Spurred by Milton Friedman, the concept of “helicopter money” – under which central banks would distribute money to citizens – is making headway in economic debate, but is often confused with the idea of basic income. This article intends to clarify the distinctions and overlaps between these two concepts.
“Let us suppose now that one day a helicopter flies over this community and drops an additional $1,000 in bills from the sky, which is, of course, hastily collected by members of the community. Let us suppose further that everyone is convinced that this is a unique event which will never be repeated.”
When Milton Friedman wrote those lines in 1969, he probably never thought that “helicopter money” would become a buzzword in the 2000s post-crisis era. Friedman’s thinking was indeed quite radically unorthodox. How did the prominent neoliberal advocate come to suggest people should receive free money and that we would all be better off as a result? Far from philanthropic thinking, Friedman was in fact simply trying to illustrate his theory of the neutrality of money.
What would happen if we were to drop freshly printed notes over a population from a helicopter, just like rain? Nothing other than inflation, suggested Friedman, one of his main beliefs being that any increase in the money supply automatically leads to a proportional increase in consumer prices. Through this thought experiment, Friedman drew the conclusion that central banks can always avoid deflation by producing money and causing it to circulate in the economy.
In fact, however, the idea that we could create money and distribute it to the people goes back much farther than Friedman. In 1924, British engineer Clifford Hugh Douglas elaborated his theory of the “social credit”, its main component being the distribution of a monthly “national dividend” generated from money creation, the level of which would vary according to national production.
Although Douglas did gain some notable following at the time, especially in Canada, the idea was ultimately consigned to the oubliettes of history, leaving Friedman with the alleged paternity of the idea, centre-staging the helicopter analogy with it.
The concept wasn’t much thought of for 30 years following Friedman’s discussion, however, and it might have been forgotten again if it hadn’t been brought back to public attention in 2002 by one of the most influential voices of monetary policy. In a famous speech, the Federal Reserve chair Ben Bernanke alluded to this concept, making the case that, under important deflationary trends like that seen in Japan, the central bank could resort to helicopter money-style instruments to achieve its 2% inflation target.
Yet, far from initiating serious consideration, these remarks only caused Bernanke to endure mockery and “helicopter Ben” as a persistent nickname.
This is probably because the concept runs counter to the whole ideological turn of the 20th century in terms of monetary policy. Starting from the 50s, money creation has been gradually shifted from the sphere of public sovereignty into the quasi-monopolistic realm of the private banking sector. This process ultimately resulted in the outright prohibition, in most jurisdictions, of monetary financing of government budgets. Helicopter money sounds very much like a reversal of this trend, and a dangerous one to the ears of many mainstream economists.
An alternative form of money creation
There is recurring confusion around the exact meaning of helicopter money, which is probably caused by the simple fact that the alleged proponent of the idea, Milton Friedman, never seriously intended to implement it.
Thus, the concept finds itself often described in very diverse terms, ranging from the old-fashioned monetization of public debt to its purest form (and probably the one Friedman actually had in mind): the distribution of money directly to all citizens by central banks. The latter will be the one we assess in this article.
Helicopter money can thus be defined as the creation of money, without corresponding assets, and its distribution into citizens’ bank accounts.
It is therefore an alternative form of money creation, which is strictly different from the most common way in which money is created today: through the banking sector’s credit issuance functions. It is worth clarifying this point here: as the Bank of England has clearly demonstrated, today’s money supply is almost entirely controlled by private banks issuing credit into the economy. This is sometimes referred to (somewhat misleadingly) as the “fractional reserve banking system”. Although the benefits and pitfalls of such an arrangement are subject to never-ending controversy between academics, the way in which this system functions is nowadays largely undisputed.
The key advantage of helicopter money resides precisely in the fact that it would bypass banks as money creators, and is therefore one way for the central bank to maintain the money supply regardless of whether banks play their role as suppliers of money into the economy. In its purest form, helicopter money also bypasses governments’ treasuries, and is therefore not legally prohibited under the monetary financing rule (Art. 123 of the EU Lisbon Treaty).
A second clarification is also required at this point: helicopter money is also different from the so called “quantitative easing” (QE) policies that have been implemented by several central banks, although they pursue a similar objective: boosting the money supply to avoid deflationary pressures.
