Know all about 'Helicopter Money'

In simple words, helicopter money involves the central bank or central government supplying large amounts of money to the public, as if the money was being distributed or scattered from a helicopter.

Hyderabad:With the coronavirus-hit economy falling deeper and deeper into a chasm with each passing day, Telangana's Chief Minister KC Rao mooted ‘helicopter money’ to help states reeling under heavy financial burden due to lack of revenue.

What is helicopter money?

In simple words, helicopter money involves the central bank or central government supplying large amounts of money to the public, as if the money was being distributed or scattered from a helicopter.

Also known as helicopter drop, the term was coined by American economist Milton Friedman in 1969.

Helicopter Money is seen as the resort by the authorities to spur inflation and economic output in dire situations.

Though it would appear to be theoretically feasible, from a practical standpoint, it is considered to be a hypothetical, unconventional monetary policy tool whose implementation is highly improbable.

When was it used for the first time?

The idea gained prominence in 2002 when Ben Bernanke referred to it while arguing that a central bank can always stoke inflation if needed.

That single reference earned Bernanke the sobriquet of 'Helicopter Ben', a nickname that stayed with him during much of his tenure as a US Federal Reserve member and its chairman.

Bernanke’s reference to 'helicopter drop' occurred in a speech that he made to the National Economists Club about measures that could be used to combat deflation.

In a 2002 speech, Bernanke said "A broad-based tax cut, for example, accommodated by a programme of open-market purchases to alleviate any tendency for interest rates to increase, would almost certainly be an effective stimulant to consumption and hence to prices. Even if households decided not to increase consumption but instead rebalanced their portfolios by using their extra cash to acquire real and financial assets, the resulting increase in asset values would lower the cost of capital and improve the balance sheet positions of potential borrowers. A money-financed tax cut is essentially equivalent to Milton Friedman’s famous ‘helicopter drop’ of money.”

More recently, Japan, which faced stagnant growth throughout the 21st century, toyed with the idea of helicopter money in 2016.

In an April 2016 blog post, Bernanke said helicopter money may be “the best available alternative” under some “extreme circumstances.”

In today’s debates, it’s envisaged that helicopter money would be distributed either by crediting people's bank balances or as a tax rebate.

The key is that it would come from a one-time creation of money by the central bank, rather than being borrowed by the government or coming out of existing spending.

What is the difference between Helicopter Money and Quantitative Easing?

Quantitative Easing (QE) also involves the use of printed money by central banks to buy government bonds.

But not everyone views the money used in QE as helicopter money. Surely, it means printing money to monetise government deficits, but the govt has to pay back for the assets that the central bank buys.

It's not the same as bond-buying by central banks "in which bank-owned assets are swapped for new central bank reserves.

What are the problems involved?

In order to get a helicopter-drop style policy, the government and the central bank must go hand in hand.

While this doesn’t present much of a barrier in theory, in practice the two seldom operate seamlessly with one another and indeed frequently operate at cross-purposes.

The most obvious examples can be seen in the US debt ceiling stand-offs between Democrats and Republicans in Washington, which was ultimately settled with a default package of government spending cuts.

These cuts, however, effectively pushed back against the efforts of the Federal Reserve to keep the country’s economic recovery on track.

Then the Fed’s Bernanke told the Senate Banking Committee in 2013: “There’s a mismatch with the timing of the spending cuts. The problem is long-term, but the cuts are short-term and do harm to the recovery.”

This type of coordination failure is a huge problem for advocates of helicopter money.

Former Bank of England economist Tony Yates worries that helicopter money could shatter the fragile political consensus that has given central banks broadly sensible mandates and preserved their independence. In this case, the perfect may well be the enemy of the good.

Countries experimenting with helicopter money

Japan’s trial of helicopter money may be more effective in forcing consumers to spend today.

In 2019, it introduced a programme which allows eligible households to buy so-called “premium” shopping vouchers to mitigate the effect of a VAT hike. The vouchers, offered at a 20 per cent discount, can be used to pay for goods and services at stores and hospitals designated by municipalities but they expire at the end of March.

Hong Kong announced in February 2020 that it will be giving each of its adult citizens a one-off cash payment of USD 1,284 to prop up the virus-hit economy.

Australia is also considering cash handouts. Several Arabian Gulf economies did the same during the Arab Spring unrest in 2011.