What the Economy Needs Is a Helicopter Drop 13 comments
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During the past half year, the concerns of the Fed have shifted from worry about commodity-driven inflation (recall $147 oil in July) to its polar opposite--fear about the onset of deflation (coinciding with oil falling below $40 today). With short-term interest rates now lower than the targeted 1% rate, traditional monetary policy measures have become less potent and the U.S. economy is more susceptible to descending into a "liquidity trap."
As mentioned by Ben Bernanke in a 2002 speech, one way out of such a predicament is a "helicopter drop"--effectively dropping money from helicopters to consumers and businesses below in order to thwart deflation, stimulate spending and prevent economic stagnation.
Consumer-Based Crisis
The financial crisis we are facing today first surfaced a year and a half ago as a consumer-based subprime mortgage problem that soon developed into an institutional credit crisis, morphed into a pervasive illiquidity dilemma, and earlier this week was, long after the fact, officially named an economic recession that began 12 months ago!
As parallels with the Great Depression of the 1930s and Japan's stagnant economy of the 1990s grow more conspicuous, the gloomy predictions of NYU economist Nouriel Roubini loom larger and closer. We are now one year into a recession that, according to Roubini, will most likely extend at least another year. What began as a seemingly minor problem has expanded into a full-blown, global financial crisis that could very well extend into 2010, becoming the most severe economic downturn in the adult lifetime of anyone alive today--unless, of course, our policymakers take appropriate and sufficiently drastic measures to stabilize the financial system.
Bush, Bernanke and Paulson have tried to fix the problem with a whole series of measures--a moderately sized consumer stimulus package in early 2008, bailouts of financial institutions, successive rate cuts, capital infusions to strengthen bank balance sheets, an increased limit on bank deposit insurance, government backstops on portfolio asset losses, purchases of illiquid assets, etc. So far, nothing has worked as well as anyone would like, and our faltering economy and plunging real estate and stock markets continue week after week to drive each other lower, in a relentless asset deflation spiral that is dragging down even the endowments of elite institutions like Harvard.
Come January 20, President-elect Obama (incidentally, a Harvard Law alumnus) and newly appointed Treasury secretary Geithner will replace Bush and Paulson, respectively, and we can only hope that the stimulus package in Obama's vision for the future of our economy will be large enough to usher in real change in a favorable direction.
As for the root cause of our economic problems, the consensus opinion among economists and laymen alike implicates overleverage, basically too much debt and too little savings, particularly among consumers. Everyone agrees that saving more would be prudent for any individual consumer facing an uncertain future, but when aggregate consumption falls, our economy unfortunately enters a vicious circle, as reduced consumer demand (from saving more) leads to reduced delivery of goods and services and higher unemployment, which, in turn, reduces demand still further. To halt this vicious circle before it does further collateral damage to our fragile economy, we need to find a practicable way to provide debt relief at the consumer level--as soon as possible. This is where the helicopter money comes in.
Helicopter Money Initiative
As Bernanke pointed out in his speech, even when monetary policy by itself becomes ineffective, there are a number of alternative ways to combine monetary policy with fiscal stimulus to prevent deflation and encourage economic growth, despite being in a near-zero interest rate environment like the one we are experiencing today. These less traditional, more innovative measures are:
- Broad-based tax cuts
- Increased purchases of goods and services by the government
- Purchase of private assets via the Treasury
- Increased direct transfer of money from the government to the private sector
President-elect Obama is already planning to provide tax cuts (measure 1 above) to at least 95% of Americans and some talk of reducing payroll taxes is also circulating. The large (maybe $1 trillion?) stimulus package (measure 2) currently under discussion in Congress will hopefully be ready for signing by inauguration day. Purchase of private assets (measure 3) is already underway in the commercial paper and mortgage-backed security markets, but practical limitations (i.e., how to price highly illiquid instruments) have prevented the proposed wide-scale purchase of toxic mortgage assets that was the main objective the initial TARP plan. Consumer stimulus packages (measure 4), along the lines of the one implemented in the first half of 2008, work most directly and immediately to maintain GDP growth and, for this reason, deserve further serious consideration.
Because near-term inflation is no longer an issue, policymakers now have the luxury of taking the most aggressive actions possible to turn our economy around. With the financially stressed, heavily indebted American consumer so central to our problems, it makes sense to implement an enhanced version of measure 4--this time in much larger size. Just as people suffering in the aftermath of a natural disaster need immediate and basic emergency assistance, prior to tax-related benefits and government spending to rebuild infrastructure, our severely damaged economy needs a very significant injection of helicopter money delivered directly to the overleveraged consumer.
To achieve the quickest and most direct money transfer to the consumer, here's what our government should do:
Beginning during the first half of 2009, write checks to every household filing a tax return, in the amount of, say, $10,000 per dependent (taxpayer, spouse, children, other household members), which is an order of magnitude larger than the consumer stimulus in early 2008.
