Print Money. Mail Everybody a Check. Fight unemployment by giving money directly to American families … America has grown desperate for smart ideas to revive a flagging economy … Ben Bernanke himself famously argued years ago that a central bank should never run out of tools for fighting deflation and depression because, as a last resort, it could always drop cash out of helicopters. That would be fun to watch, obviously, but mailing checks would be a lot simpler. And even though it sounds a little insane, it becomes a more and more compelling idea the more you think about it. – Slate
Dominant Social Theme: Let's get money to the people and the helicopters will provide …
Free-Market Analysis: We've often pointed out that current economics involves transmitting electronic digits from central banks to money center (distributive) banks that then lend out the money or not as they choose.
There is really no difference between putting this money in banks for distribution and providing it to citizen-recipients themselves. And this is what Slate has finally gotten around to suggesting.
But it is a most naïve proposal.
The reason that money is distributed via banks is to maintain the fiction that money (currency) is somehow hard to get and not easily available. Another reason is that those closest to the money spigot derive a great deal of advantage from obtaining money first, before it has been degraded and subject to price inflation via further circulation.
The article recognizes neither of these facts but does do us the favor of recognizing the monetary system for what it is, merely a way of distributing electronic credits via a cumbersome supply chain. Here is more:
Sunday night in the Financial Times I read one of the most desperate: an op-ed by UCLA economist Roger Farmer arguing that the Federal Reserve should deliberately re-inflate a new asset price bubble to goose the economy. It's a pitch too far for me, but the conclusion is driven by two fairly reasonable arguments. One is that the economy continues to suffer from weak aggregate demand. The other is that reviving the economy through large-scale public works expenditures is likely to be ineffective and inefficient. The former is clearly correct —unemployment remains high and inflation low—and though the latter is somewhat controversial, I think it's true. Farmer's bottom line that he'd "prefer to see the creation of more private sector jobs, not more government jobs" is right on. But doing this by trying to engineer a stock market boom is insane. We should do something much simpler: print up a bunch of money and send it to American households.
The best thing about helicopter money is that it's largely agnostic as to what lies at the root of our problems. As long as you think there's some level of excess capacity in the economy, putting cash in the hands of households will help. Most obviously, if people had more money they'd buy more stuff. That means more jobs making, transporting, and selling the stuff. But not everyone would spend all of their helicopter money. Lots of families would use it to help pay off debts already accumulated, which would help speed the process by which we climb out of the debt hole of the boom years. Prosperous families without debts would just save a large share of their money. Increasing the size of the savings pool should drive borrowing costs down for firms that want to expand, while pushing up the value of stocks and other financial assets.
Compared to fiscal stimulus plans, this has many advantages. One is that it makes the budget deficit go down rather than up. Tax revenues will rise as economic activity speeds up, and the need to spend money on unemployment insurance and the like will fall if people get new jobs. (In many contexts, handing out money is an underrated tool for the long-term social good: Children in a Native American tribe that got revenue from a new casino had much better mental health than children whose families didn't get the unexpected bonus.) It's also really fast. Stimulus designers necessarily end up torn between a desire for speed and a desire to spend money in smart, low-waste, high-value ways. Cutting checks is all about speed, and it lets you consider well-designed investments on a separate track.
We can see from these excerpts that the article is making a sincere pitch for distributing credits directly to the populace. The drawbacks, according to the article, are that it is probably illegal and might be inflationary from a price perspective.
But the article goes on to make the same argument that we have made recently as regards tax collection – that while circulating money might be inflationary, Fed officials have been very clear that they have the power to drain money from the economy should they chose to do so. If so, then there is no problem in circulating currency (electronically or otherwise) to the "people."
Case closed? Not so fast. This argument is a variant of the social credit perspective advocated by various charlatans around the 'Net. It is one we have fought for a long time already. Our reason is simple and has to do with the inherent authoritarian tendencies of such programs.
Central banking itself is a price-fixing scheme providing great power to only a few people who can peg the price and value of money at will. Imagine if these people were now responsible for distributing money directly to the populace. Imagine how vicious and unforgiving – and unfair – the politics would soon become.
The bigger reason that bankers will never distribute money directly to people is because it would disintermediate banks and would strip money creation of its mystery. People would soon realize that money did not come from banks but was simply provided to a fortunate few via the push of a button.
This would be a most worrisome development and thus other options are now being discussed seriously, such as a return to a gold standard of sorts. But the idea that money will be distributed directly to citizens is a proverbial non-starter and it would be most surprising if something like that took place.
The only way to cure the current monetary troubles is to allow free banking, competitive currencies and the free circulation of gold and silver. Private, market-based money is the key to prosperity, historically and currently.
Ironically, if the system continues to break down, we may achieve this sort of money simply via the evolutionary mechanisms of social chaos and the logic of privatization. It won't be an optimal evolution but at least markets will operate more freely than they have in the past.