The governor of the Bank of Japan just said no to an oddball policy called "helicopter money."
Japan's been stuck in an economic rut for years, and normal policy options seem powerless to do any good. While America's economic growth is mildly better, it's not stellar. So helicopter money has been proposed here, too.
But just what is helicopter money — or, more accurately, a helicopter drop — anyway? And should America and Japan rethink their reticence to use it?
The term started as a half-joking thought experiment by economist Milton Friedman: If you're looking to boost the economy, why not just send helicopters out with stacks of money and drop it out of the sky on eagerly waiting Americans?
There's a basic divide in how economic policy-making works in America and most Western countries: The government spends, but when it spends more than it taxes, it must borrow. This is fiscal policy. And the central bank — the Federal Reserve, in America's case — controls the money supply and can create new money, and uses those powers to push interest rates up or down. This is monetary policy.
Helicopter money just marries these two powers: Have the government spend by creating new money, rather than spend by taxing and borrowing.
Now, in the worlds of politics, media, and finance, powerful people in the know tend to be super skittish about this idea. Former Fed Chair Ben Bernanke mentioned helicopter money once, just in brief passing, in a 2002 speech — and spent years living down the nickname "Helicopter Ben."
But helicopter money is taken more seriously these days, because it comes with several bonuses: It would allow the government to spend more, and thus juice job creation and wage growth, without increasing the deficit. That's nice when you've got a Congress that's terrified of adding further to the national debt. The other main way to boost the economy is for the Fed to cut interest rates. But they're already about as low as they can go. So helicopter money is a nice alternative from that perspective, too.
Of course, the money isn't actually dropped out of the sky on people. Practically speaking, there are a few different ways to actually do a helicopter drop.
The easiest way is for Congress to just deficit spend normally — it passes some new program, financed entirely by borrowing, and then the Fed buys up all the U.S. debt created by that program. The key thing to realize here is that when the U.S. Treasury pays interest and principle on its debt held at the Fed, the Fed turns around and gives that money right back to the Treasury. So the government loses no money servicing that debt — it's effectively money created from nothing.
Whether or not this actually meets your definition of "helicopter money" probably depends on how the government spends it. The government could give every American a check or a tax rebate for an equivalent amount, or it could invest in some massive new infrastructure project to create jobs. Or it could finance a tax cut for the rich, or start a war. The former set of choices is probably much more what helicopter money fans have in mind.
The Fed could also choose, at any time, to sell the U.S. debt it holds back to the financial markets, and the government starts losing money on service payments again.
The upside to this form of helicopter drop is that Congress and the Fed could make it happen with the legal powers they already have. The downside is they have to choose to do so, and coordinate their choices. Meaning they could always choose differently.
There are other ways to do a helicopter drop, too.
Instead of having the Fed create new money and use it to buy government debt, the Fed could just create the money and give it to the Treasury directly. That's not currently allowed by law. But as Bernanke recently proposed, Congress could pass a law creating a special account for the Treasury, which the Fed could fill with newly created money at its discretion. So while the Fed retains power over when to create money, once it's out the door the Fed can't renege. But you're still dependent on Congress to choose to spend that money properly.
This brings us to the final version of helicopter money: The Fed creates new money, and just drops it directly into Americans' bank accounts. (Or gives them checks, if they're among the many millions who don't have a bank account.) That's really not allowed by current law. Congress could pass the change, but it would be seen as a radical revision, since it's basically Congress taking its power over fiscal policy and handing some of it over to the Fed.
This all gets us to the final irony, which often gets lost in the discussion: Any deficit spending at all by the federal government is a potential helicopter drop waiting to happen — it just depends on Congress and the Fed choosing to act together in a particular and coordinated way.
Critics rightly hammer the Fed for being too quick to raise interest rates, and too willing to fight inflation at the cost of job growth. But the Fed's been relatively responsible compared to the destructive decision by Congress to shrink the deficit rather than expand it to lift the economy, despite historically low interest rates and the grindingly slow seven-year recovery from the Great Recession.
Talk of helicopter money implies that we lack the right policy tools to fix our economy's problems. But we don't lack them — they're just going unused by our elected officials in Congress and the White House, and, to a far lesser extent, the people they appoint to the Fed.
All a helicopter does is let us get around them.