Offhand, it might appear that this type of seemingly frivolous fiscal policy would be a desperate and highly wasteful use of taxpayer money that could spark a new, undesirable bubble. However, given the precarious state of our economy, such a radical measure stands a greater chance of doing more good than harm and has many benefits:
- Immediate and Direct Impact: Helicopter money provides an immediate stimulus to consumers and businesses, directly benefiting Main Street (a refreshing change after all the prior rescue plans with trillions of dollars going to Wall Street financial institutions);
- Reduced Consumer Leverage: Consumers will use some of the money to pay down mortgages, credit card debt, car loans, etc.;
- Increased Consumption: Consumers will use some of the money to do what consumers do best, i.e., buy products and services, which will immediately boost sales of businesses large and small, preventing further job destruction;
- Market Support: Some of the money will be invested in the stock and real estate markets, relieving downward pressure on asset prices and helping to create the market bottom that is so badly needed to build consumer and investor confidence and turn our economy around;
- Global Economic Growth: Reduced consumer leverage, increased consumption and increased investment will all boost the U.S. economy, which in turn will help revive the global economy.
With the U.S. population at about 300 million, this new consumer stimulus package of $10,000 per person would total $3 trillion, which is about four times the $700 billion TARP package but less than half of the approximately $8 trillion in cumulative funds the government has already committed through all of the various measures announced. The net effect of this helicopter money plan would be to shift up to $3 trillion of debt from the consumer to the government. This would reduce leverage at the consumer level and boost aggregate demand to stave off a deflationary spiral.
As Professor Roubini points out in this interview, the basic structural problem we face is a global supply glut cannot immediately be reduced even though demand has fallen. Therefore, at least in the short run, the severity of the current crisis justifies "pulling out all stops" to create the demand necessary to meet existing supply. A large helicopter drop appears to be exactly what is needed to stabilize our economy and sidestep the negative impact that further deterioration in employment and the housing and stock markets will otherwise bring.
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This article has 13 comments:
The efficiency gain is from 20 to 200 miles per gallon. Building the infrastructure will change the lifeblood of our economy from oil to ingenuity.
HAHAHAHA. If you want to stimulate things, why not mail everyone a million dollars? Then, they can pay off all their debts, the vast majority of us own less than a million dollars!
Then we have happy days!!! Zimbabwe should blush as they consider their 23,000% inflation. We will be #1.
Frankly, that foolish $600 giveaway last spring exactly coincided with a sudden and catastrophic surge in the price of everything we need to buy to stay alive; food and fuel shot up.
I calculated that nearly every penny of that boon I got went to the oil companies and buying food. I paid off no debts, put up no savings and the only changes I made with my purchases was to make fewer trips and buy less stuff!
This is why such things fail: they always fail. If the government goes into debt in order to pay my debts [I have very few debts] then we end up not with slow inflation in several years but INSTANTANEOUS inflation.
Worse: most things people buy these days are either produced overseas by American corporations or if made in America, are made in foreign-owned factories. So the profits flow out. Or if the profits are retained, the balance of trade is made worse.
So giving people money to spend in our very foolish 'consumer society' only makes our balance of trade worse. It leads to nearly direct hikes in energy costs. And puts the entire US government deeper into debt.
There are two major things wrong with our economic system:
1. A government running all the time in the red.
2. Trade that is always in the red and getting worse each decade.
If we don't fix these two things, WE GO BANKRUPT. We are being kept afloat not because Americans are eager to buy US government bonds but by international corporations, offshore pirate funds and outright potential enemies and very dangerous trade rivals in Asia, they are buying this debt.
To hand over a hunk of money to US consumers to spend on imports is totally insane, utterly useless and downright suicidal. The inability to keep in mind, our massive trade deficit, which over the years has equalled and is now surpassing our budget deficit----this is typical.
Mr.Sakazaki is too immature to be making comments about international financial matters if he imagines that having a government take on many trillions in debt to undo too much lending.
This has been proven in the past, decisively, as futile. Only if a government has NO debts or very little, dare it do such a thing. And ONLY if it has huge trade barriers like a certain country called 'Japan'. I call Japan 'Fortress Japan' for a reason: few foreign corporations last very long, trying to pry open that particular clamshell.
And the Japanese people own over 85% of their government debts. The US people own less than half of our own debt and it is dropping like a rock. To comment on these sorts of matters, we must always keep the much bigger picture in mind.
Russia went bankrupt. England went bankrupt after WWI. Germany and Japan went bankrupt and tried to fix that with WWII. That was a total failure. Rome went bankrupt nearly 2,000 years ago. Empires can and do and nearly inevitably go bankrupt because they get very arrogant about not balancing the books and spending carefully.
What is at stake here is not how comfortable we are but whether we will survive as a nation, as an empire. I strongly suggest we begin negotiating with our supposed allies like Japan and Europe, them taking over paying for their own defense. They are certainly wealthy enough to do this.
