Helicopter Money

Coronavirus has shown its impact on the world economy. The lockdown imposed by nations has savoury depleted economic activity. Thus the world is in recession. To support the economy, many countries have proposed relief packages. In this scenario, monetary policy is on the rise, i.e. Helicopter Money.  Helicopter Money is a concept used by economists to boost the economy of a country. To understand helicopter money and how it can help revive an economy, let’s first understand what is helicopter money.

Helicopter money meaning:-

This helicopter money was first introduced by the noble price winner economist Milton Friedman in 1969 in his research paper “The Optimum Quantity of Money”. This concept was focused upon raising liquidity in the economy to counter the recession by provoking people to spend more which will boost the demand for a product or service which then can lift the economic output which will help the economy get out of recession.

In simple words, the government is trying to boost its economy by giving away free money to the people to spend. This concept was created to help in the liquidity crunch scenario. According to this concept, the government has to print more money and have to drop it from a helicopter (but the government don’t have to drop it and can add that amount of money in the people bank account). There are a few assumptions to this concept.

1. People have to spend the money which they received from the government. People should not stockpile money. If people stockpile, then the situation will not change.
2. The government has to precisely calculate the total amount of money injection. Overspending can lead to inflation and underspending will not change the situation.
3. The government has to select the areas carefully for helicopter money as every area has different needs.

 

Now let’s understand how helicopter money can help the economy.

1. Raising liquidity–

The biggest problem at the time of recession is the economy got stuck in a liquidity crunch. It is a situation where cash is in the hands of the firm and people deplete. Companies and people find it difficult to spend money and the economy slowly heads towards recession, with the help of helicopter money this depleting cash in the economy can be restored if properly used. Spending money at the time of recession is the primary step and with the help of helicopter money, this goal can be achieved.

2. Raising Spending–

When an economy is stuck in a recession, expansion of the firms stops and GDP contracts along with public spending. Thus one of the steps to get out of this vicious circle of recession is to raise spending and with the help of helicopter money, now with more money in the hands of people supplied by the Govt. people and business can spend, and the economy will boost to get out of this vicious circle.

 

Why should we consider Helicopter money in crisis COVID-19?

It is estimated that the world economy will face $8 to $9 Trillion loss due to coronavirus. This figure is so enamouring that this figure is more than double the GDP of India and more than Japan and Germany’s GDP. Drop at the price of the oil also have negatively impacted oil-producing countries. (You can read my article on COVID-19 & Decreasing Oil Prices). Some economies have recorded a negative growth rate in the GDP.  Governments have announced as much as 30% to 40% of their total GDP as a relief package.

These steps are appreciable and have hail by many economists, but as we know there is always a policy lag. Due to the policy lag steps implemented by the respective government can take years to show its impacts, but in the current situation, the country doesn’t have much time. Many firms and people are protesting against the lockdown. Many people across the globe are in urgent need of essential goods and services. Countries should not only reopen the economy but also have to raise output. Usually, the recovery can happen in U-shape which can take time. This type of recovery can easily take a couple of quarters or a year. Thus we need a policy which can have a direct impact. Helicopter money can be a solution to the current crisis.

 

Why we should not consider Helicopter money in crisis COVID-19?

We should not consider Helicopter money even in this case, as there is a high probability that this step can backfire and hurt the economy. In every economy, there are a specific number of currencies in circulation. Central banks have to carefully evaluate the supply of currency in the economy. The country should raise an 'n' number currency if its GDP rise by 'x%' and vice versa. This number can differ for every nation.

In the current economic situation GDP of almost every country is shrinking and in this situation, if we raise the supply of the money then it will directly contradict the rules of economics. At this point, rising currency supply may give temporary upshift but eventually, it will be stuck in a liquidity trap which will hurt the economy in the long run. This excessive supply of money can ignite inflation and without proper handling can result in hyperinflation. We have examples of Venezuela and Zimbabwe where excess money supply has led to hyperinflation.

One of the assumptions for helicopter money is people should not stock up the money and in the current situation, there may be a group of people who will not follow the rule. Thus implementing the concept of helicopter money will be a huge risk.

 

 Conclusion –

Helicopter money is a good concept but it has its risks. As per my opinion helicopter money should be considered as a last resort. I totally agree that this crisis is one of the worst in history and requires efforts to recover from the crisis. Helicopter money seems attractive and can give immediate returns but it will hurt in the long run. Governments across the globe should not focus on shortcomings but should focus upon the bigger picture.

 

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