Taking Off With Helicopter Money

With global economies in doldrums, is helicopter money a viable solution to pull an economy out of the financial ventilator?

As a child, I was really fascinated with Jodha Akbar, especially the scene where Akbar would throw gold coins into the air and people would hastily collect it, wishing for it to happen in real life, someone throwing so many chocolates at me, and I grabbing all of it. Now that I’ve grown up, and see a version of the same happening around the world, with real currency, I wonder if it is as harmless to the economies, as it was to Akbar then.

May 17, 2020, the Treasury Secretary of USA announces a $1000 stimulus to every American in a record-shattering $3 trillion relief package ⁽¹⁾ . May 22, 2020, news of New Zealand mulling over the plausibility of distributing helicopter money comes up ⁽²⁾ . Within the next ten days, the internet is flooded with economists suggesting Helicopter Money as the most viable solution to the economic destruction COVID-19 has caused.

But what is helicopter money? The economist behind the term, Milton Friedman, used a parable to explain it “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 that will never be repeated”. ⁽³⁾ However in the real world, nobody is going to climb into a helicopter with sacks of bills. What Friedman actually referred to was when a government decides to increase the money supply by printing more currency notes and distributing it among the people for free i.e. without them having to pay anything in return. If a central bank does adopt this policy of creating large sums of money, it will be distributed to the public via checks or electronic transfers to their bank accounts.

RBI, in the case of Helicopter Money, buys government bonds which are immediately written off by it, creating no external liability for the government. Quantitative easing, on the other hand, is when RBI invests in instruments of the financial market, which it will ultimately receive back, along with interest in a definite number of years.

THE INDIAN CASE

22nd March 2020 – 1st June 2020, 130 crore Indians in their homes. Factories closed, services hauled, local businesses in trouble, and firms bankrupt.

The pandemic has led to a very unstable situation. With economic activities in jeopardy, exorbitant expenditure in the healthcare sector, people restricted to their homes and tax cuts, the deficits are ever-increasing. The poor, living hand to mouth are the worst hit. Continuous expenditure with no source of income and loss of jobs have left them vulnerable. While locust attacks have left farmers in a tense situation, the unemployment rate has risen to a massive 23.5 per cent as of May 2020 ⁽⁴⁾ . The employees are increasingly facing pay cuts and stringent work conditions. Interest rates are at an all-time low since 2000, reduced to 4.25% ⁽⁵⁾ , EMI payments deferred till August 2020 and a stimulus package of $265 billion announced by the Government to help revive the economy.

Having said that, a stimulus package worth 1 per cent of the GDP ⁽⁶⁾ might not be enough to save current jobs, help revive already hit sectors and prevent a total demand collapse. Nor will the old textbook prescription of slashing interest rates be effective as one would not want to take a loan and increase his financial burden in an already ambiguous future. In such a precarious situation, is Helicopter Money the magical solution to all our economic difficulties?

THE CONSUMPTION PROBLEM

Consumption, in general, constitutes a major chunk of a country’s GDP. In India alone, consumption comprises almost 60 per cent of its GDP ⁽⁷⁾ .

When recession strikes and a country goes into a deep financial crisis, rising unemployment becomes commonplace. In such a situation of reduced or no income, it is consumption that gets hit. With little or no consumption, the economy will come crashing down. Why would one spend on beyond what is basic when he is uncertain about his future?

Distributing currency among the people, on the other hand, helps overcome this uncertainty and encourages people to spend. While extra money would help the poorfulfill their basic needs, it would give the upper classes an incentive to spend on non-essentials.

Increased money supply encourages people to buy more, and production units to produce more, thus increasing demand and leading to the economic prosperity of a country.

PRINTING MONEY, THE ULTIMATE SOLUTION?

If printing money was the ultimate solution then we all would have houses full of money and no rich, poor, middle class whatsoever. Lessons of the past and anecdotes of the present show a different reality altogether.

Venezuela- a country that paid off its entire world bank debt in the early 2000s, has an inflation rate of 1 crore per cent today ⁽⁸⁾ . Most of which can be attributed to the government’s reckless printing of money.

Similar was the fate of Zimbabwe under Robert Mugabe, who in order to subtly crush public rebellion, reward his allies and bribe his enemies, exploited the printing press into irresponsibly printing huge sums of money.

Excessive printing of money and its distribution over a prolonged period leads to a drastic increase in demand for commodities in comparison to significantly low supply of the same, leading to a hyperinflationary crisis. The journey of the now-extinct Zimbabwe Dollar from 4 Z$ equalling 40 USD to 1 hundred trillion Z$ equalling 40 US cents in 2009 is the biggest testimony to the fact that irrational and uncontrolled printing of money can lead to the financial ruin of a country. ⁽⁹⁾

Free money does not always mean people will go out to buy commodities. While some would spend, others would prefer to save all or some part of the money for the future, thereby rendering the objective unachieved. In fact, an independent survey by the Central Bank of Netherland ⁽¹⁰⁾ found out that consumers would prefer to spend only 30% of this money and save the rest for what lies ahead.

IF I HAVE MONEY, WHY SHOULD I WORK?

One aspect that is often ignored in the case of helicopter money is the undesirable impact it has on people’s minds. Distributing helicopter money among people is like giving extra marks to a student. Will the student work hard if she knows that however she performs, she will get pass marks every time? Similarly, when free money is distributed among the people, they lose the desire to work hard, for their financial needs are immediately fulfilled by the government. It also leaves them expectant of more such financial stimulus’ and usually more than the previous one rendering undue pressure on the government. Isn’t this what is happening in Japan, wherein days after Prime Minister Shinzo Abe launched a $1 trillion stimulus package to battle the pandemic’s financial fallout, some ruling party lawmakers and its people are calling for even bigger spending. While the government already plans to boost bond issuance to a five-year high of $1.35 trillion, or 30 per cent of the size of Japan’s economy, to finance the stimulus. ⁽¹¹⁾

DESPITE SO MANY CONS, IS HELICOPTER MONEY STILL THE WAY TO GO?

Adopting Helicopter Money today is of utmost importance for a country like India wherein 27.1 crore people lie below the poverty line. While most of the people have no source of income, an adequate stimulus would not only benefit the country but also restore faith in the government which is often shaken during uncertain times. If helicopter money is adopted now, chances of it causing uncontrolled inflation will be very low, as the country is in the midst of a total demand collapse.

However, unlike the USA which has plenty of reserves to be utilized for printing money, reserves in developing countries like India are limited. Therefore, it is of utmost importance to strictly implement this monetary policy as a short term emergency measure used as the last resort to a deep financial crisis.

In Gita Gopinath’s words “This is a crisis that calls for targeted measures, we cannot have helicopters over the entire country.” ⁽¹²⁾ Helicopter money can be a workable solution only if the government plans extensively and meticulously before implementing it. Identifying the target group, deciding the apt amount in accordance with how much the country can bear, while also ensuring that political corruption does not malign the effort are just a few challenges. Mode of distribution of currency keeping in mind the unbanked while also ensuring that every person considers it as a unique event that will never be repeated is a major roadblock ahead.

Remember the two irons you’ve always seen in movies used to revive a dying patient on a ventilator? A bit more or a bit less of this “shock treatment”, and the patient’s condition worsens. While helicopter money seems like the most viable solution to this economic crisis, it is not without risks, and only time shall tell whether this desperate measure in this desperate time, can help the economy recover from this financial ventilator.

By Jahnavi Sekhsaria
Senior Secondary Student, Mahadevi Birla World Academy (MBWA), Kolkata, West Bengal

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