Be it Great Depression or 2008 Financial Crisis, unexpected economic downturns have stimulated economists’ and politicians’ imaginations alike to use innovative solutions rather than the usual tried and tested.
Milton Friedman ruminated on one such thought experiment in 1969, in which he imagined a helicopter dropping money from the sky. In response, it was expected that the targeted individuals will go into a frenzy of collecting the money since the event is unique and not likely to be repeated. To put it in one line, helicopter money entails simply printing the money and distributing it among the people.
Although this does not sound like a good idea especially when the economy is already struggling with the effects of the pandemic, still Telengana chief minister KC Rao has confidently suggested it as a possible solution. The experiment with the helicopter money is not without a precedent.
Japan’s attempt to introduce helicopter money in 1999 turned out to be a flop show. It issued shopping coupons to a particular section of people in response to the long-standing recession. Though the spending on semi-durable goods increased temporarily but it hardly had any long-term effect against the recession. Most people did not even use all the coupons and they expired after six months.
Despite such examples, discussions over the various ways of injecting helicopter money in the economy are making rounds all over world, including US, Europe and Japan. If it is introduced, it presents us with two possible scenarios-
- When the money is spent – Such a scenario would stimulate the economy. The continued circulation of money would reduce the levels of poverty, particularly in times when more and more people are slipping below the poverty line as they lose employment and reserve money due to the pandemic. Given that a large section of population in India is rural, most of the helicopter money might be spent on the immediate needs like food and shelter, thus leaving little or none to be saved. With more money in the hands of people, the income tax returns can be expected to be maintained at the existing levels. Overall, the point is to have the money circulating in the economy.
- When the money is not spent – Former RBI Governor Raghuram Rajan believes that people may end up saving the money rather than spending it. This means that the growth will continue to remain stagnant or negative.
Moreover, the tendency to spend money is also a very cultural phenomenon which differs from region to region. Asia has traditionally seen higher saving rates amongst people compared to its western counterparts. The success story of the Asian Tigers was largely carried out with the investments made using public savings. Especially in a state of panic, when the future seems deeply uncertain because of the pandemic, people in India might choose to keep the money saved for future hardships.
Other factors that make helicopter money highly undesirable are the inflationary effects it might have and the implicit invitation to political interference in the independent functioning of the Central Bank.
A questions might be coming to your mind that isn’t this somewhat similar to Quantitative easing? Let us see.
Quantitative easing does involve the use of printed money by central banks to buy government bonds to monetise government deficits. However, in this case the money is paid by the government to get back the assets from the central bank, unlike in helicopter money where the money is not expected to be returned in any form. Also, helicopter money is not meant to be used to service the debts of the government.
So that is all for this post. See you in the next post.
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This article series is a part of Qurious series. You can find other article in the series HERE->
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