’s like swapping a savings account for a checking account. Further, QE takes interest income out of the private sector which could lead QE to be marginally deflationary.
• Helicopter money is different in that the Central Bank would not swap out the currently held private sector bond. It would simply credit cash into the private sector which would likely get deposited into bank accounts at some point as an asset for the depositor. I’ve referred to this in the past as “Roche’s Bags-O-Dirt”. That is, the Fed could buy worthless bags of dirt in exchange for cash in what is essentially a form of QE where the Fed buys an asset that isn’t worth anything instead of buying a bond at market value.
• Going back to bullet point 1, I think it’s safe to assume that helicopter money would work because it increases the quantity of assets held by the private sector.  People will spend more because they feel wealthier than they did before.  This would be real “money printing” in the sense that most people think QE is “money printing” as opposed to what’s been done which is really just “asset swapping”.

Of course, the politics make all of this a bit tricky. I suspect John is right that this sort of policy would not be politically tenable. Especially in Europe.  And it’s flat out illegal in the USA because the Central Bank would be seen as skirting Congress in what is essentially an act of government spending.  So, the actual implementation of helicopter money is as unlikely as Janet Yellen actually getting into a helicopter and dropping money from the sky.