Helicopter Money

Below is a script I made for two Economics Proffesors such that they could make a video over more economic subjects. Please enjoy!

“Let us suppose now that one day a helicopter flies over this community and drops an additional $1,000 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.”

These were the words of the famous economist Milton Friedman when proposing a very unorthodox idea in a paper titled “The Optimum Quantity of Money”. Milton Friedman had devised a policy aimed to kickstart an economy after deflation and economic stagnation. The theory now dubbed as “helicopter money”.

In short, this theory is a proposed solution to revitalizing a stalled economy, which aims to “drop” money back into the pockets of the general populace in order to encourage spending and in turn push the economy in a revived period of growth. The policy is very similar to jumpstarting a car battery by giving it a quick spark, from which it can ideally sustain itself.

But the unconventional theory, which has been dubbed “the boldest monetary policy at play”, has led to some controversy, and with many different opinions on the potential solution, the concept has been a topic of much debate.

So how is helicopter money supposed to work?

Friedman initially intended such a solution to work as a tax rebate for individuals to gain back some immediate spending money, but the idea has shifted over time to feature other means of stimulating the economy. In July of 2016, when the Japanese government considered the policy, a potential rebate was only one of three possible applications of helicopter money, with two additional measures being debated as well.

The first way to initiate the use of helicopter money is Friedman’s aforementioned proposal, whereby the general consumer receives a spontaneous “refund” on their taxes, thus giving them a little bit of extra money that they can plug back into the economy. The second takes a more Keynesian route, and as proposed by Ben Bernanke, former Chairman of the federal reserve, calls for cheap loans being handed out to consumers and small businesses.

The third and final calls for money to be simply printed and handed out to the general public, working around a rebate in order to keep prior tax money in the government’s hands so the government can pay for prior expenses.

Yet, these solutions are far from without criticism, and there are many skeptics far and wide of helicopter money. For instance, critics of the possible solution in Japan noted that the government had already increased fiscal spending in order to stimulate jobs in the economy, taking on infrastructure projects designed to employ more individuals, and this had little success. Additionally, there is a great concern that further printing of money would lead to hyperinflation, and as soon as a government institution tried this once, they could very quickly fall into a slippery slope. To quote Taiwanese-American economist, Richard Koo ““if such envelopes arrived day after day, the entire country would quickly fall into a panic as people lose all sense of what their currency is worth.”

There are even further concerns as to whether or not the money would even be spent, as checks granted which were immediately placed into savings would fail to stimulate any economic activity in the moment, as well as concerns that even if the central bank gave out that money, ultimately they would have to take measures to regain the difference through either more printing of money, or increased interest rates, which would slow down loan taking in the first place. Conversely, those who argue against the central bank loaning out the money for low-interest rates indicate that the 2008 financial crisis was a result of loans being too easy to access and caused a deep excess of credit in the economy.

With stark opinions on both sides of the argument, the discourse of whether or not helicopter money is possible remains unsettled, so tell us what you think in the comments below. Additionally, if you like our videos be sure to like and subscribe, and share our content on Facebook and Youtube! This has been Marginal Revolution University, hoping to help you understand your modern economic world.

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