Send in the choppers?
Why economists are talking about throwing you free money — and what it means for businesses like GE.
We are in a world of slow growth and low inflation. Policymakers in a number of countries try to find new ways of getting their economies to perk up.
Helicopter money is one idea that has re-emerged in the news recently; it seems that Japan may be considering it, and some argue that Europe and the U.S. should consider it too.
Here is my take:
So what is helicopter money?
Economists are known as the dismal scientists — spoilsports who always tell you that there is no free lunch.
And yet sometimes we come up with fun ideas with catchy names!
It was Milton Friedman who came up with this one. Note that Milton Friedman was a very no-nonsense conservative economist at the University of Chicago, Nobel Prize winner.
And yet about 50 years ago he conjured the idea of a helicopter flying over a city and dropping dollar bills (obviously not coins… he was aware of the risk of injuries and lawsuits…)
What is the idea here?
Suppose you are in a situation where the economy has an efficient manufacturing and services sector ready to produce. But people have no confidence or no money — and so they do not spend. You get a recession and deflation.
All would be okay if only you could just persuade people to spend…
If you give people free money, they will spend it. The economy will grow faster and inflation will rise to healthy levels.
How could that work in practice? Would you really rain money from helicopters?
Probably not. The pragmatic version of this is that the central bank (CB) would print the money and give it to the government; the government could then transfer it to the citizens, perhaps as a tax rebate; or it could spend it in one of the many ways that governments can spend money.
In exchange for the cash, the government would issue to the central bank zero-interest perpetual bonds — bonds on which it does not have to pay any interest and that it will never have to get back.
If this is the CB buying government bonds, how is it different from quantitative easing ?
The Fed and other central banks have pursued quantitative easing (QE) for the last 6 years. The idea of helicopter money (HM) differs in two ways:
- With HM, the CB finances the government directly — whereas with QE the CB buys government bonds on the free market;
- Second, since the bonds carry no interest and will never be repaid, here there is no increase in government debt.
So this sounds great, right? More money for people to spend, or for the government to spend, with no increase in taxes and no increase in debt. The central bank prints it, and someone spends it. What are we waiting for?
Time for the dismal science again….
Helicopter money is the right solution if the problem is that you are in deflation, with most prices falling and the economy stalled or contracting simply because people have lost confidence and are not spending.
This is definitely not the case in the U.S. or in Europe. Here people are spending and prices are not falling.
The reason the economy in the U.S. and in Europe is not growing at a faster pace is largely on the supply side: slow productivity growth in the first place. We are not going to solve that by giving people free money.
Even in Japan, lack of consumer confidence is not the only problem. Productivity growth is still too slow, the country’s industry needs more efficiency, including with better corporate governance.
But isn’t it worth giving it a try anyway? What’s the worst that can happen?
There is a big risk.
Once you get the government used to getting money for free, it is hard to break the addiction. Eventually it will lead to excessive government spending and high inflation, with no benefit for growth. It’s happened before. This is why many countries have laws prohibiting the CB from directly financing the government.
I know it seems crazy to worry about inflation these days, but consider the following thought experiment:
If we could print any amount of money we want without fueling inflation, then the government, financed by the central bank, could buy an unlimited amount of goods and services and give them out for free to the population. We could all be rich, with a big house and a Ferrari in the driveway.
Instead, in Venezuela people are crossing the border into Colombia to buy toilet paper.
So helicopter money can help in the right circumstances, but you cannot print your way to prosperity: it takes infrastructure, investment, innovation and hard work.
What does this debate mean for businesses like GE?
First, it is a reminder that we are likely to remain in this world of slow growth and low interest rates for some time, certainly well into next year.
Second, unfortunately, it confirms that people are still looking for easy solutions. While helicopter money might make sense in Japan, it is crazy to even consider it for the US or Europe today. It’s just looking for another easy way out.
Which means we are unlikely to see the right policies for stronger growth. And it means that the risk of more populism and more protectionist policies is strong.
Third, it means that Japan’s situation remains very challenging. Japan has an enormous debt burden, about 250% of GDP just in government debt. Japan desperately needs both higher growth and higher inflation to make this debt sustainable — otherwise it will eventually suffer a financial crisis. The government is trying, but transforming the economy and boosting productivity is not easy.
The way out of this slow-growth world is not to have helicopters drop money from the sky. It is to make helicopters, planes, trains and all other industrial equipment more efficient. It is to boost productivity. This is why what we do here at GE matters.