Under QE, central banks create money (the so called central bank’s reserves) and mobilize those reserves to purchase financial assets on a large scale and over a certain period of time. Usually, central banks purchase sovereign bonds with the intention of pushing down interest rates on those bonds, to encourage the financial sector to move away from investing in sovereign bonds and to instead lend money to riskier projects under the so-called “portfolio rebalancing effect”. This type of money creation is therefore targeted to the financial sector, with assets as collateral on the central bank’s balance sheet and, more importantly, is a temporary operation: the central bank destroys the money once the bonds it holds come to maturation.
Helicopter money is therefore very different from QE. In fact, it is precisely because of the many shortcomings of QE that helicopter money is being presented by a growing number of people as a superior alternative.
Helicopter money as an alternative to quantitative easing
The assessments of QE programmes in the US, Japan, and the UK have been subject to a wealth of contradictory conclusions. In Europe, the ECB’s QE programme was first applauded as progress, after years of speculation and resistance to implementation of QE when it was desperately needed – when the Greek crisis hit. However, it is becoming clear that QE recipes, in Europe and elsewhere, never really do the trick.
Generally speaking, QE does cause lending conditions to improve, but it does not automatically lead to an increase in bank lending. In other words, the “transmission channel” of monetary policy does not work so well under QE. To be fair, this is not the banks’ fault: there is little banks can do when conditions are so bad that virtually no companies or households want to take on debt because the economy is already over-indebted.
Economists talk of a “liquidity trap” whereby injections of cash into the private banking system by a central bank fail to stimulate the real economy. QE doesn’t overcome this trap.
Even worse, QE is often accused of creating asset bubbles and increasing wealth inequality, because the massive injection of money is narrowly targeted towards financial assets disproportionately owned by the rich. The Bank of England itself estimates that its own QE programme has increased by 40% the wealth of the richest 5% of Brits.
Against this background, helicopter money is experiencing a comeback, perhaps with even more strength than Friedman could ever have imagined. Since the start of the crisis, prominent economists and commentators, including Martin Wolf, Steve Keen, Anatole Kaletsky, Willem Buiter, Adair Turner, John Muellbauer, Bradford Delong and Martin Sandbu, have advocated for central banks to implement some form of helicopter money. Anatole Kaletsky and Steve Keen almost simultaneously proposed re-branding the concept “QE for People”, which later became the name of a European campaign (for which the author currently works).
The case for QE for People is quite straightforward: since the banking sector is not currently able to “transmit” the central bank’s monetary policy accommodation by increasing their loan’s issuance, why shouldn’t the central bank do it by itself? If the main task of central banks is to maintain inflation at around 2%, then should inflation be persistently under 2%, the most effective way to get inflation back up to 2% would indeed be to distribute money to people so they can spend it.
The debate on helicopter money took another turn when it was mentioned by the ECB’s chief Mario Draghi, under the spotlights of a press conference on March 9th 2016 and later by other senior ECB officials. “Helicopter money is a very interesting concept” Draghi said, while adding that the idea was not yet being considered by the ECB. Whether one thinks this was sincere curiosity or a clumsy statement on Draghi’s part, the fact is this single sentence provoked a historic tide of comments and debate on the idea, including within policymaker spheres.
How about basic income?
Similarities between helicopter money and basic income have led some commentators to offer very confusing explanations, claiming, for example, that Finland was already undertaking a “helicopter money” programme (the basic income experiment).
Undeniably, there are resemblances between the two concepts, as both involve making unconditional payments to all citizens and usually without means-testing. Basic income’s principles of universality and unconditionality can also be found in helicopter money.
Key differences quickly emerge under careful analysis, however. Under a helicopter money regime, there is no clear commitment from the central bank to make payments periodic. Quite the contrary in fact, as most proponents of helicopter money (read the prolific Eric Lonergan for example) are keen to be clear on the fact that this should be an exceptional measure, to be used on a one-off basis, with the possibility (but not the commitment) to renew if necessary.
There is nevertheless some theoretical overlap with basic income. In addition to Douglas, several key advocates of basic income have put forward the case that money creation could be used to finance the benefit, either as a “boot” phase or as a way to supplement the fiscal means to finance basic income schemes. The French economist Yoland Bresson made the case that perpetual low interest sovereign bonds could be used to kick off the basic income in a first stage, thus leaving time for the government to implement all the necessary reforms of the tax-benefit system to make UBI fully functional.
These theories relate to the understanding of basic income as a mechanism of pre-distribution (as opposed to redistribution), whereby basic income is a recognition of the intrinsic value of all participants in society, or even as a common inheritance. If all citizens create value “because they exist”, then it makes sense to “pre-validate” this economic value using money creation. If we are all richer today because of our predecessors’ work and heritage, then one can argue that more money should be introduced into circulation to recognise this added wealth.
