Helicopters drop money on virus zombie economies

Via FTAlphaville:

Amid the border closures and flight cancellations, comes one trip that — were it not for the coronavirus — might never have happened.

The money helicopter has arrived. Via the South China Morning Post:

Hong Kong permanent residents aged 18 and above will each receive a cash handout of HK$10,000 (US$1,200) in a HK$120 billion (US$15 billion) relief deal rolled out by the government to ease the burden on individuals and companies, while saving jobs.

Financial Secretary Paul Chan Mo-po confirmed an earlier Post report when he unveiled the payment during his budget speech on Wednesday morning, along with a full guarantee on loans taken out by companies to pay wages and taxes.

This follows similar efforts by Macau, which will offer residents shopping vouchers, and Singapore, which will give people between $100 and $300 in a one-off payment. (Hat-tip to our favourite twitter troll @econhedge for alerting us.)

Much touted but seldom tried, economists have long seen helicopter money as the most radical tool that central bankers could deploy to fight a weak economy. The idea is usually credited to doyen of monetary economics Milton Friedman.* Unlike most monetary policy measures, people tend to get excited when it is mentioned — unsurprisingly given the image of loads hundred dollar bills being thrown out of helicopters and falling to the ground that it conjures up. It’s all very Hollywood in a way that, say, buying bonds on electronic screens is not.

However in these latest instances it’s the politicians leading the charge. We are not sure whether that would happen in somewhere more fiscally conservative, such as Northern Europe, or whether it would fall on the shoulders of the European Central Bank. Hopefully, we will not need to find out.

Has the measure worked in the past? The most often cited example of the policy in action comes from Japan, which in 1999 dolled out consumption vouchers that people had to spend within six months. The results on that occasion were far from staggering.

Will it work now? We haven’t a clue. Some say officials should just cut taxes instead. Maybe, but that is far less exciting. It might all depends on how the policy is designed and whether people think more trouble is in store (when they often decide to save one-off payments instead). But if the virus continues to haunt us consumers in the weeks and months ahead, expect more authorities to try it.

*We’d add, as some have pointed out on Twitter, that it matters how helicopter money is financed and whether it leads to permanent money creation. We don’t know if time will prove this a temporary measure, with the Hong Kong authorities later recouping the funds, or whether it will prove a more lasting form of money creation. We’d also point out that while QE was supposed to be temporary, we’ve yet to see see most central banks even try to shrink their respective balance sheets. 

Well, exactly. It’s not helicopter money if it comes from government bond issuance. Australia did that in the GFC. It needs to come from the central bank as freshly printed and spewed cash.

In the Aussie example it worked a treat. Though, admittedly, was no virus zombie apocalypse to keep poeple at home.

David Llewellyn-Smith
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