There is an adage that ‘if you live long enough you see everything’ and this is so true when it comes to monetary policy developments, especially over the past decade. As graduate students in the late 1960s, steeped in Keynesian economics, we were very derisive of Milton Friedman’s policy prescriptions to fight economic downturns. Especially, we looked at the idea of ‘helicopter money’ and chuckled that this would never happen, deflation and economic depressions were not our future. Governments would never need to resort to literally having money fall from the sky -----a metaphor for governments sending out checks to each citizen to encourage spending. But little did we know how prescient Friedman would turn out to be long after his passing from the scene.

So, here we are facing one of the greatest economic threats in our lifetime from a pandemic virus. Today, the New York Times advocates that “the crisis requires an urgent response from the federal government, and the most important step is simple: Send $2,000 to every American, immediately.” In the U.S. there is a growing chorus calling for cash to be distributed directly to individuals. The US debate seems to be about how big a handout is needed to prevent a very serious economic downturn. Japan is also considering direct handouts, and this is a nation that has been the leader in government bailouts in the form of public and private debt purchases for nearly two decades.  No doubt we can expect similar policy discussions to take place in Europe and action to be announced very soon.

Helicopter money is an unconventional monetary response in which individuals receive direct payments from the government to use at their own discretion. It is usually considered as an alternative to the more familiar quantitative easing (QE) which is being deployed by the Federal Reserve, the ECB and the Bank of Japan. We can expect QE to continue while financial markets are being whipsawed worldwide. The QE and now helicopter money are in response to an economy that is in a “Keynesian liquidity trap”. A liquidity trap occurs when, despite interest rates being zero or even negative, individuals and business do not increase their borrowings and the economy remains in recession. We are seeing daily that there are limits to the effectiveness of lowering interest rates on overall aggregate demand.

In principle, helicopter money seems quite simple. Yet, politically the issues resolve around whether to provide direct cash benefits for everyone or for those in need. If it is latter, then how does the government determine who in need? Are their sliding scales? The allocation of credit is a major challenge. Nonetheless, we are embarking on a new chapter in the history of monetary policy.