Maybe Free Money Isn’t a Bad Idea After All

Ryan Cooper begins his piece in the new Washington Monthly magazine with a straightforward pitch:

How would you like to get $2,000 in free money today, fresh off the government printing presses? And what if I told you it wouldn’t just be a nice windfall for you and your friends and family, but that we’d do it for all Americans on an ongoing basis, and that doing so would solve our crippling problem of mass unemployment?

Not long after the financial collapse in September 2008, my friend Duncan Black began recommending that then Federal Reserve Chairman Ben Bernanke should just throw money from helicopters. Despite the fact that Mr. Black is a Brown-educated economist who I personally respect a great deal, I thought his recommendation was one part utopian and one part delusional. I no longer think he is delusional, and Ryan Cooper’s piece explains why.

Black got the idea from Milton Friedman, through testimony given by none other than Ben Bernanke himself.

Milton Friedman suggested that monetary policy could never fail to cure mass unemployment, because as a last resort the central bank could just drop cash out of helicopters—an enticing analogy that former Federal Reserve chairman Ben Bernanke borrowed in a 2002 speech, earning himself the persistent nickname of “Helicopter Ben.”

It was Black who introduced me to the term “Helicopter Ben,” which he initially used derisively as he watched him preside over the Housing Bubble. After the bubble burst, Black began urging Bernanke to live up to his moniker, writing in the USA Today that “The Federal Reserve should give people free money.”

The only potential risk of this is increased inflation, though higher inflation is a potential consequence of any expansionary monetary policy, and the Fed has demonstrated its ability to reduce inflation when necessary. In any case, an additional bit of inflation would be welcome right now, as it would reduce the real values of fixed rate mortgages and help to decrease the number of “underwater” borrowers.

The Great Recession, with its long period of extended high unemployment rates, has caused unnecessary economic hardship for millions. Remarkably, there’s a simple way to help people and improve the economy. Even more remarkably, we aren’t doing it.

If you are like me, you learned about German hyperinflation in the 1920’s at a relatively young age, and you probably were taught that the hyperinflation was caused by the overprinting of money. The idea is simple: the more units of money there are, the less each individual unit is worth. After all, printing money doesn’t create wealth.

But that may not be true. As Mr. Cooper explains, the key to a healthy economy is strong aggregate demand:

The key economic idea undergirding this policy idea is something called aggregate demand, which, stated simply, is the total amount of spending in the economy. During a financial crisis, aggregate demand goes down, since newly unemployed workers have less money and people who manage to keep their jobs reduce their spending out of fear. When people spend less money, sales fall, and businesses are forced to lay off workers, who then spend even less money, and so on. In other words, money goes in circles: my spending is your income, and your spending is my income. If we all simultaneously cut back on our spending—if aggregate demand declines—then everybody’s income declines, too. That is, very crudely, what happened during the Great Depression, when there were millions of perfectly able workers desperate for jobs, while perfectly functional factories lay idle due to lack of customers. It’s also what has been happening, to a milder degree, in our economy since the 2008 crisis.

The government can increase aggregate demand by increasing spending and/or by lowering taxes and fees. In the former case, they replace absent consumers and give businesses someone to sell to. In the latter case, they can let consumers keep a little more of their money in the hope that they will spend it. The more money there is in the economy to buy stuff, the fewer people will be unemployed, the more revenue will come into the treasury, and the less money will go out for things like unemployment insurance and food stamps. Unfortunately, whenever the economy takes a sharp turn for the worse, the natural political reaction is to ask the government to tighten its belt like everyone else. What we wind up with is a movement that demands governmental austerity and claims that it has been Taxed Enough Already, despite taxes being at the lowest level they’ve been since the Eisenhower administration.

It may be politically difficult, but the basic economics here aren’t controversial among economically-literate people. Somehow, someway, more aggregate demand must be created if we are going to succeed in lowering the persistently-high unemployment rate.

Cooper details four plans for solving the problem, all of which are responses to the failure of the existing tools in the Federal Reserve’s toolbox to function as they used to.

