Helicopter money has dropped into the discourse once again

Helicopter money is in the news again. The original concept was from Milton Friedman. In a 1969 paper he asked what might happen if banknotes were dropped from helicopters, and people knew it was a one-off event. In his case it was a thought experiment, but it has been put forward since as a serious policy proposal. 

The thinking is that if the economy has taken a hit, as happened with the corona virus, then a stimulus will be needed to help it restart and move into growth territory. The idea is that a consumer boost might be stimulated by giving people free money, as if dropped from helicopters. If it produces extra spending, businesses will take up the economic slack, and production will be increased, with a positive effect on jobs and wages. 

This might be fine in theory, but does it work? There have been tests of a kind, done under George W Bush in response to the 2008 financial crisis, and later under Obama. The evidence is open to interpretation, but there are indications that if people receive one-off cash sums, they don’t tend to spend it, and therefore don’t create the desired stimulus. They save it instead, with richer people adding it to investments, and those lower down using it to reduce debt, such as paying down credit card balances to reduce monthly repayments. 

The supposition is that if people think it is a once-only, not to be repeated, they don’t want it to go without trace. They behave differently, though, if the extra money comes not as a lump sum from the government, but as an increase in the size of their wage packet. If their tax rate and social security taxes are reduced, they see more in their wage packet, and they tend to spend it instead of saving it.

The reasoning is based on psychology. If they think this is now a regular increase, to be repeated every month, they are more inclined to spend it, knowing there’s more coming along. They save the one-off, thinking that’s all there is, but they spend the extra funds if they think there’ll be more where that came from.

The lesson seems to be that helicopter money can work to kick-start an economy fallen on hard times, but not if it’s dropped all at once in a single lump sum. Instead of that, if those helicopters drop regular sums into monthly pay packets by way of lower income tax and National Insurance rates, people will be readier to spend their new-found wealth, giving businesses the sales boost that can lead them to increase production and take on staff. 

So yes. After the epidemic we might get those helicopters flying, not dropping one-off lump sums to everyone, but dropping them extra spending power by leaving them more in their pay packets. Milton Friedman didn’t suggest helicopter money as policy, but he’d certainly have approved of lowering taxes.