Yves here. While Milton Friedman invented the concept of helicopter money, it was Ben Bernanke, in a 2002 speech on deflation, that brought the idea into widespread use. Bernanke claimed that a central bank could always generate inflation, and the last-ditch measure would be “helicopter money.” The original image was that of throwing money out of helicopters. The monetarist view was that people would recognize that so much extra money floating around would be inflationary and would rush to spend it before inflation kicked in….which would of course create inflationary expectations and induce inflation by increasing the velocity of money.
But what Bernanke actually proposed back then looks an awful lot like trickle-down economics, since he suggested using tax cuts, which would distribute more money to those with the lowest propensity to spend, the rich. We’ve seen how well trickle-down economics has worked in practice. This is the relevant section of his speech:
Each of the policy options I have discussed so far involves the Fed’s acting on its own. In practice, the effectiveness of anti-deflation policy could be significantly enhanced by cooperation between the monetary and fiscal authorities. A broad-based tax cut, for example, accommodated by a program 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 re-balanced 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.
And you notice that Bernanke assumed that the wealth effect will do the trick? Again, as we’ve discussed at length in older posts, the first central bank to use the wealth effect to stimulate consumption was the Bank of Japan, starting in the mid-1980s. We know how that movie ended. Yet the Fed tried that twice, first with Greenspan relying on goosing asset values in the dot-com bust, and then in the wake of the crisis, when the Fed and the Administration convinced itself that rescuing the banks and propping up housing prices and the stock market (while ignoring the devastating impact of millions of preventable foreclosures) would lead to a solid recovery. The result, instead, was the Democrats played into the hands of Trump by refusing to recognize the damage their economic policies had done and refusing back Sanders, who consistently outpolled Trump by large margins.
Back to the post below. It’s important because it tears yet another big hole in the helicopter money theory. It also confirms what economist Richard Koo said about balance sheet recessions: that when people are worried about their financial well-being (whether personally by virtue of having lost savings or seen their home price fall, or are carrying uncomfortable levels of debt, or see too many people around them in stress to feel secure), they prioritize saving over consumption even if they have the ability to spend comfortably.
By Ian Bright, Senior economist, ING, London and Amsterdam and Senne Janssen, Senior Economist, ING, London and Amsterdam. Originally published at VoxEU