The first is to push interest rates below zero. The idea here is fairly simple. If the problem with our economy is framed in terms of people trying to save too much relative to their spending, then negative interest rates would make saving money expensive. If you kept cash in a savings account with a negative interest rate, you would actually lose money. There are a few major problems with this idea, one of which is cultural. We Americans consider saving virtuous; a Fed policy that punished savers would simply not go over well. Another problem is that if interest rates on money were sharply negative, investors might just pour their money into commodities like wheat, oil, or copper as a store of value, which would keep those raw materials from socially positive uses and be tough to regulate. Yet another problem, which the economist Miles Kimball (an advocate of this idea) points out, is that if we really wanted to make this work, all money would have to be subject to interest rate fluctuations, which means we’d have to get rid of paper money. (If everything were electronic, there would be nowhere for savers to hide.)

The second major policy option, championed by International Monetary Fund economist Olivier Blanchard, is functionally very similar to the negative interest rate proposal, although it’s a little sneakier. Right now, the Fed targets inflation of 2 percent. Raising the target to 4 or 5 percent (assuming it could be achieved) would discourage savings and promote spending in the same way that negative interest rates would, but without the probable outrage at having money subtracted from one’s bank account.

The third policy option is known as nominal gross domestic product targeting, the major proponent of which is the economist Scott Sumner. The idea is all about self-fulfilling expectations. Recall that the central bank owns the printing press, so it can create arbitrary quantities of dollars. By making a pre-commitment to keep the economy on a particular spending trajectory, self-fulfilling collapses in spending would not happen. Something similar to this policy seems to have kept Australia and Israel out of the Great Recession. But in order to sustain such a policy, the Fed might have to intervene in the economy quite frequently, and then the distributional consequences could be serious. Quantitative easing, for example, helps push up asset prices (the stock market has regained all the ground lost since 2009 and then some), which disproportionately benefits the wealthy.

The fourth and final policy proposal on the table is what I’ll call the “helicopter money” option. It too is fairly simple. Under such a policy (which could be combined with aspects of the first three), every U.S. citizen would receive a regular payment, in the form of, say, a check from the Internal Revenue Service. The amount of each check would change depending on the health of the economy, but it could be fairly substantial during times of economic slack. To jar us out of our current slump, for instance, I’d start with payments on the order of $2,000 per person. These checks would arrive on an as-needed basis, depending on the state of the economy.

When I look at those four options, none of them appear particularly viable from a political perspective, but, perhaps for that reason, the helicopter option no longer seems like a radical outlier. Simply put, the tools that have more or less worked in the postwar era are out of juice. Interest rates are at their lower bound, and Congress is incapable of delivering fiscal stimulus. Workers can’t borrow more money, and they’re getting an ever-decreasing percentage of the wealth created by productivity gains. Under the circumstances, there is no simpler way to pump up aggregate demand than to simply throw money at people.

Cooper argues that conservatives may warm up to this idea, but not until they are put back in power and charged with fixing the economy.

Democrats should be for it because it is straight-up economic stimulus, writ large. And Republicans should be for it because it is the stimulus option that’s most in line with conservative values. To be sure, a whole lot of right-wing conservatives will object to the very notion—government checks give them the willies. And for conservatives with the strongest tendencies toward gold buggery, who are already freaked out that the Fed’s quantitative easing is debasing the currency and setting us up for hyperinflation, the idea will never be in favor…[but]

…The helicopter money policy, by contrast, keeps government almost completely out of the picture. It distributes resources directly to citizens, with no limits on how they can spend it, thereby strengthening individual choice and the private sector, not government bureaucracies. It’s a stimulus Milton Friedman could love. And if everyone gets the same-sized check, there’s not even a concession to the god of progressivity—it’s like a flat tax in reverse! There will be a Republican president again someday, and as we’ve seen, it is highly likely that government will face the same weak growth and high unemployment we face today. This is a tool as friendly to the conservatives’ ideology as they are likely to find.

Giving people free money still sounds crazy and utopian, but it seems like the most rational and plausible option left to us.

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Martin Longman

Martin Longman is the web editor for the Washington Monthly. See all his writing at