These are, however, only marginal justifications today, put forward to support neither helicopter money nor basic income. Beyond some theoretical common ground, the differences between the two policies are most clear when one understands that they pursue different objectives.
Put simply, helicopter money can be framed as a punctual measure (extreme, one may say) with a rather narrow purpose: to stimulate economic activity by boosting people’s incomes under some strict circumstances, that is, when the economy is under threat of deflation.
Basic income, on the other hand, pursues a very wide range of objectives from poverty alleviation to work emancipation, gender balance incentivisation, social protection modernisation, more aggressive redistribution, and so on. In contrast, stimulating people’s purchasing power is certainly not the main argument for introducing a universal basic income.
From those different objectives also stem different institutional frameworks. If the objective of helicopter money’s proponents is merely to stimulate demand, then transfers to citizens is only one practical means by which to achieve this single clear goal. From this viewpoint, it also makes sense to give independent central banks the legal capacity to distribute a citizens’ dividend as a new instrument in the monetary policy toolbox.
If basic income pursues more numerous and complex objectives, by contrast, it then makes sense that it should be the responsibility of elected governments to design and implement it, just like any other fiscal policy.
In conclusion, helicopter money could be seen as one of many “partial basic income” proposals: schemes that share some of the characteristics of basic income but not all of them. Yet given the very clear institutional distinctions just covered, it does not make sense then to associate too closely the two concepts. In this light, it might be more meaningful to refer to helicopter money payouts as “social dividends” or “monetary dividends” as opposed to “basic income”.
Can helicopter money lead to basic income?
Despite all the institutional and practical distinctions drawn above, it is quite enlightening to recognize the political porosity between the two proposals. Helicopter money proponents tend to also favour basic income (though not all do) and vice versa.
This is probably because the two ideas, to some extent, share some common strategic interests and help one another in the struggle for cultural acceptance of each proposal, especially in regards to unconditionality and the disconnection of money from labour.
From a basic income viewpoint, the rise of the helicopter money discussion is a useful addition to basic income’s financing question. Given the fact that central banks can create money, then surely it would be easier to finance a basic income.
On the other side, it is also convenient for helicopter money proponents that the basic income discussion is making headway in the argument for universal payments to citizens: it alleviates an important moral blockage.
Even more strategically, perhaps, there is a case for seeing helicopter money as a necessary step towards the implementation of a fully-fledged basic income policy.
This is a particularly relevant argument when it comes to the European Monetary Union, which is currently deprived of any significant common fiscal policy. Because of this, it will probably take years before we might see something like a eurodividend (an EU basic income scheme financed by an EU budget) as articulated by Philippe van Parijs.
To circumvent this cumbersome and very long-term political route, Slovenian economist Jože Mencinger has repeatedly suggested the use of helicopter money as an “ideal experimental possibility” to kick-start a form of basic income in the EU.
Instead of QE, the ECB could start a helicopter money scheme by giving 200 euros per adult citizen for one year – no strings attached, no taxes involved, simply courtesy of the ECB’s (digital) printing presses. This would involve about one-third of the money printing of that under QE and yet would be more likely to fulfil the ECB’s objective.
If this works and garners favorable public opinion, there would be even greater political momentum for implementing something like a permanent eurodividend scheme. The ECB’s temporary scheme would allow some time for EU policymakers to create the institutional and fiscal infrastructure for such a eurodividend to be functional.
In the long run, nothing forbids us from thinking that the ECB could permanently fund such a eurodividend scheme at a certain level, as Kevin Spiritus and Willem Sas have sketched. Yet such funding cannot be seen as an obligation for the ECB under the current legal framework. More intellectual debate will be required before policymakers come to the conclusion that some form of permanent helicopter money is necessary and desirable.
There is still much work to be done before either basic income or helicopter money can be put in place. However, 10 years after the financial crisis, it is clear that central banks’ models have not delivered as they were expected to. There is a clear mismatch between the massive size of their balance sheet interventions and the bleak outlook for the economy.
There is a growing case that the whole central banking theoretical framework must be revised. Helicopter money is certainly one idea that is usefully challenging the monetary policy status quo. It will surely take another leap of determination and audacity for central bankers to take this step forward, but we should not rule out that it might also be the most pragmatic thing central bankers can do at some point in the future. When things get to this point, the basic income movement must stand ready to play its part in facilitating the move towards helicopter money, while making sure to build upon this gigantic central bank experiment towards a permanent and sustainable basic income.
This article appeared originally on the Basic Income website.
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