by Mark Gilbert, Bloombergview:
Central bankers, it may soon be time to don your flying suits and start your engines. There’s a growing suspicion that quantitative easing and zero/negative interest rates have lost any power they might have had to kickstart the economy. So Milton Friedman’s famous “helicopter money” is back on the radar as a potential solution to what ails global growth.
With governments still unwilling to flex their fiscal muscles to boost the world economy, Friedman’s idea — easy to articulate, devilishly hard to envisage in practice — is very much in vogue. Here’s how he described it in “The Optimum Quantity of Money,” a collection of papers published in 1969:
The hope would be that putting more money directly into consumers’ pockets would send them scurrying to the shops to spend their windfalls. The ensuing surge in demand would revitalize animal spirits, averting the threat of deflation by persuading retailers to raise their prices. Inflation rates would make their way back to the 2 percent targets many countries have adopted as a safe pace of acceleration for consumer prices. In practice, a central bank wishing to drop money on its constituents would probably either just add money to their bank accounts, or move in tandem with the government to fund a national tax cut. We’d all wake up a bit richer on a Monday morning.
Friedman appended an important caveat to his thought experiment: “Let us suppose further that everyone is convinced that this is a unique event which will never be repeated.” The truth is no one would regard a helicopter drop as a one-time event. Once the whirlybirds are in the air, they’d likely fly again and again. Moreover, if the money drops had the desired effect of reviving inflation, it’s entirely unclear how you’d go about taking stimulus back out of the economy if prices spiral dangerously higher.
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