Helicopter Money? It's Really Not a Bad Idea.
In early 2016, as Distinguished Scholar in Residence at the Brookings Institution, former Federal Reserve chairman Ben Bernanke authored a piece advocating the Federal Reserve use helicopter money during extreme downturns where inflation is absent. Part of a series titled “What tools does the Fed have left?”, the piece looked at various unconventional monetary measures that could be deployed if traditional monetary policy proves ineffective.
Most hear "helicopter money" and envision someone throwing cash out of a helicopter to consumers down below, but its merely a reference to a piece Milton Friedman wrote in 1969 illustrating how one should interpret an increase in the money supply. Today's economists use it to describe a scenario where a government entity issues money directly to its citizens as a way to stimulate the economy. Bernanke advocates using helicopter money, however in a more fashionable sense.
In what he calls a Money Financed Fiscal Program (MFFP), Congress either cuts taxes or increases spending, and the Fed finances these measures by permanently increasing the money stock. Basically, Congress cuts taxes or spends money, and the Fed pays for it. Now I know some of you are thinking this is a ridiculous proposal, but it’s actually quite brilliant if implemented correctly. It merely adjusts the way in which the Fed creates and circulates money. Sure those on the economic left, myself included, would rather the Fed increase the money stock and send checks directly to the taxpayer (i.e. real helicopter money), but Bernanke’s MFFP is more politically doable. It's not as sexy, but it's capable being supported by more than a handful in Congress.
As you may know, the Fed, via four rounds of quantitative easing (QE 1, QE2, Operation Twist, and QE3), increased its balance sheet increased from $800 billion to over $4 trillion during the recession. Many have asked, "where did the newly created money go?" Well, in order to stimulate investment, the Fed lowered its fed funds rate to essentially zero, but as the economy continued to struggle (unemployment was still historically high and disinflation had turned into outright deflationary pressure), the central bank purchased liquid and some not so liquid bonds to help bring down long term interest rates. Most notable were the purchases of long dated treasury bonds. The hope was that doing so would spur investment, thus increasing aggregate demand.
But looking back, most economists would agree that the whole quantitative easing program had mixed results—QE1 was extremely successful, the rest not so much. So as a thought exercise and perhaps as an instruction manual for future chairpersons, Bernanke showed that, in a liquidity trap, there are still many tools left in the Fed’s toolkit.
In today's world, during times when deflationary pressure is widespread, the Fed is often looked at to jumpstart the economy. Sometimes Congress can simply increase domestic spending, cut taxes, or do a combination of both and achieve a policy driven recovery. But sometimes, like in 2008, even those measures prove ineffective and politically hard to swallow. If you remember, after the recession ended (but the country was a long way from full recovery), Congressional republicans favored implementing austerity measures (tax increases and spending cuts) similar to those adopted by countries in Europe (which proved to in fact increase deficits and debt) as a way to tighten our fiscal belts and encourage investment. Democrats, on the other hand, felt the best thing to do was increase domestic spending through creating shovel ready programs targeted for the middle class and working poor. As a result, congressional infighting ensued and the Obama administration signed piecemeal legislation that wasn't exactly the New Dealish stimulus we needed.
But Bernanke’s MFFP offers a solution to such stalemate. If the economy needs inflation to get back on track, and Congress doesn’t want to borrow money because they believe it’s impudent to “pass on debt to our children and grandchildren,” then just have the Fed create new money and give it to Congress to spend. The treasury sells bonds to the Fed; the Fed uses newly created money to buy them; Congress implements stimulus. Piece of cake. There is no increase in indebtedness since Fed profit (i.e. interest payments on the bonds from the Treasury) is legally required to be sent back to the Treasury.
Now, it is worth noting that a crisis similar to 2008 isn’t likely to happen again for quite some time. But if it does, monetary policymakers need to be ready for the worst. And the last thing the country needs to worry about during a recession, or even during recovery, is political infighting over where to find the money. While Bernanke’s MFFP does leave it up to Congress to decide how to spend the money (another issue altogether), he does offer a novel approach to Fed policy when constrained by the zero lower bound and Congress is dragging its feet. Hopefully we will never need a MFFP, but it's nice to know there are more tools available, if we do.