Since the 2008 crisis, practically the entire developed world has been stuck in an economic sandpit. Not only have most nations not fixed their economies, they have almost totally abandoned attempting to fix them. Outside of some halfhearted monetary stimulus, they have instead chosen to make the problem worse with job-killing austerity.
As a result, 2008 is looking increasingly like a global hinge point in economic development, where the steady upward trend in per capita GDP from the Industrial Revolution through the early 21st century slowed dramatically. The potential implications are colossal. In the U.S. alone, estimates of the gap between potential and actual economic output are today about $500 billion per year — which has decreased from over $1 trillion in 2009 mainly through the slow erosion in potential, rather than catch-up growth that would undo some of the damage of the Great Recession. The cumulative worldwide loss 50 years hence could be literally in the tens of trillions of dollars.
So for critics of this senseless waste, it's remarkable that one policy — helicopter money — gets much less attention than it does, as Simon Wren Lewis argues. It has the potential not just to undo all current weakness in one quick stroke, but would dramatically strengthen the positions of government to deal with future crises.
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What is helicopter money? It's a way to strengthen the depression-fighting power of central banks. Instead of the bizarre and clearly weak policy of quantitative easing, in which the central bank buys financial assets with new money to lower interest rates and push money into the economy, it would simply give the new money directly to citizens. It's fiscal policy because it involves transfers of money to individuals (rather than control of the money supply), but it's also monetary policy because the transfers are financed with new money rather than taxes.
Such a policy have several key advantages in today's economic environment. First, it works fast. Shocks to aggregate demand (as in 2007-8, when a credit crisis destroyed businesses, causing layoffs, which reduced overall spending, causing more layoffs, and so on) can gather force very fast. Instead of relying on the indirect route of fiddling with the supply of credit, or waiting for Congress to stop picking its nose and pass a spending bill, the central bank can put money into every citizen's hands in a matter of days.
Second, helicopter money allows central banks to beat the zero lower bound problem. When an economy needs stimulus, traditional central bank policy relies on cutting interest rates to ease credit. But if interest rates are already low, then you've got nowhere to go once you hit zero — as most of the developed world did in 2008. With helicopter money, this ceases to be a problem.
Third, it will help central banks maintain steady prices. The conventional wisdom used to be that the major task of central banks was to keep inflation from getting too high, but these days central banks have kept undershooting their inflation target — for years on end.
What's more, too-high inflation will not be a problem until full employment is reached, because an economy-wide bidding war won't happen so long as there is idle capacity that can be brought back into production. When disaster strikes, the central bank can dump money into the economy, then when inflation starts to pick up, pull back.
So what's not to like? Well, many economists, such as Paul Krugman, scoff at helicopter money because it would be functionally quite similar to fiscal stimulus (like the Recovery Act of 2009). If Congress can't get it together to pass fiscal stimulus, then why would they spring for a weird new money-printing spree that would give Ron Paul an aneurysm?
They wouldn't of course, not yet at least. But the benefit of helicopter money is in how it changes economic institutions. As recently as 2007 it was thought that huge collapses in aggregate demand simply wouldn't happen, and if they did, economists and politics had learned the lessons of the past, and the problem would quickly be fixed.
But despite the fact that most nations managed at least some Keynesian policy in 2008, they couldn't keep doing it. Instead, an incomprehensible and maddening fixation with austerity — spending cuts and balanced budgets — swept the elite of almost the whole developed world. It was something like crying "Fire! Fire!" during Noah's Flood, and it placed a new spending policy very far out of political reach.
The only real comparison with 2008 as a world economic hinge point is 1929. There the downturn was much worse, but all the economic damage was eventually undone by the massive fiscal stimulus of World War II. Today, thankfully, there is no such war on the horizon — but there is every reason to think that the problems of lingering depression, austerity madness, and the zero lower bound are with us for the foreseeable future.
So when a left-wing challenger does manage to take power, putting helicopter money into to the central bank toolkit is one of the smartest steps it would be possible to take. The left ought to be thinking not just of the next recession, but the one after that.