We should not be spending half a trillion a year, patrolling the Muslim world and protecting Europe and Japan! This is utterly insane. Then, we can cut the Pentagon's budget by two thirds, cease using the military/industrial complex as our engine of wealth and figure out how to be an industrial nation, not a consumer society. With tariffs and barriers to protect our industrial base and keep our foreign powers.
This harsh prescription is the only solution. We can't live off of military production which is today about 60% of our industrial base. This is cannibalizing our capitalist society.
Thank you
And how, pray tell, did we get so overleveraged and overindebted ? By a decade long "helicopter drop" of easy, cheap, unlimited credit by el Maestro, Alan "Bubbles" Greenspin.
Our current predicament was CAUSED by too much cheap money. What financial institution would have given out liar's loans if money was scarce ? Who would have borrowed $Trillions on carry trade margins if interest rates had been set by the market ?
Too many financial "experts" are blinded by economic theory and the inability to see what is plain fact. Every part of the current mess is a result of flooding the nation and the world with too damn much cheap money. And the idea that all can be fixed by throwing more cheap money into the mess ranks right up there with spiking the coffee at the AA meeting.
Are you NUTS ? Our biggest problem at this point is we have way too many financial experts who've drunk waaay too much of the koolaid, and have forgotten the concept of UNSUSTAINABLE.
A decade-long tidal wave of unlimited cheap money created an unsustainable condition. This is Humpty Dumpty, off the wall. It's time to clean up the mess in the bankruptcy courts and stop clicking our heels.
Lloyd, you propose to make maximum use of the inflationary aspects of supply side and Keynsian theories simultaneously. This is, to my mind, overkill. I feel this overkill is like giving massive steroid treatments to someone who has suffered serious injuries in an auto accident. Some anti-inflamatory treatment may be indicated but overdoing it does not significantly change the one thing needed for recovery: time. And the overtreatment can have serious negative after-effects.
My net on this: we need some stimulus to cushion the impact of the fall from the burst bubble, but too much stimulus can not avoid the fall from the bubble and the necessary restructuring. Too much stimulus can merely give us new illness on the other side of the trough.
The problems: how much stimulus is enough? What form(s) of stimulus is (are) the best?
Bill, one form of stimulus is infrastructure buildout and repair. Personally, I feel this is one area of activity that should be implemented (expanded). Whether your PRT project is the single best investment to make is open to debate. Electrical grid modernization and expansion, alternative energy (domestically produced), improved long distance rail (for freight and passenger), improved education and medical infrastructure, as well as bridges and highways are among the competitors for investment. Cost/benefit analysis is needed to establish priorities. The possible unintended consequences of all actions should be assessed IN ADVANCE.
Elaine, I recognize your concern about bankruptcy, but I do feel that collapse (in the next few decades) is not probable. However, high inflation, a la the late 1970's to early 1980's is a real risk post 2009-2010. I disagree with your assessment that the best course is to reduce military spending by 2/3. Military strength and financial security have some correlation in the middle of the spectrum that ranges from North Korea (over-committed to military expenditure) to countires like Mexico (too little military strength to even control internal hoodlums). We need to stay away from these extremes. We can reduce our military expenditures, but by less than you propose. We definitely can save money by avoiding unnecessary extended military operations like Iraq. We can also save, as you suggest, by insisting that other countries reduce their dependence on us and assume more of the cost of their own defense. However, I believe it would be a mistake to try to become a "Fortress America".
We can make savings in the military budget, freeing capital for more productive uses. I just think the savings are more at the margins than at the core of our military.
There should be more in-depth discussions like this on SA. Some of the one-liners are entertaining (and ocassionally insigthful), but are too often superficial.
Wouldn't that be THE solution to both economic and other problems???
I have a proposal: "NFL's Detroit team is atrocious this year. Why don't they simply trade all their bad players to the Lions?"
What exactly is your fairy tale conception of "the government"? Is "the government" some kind of disembodied entity floating above the troublesome entanglements of debt and solvency? Isn't the government, at the end of the day, all of us, and all of our descendants? Isn't the government merely the sum total of all the consumers, present and future? The proposal you make, like ALL the proposals of the past several decades, would accomplish, simply and precisely, the transfer of what should be our own debt burden, with its simultaneous augmentations (via interest and foregone investment), to our children and grandchildren. Along with Bernanke, Paulson, etc., I say you are making an IMMORAL proposal: one that only a chicken, only a whining, sniveling worm of a person, would make consciously. I don't know you, and I hope that you are motivated by ignorance, not by a desire to foist your own obligations onto others, but I also hope you come to understand your proposals in this proper light. America can not long survive with proposals like yours.
Now wouldn't that be a twisted irony. :o doh!
Now wouldn't that be a twisted irony. :o doh!
Why not make millions of jobs and secondary jobs by use of ensuring clean and unlimited concentrated solar themal energy!!!
That is the only way out!!! If we do not somehow make this energy transition, there will be no jobs, and the world will spiral down into the depths of hell. China will become broke and there will be WW3...