There’s a major flaw with helicopter money.
The policy — whereby people are directly given money by central banks to stimulate the economy — wouldn’t work because most people wouldn’t spend the cash, according to reseach from Dutch bank ING.
At its most basic, the argument behind helicopter money is that by giving people money directly into their pockets, central banks encourage consumer spending, which in turn helps stimulate growth and moderate inflation.
However that argument falls flat on its face in Europe. The bank’s study, which asked the opinions of around 12,000 people in countries across the continent, showed that a majority of people would save a substantial amount of the money, almost entirely negating the point of helicopter money.
ING asked the question: “Imagine you received €200 in your bank account each month, for a year. You are free to do what you want with the money and don’t need to repay it or pay taxes on it. How would you use this extra money?”
Over half of people surveyed said they would save the cash, compared to only 26% who would spend the majority of the money. Survey respondents said that they would spend 24% of the €200, or a total of €48.
Here’s the bank’s breakdown by country:
Helicopter money will only really work when people put the money they’re given back into the economy through spending, so the research is a negative blow for advocates of the most unconventional of all unconventional monetary policies.
“Despite the positive intention behind helicopter money, our research among consumers in Europe suggests that they would spend only a small part of the money handed to them,” Ian Bright, a senior economist at the bank.
Obviously, one survey of a relatively small sample doesn’t mean that helicopter money would be a total failure if it did ever see the light of day, but it does highlight a massive flaw in the idea — namely that you can’t force people to spend money.
The term helicopter money was first coined by American economist Milton Friedman in the 1960s. The basic principle is that central banks create new cash and give it directly to people to spend on whatever they want.
Here’s the quote from Friedman that coined the phrase: “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.”
For decades, helicopter money has remained as more a thought experiment than a viable policy. But, with negative rates and chronic low growth confounding central banks, the idea is picking up credibility. The Bank of Japan was reportedly close to introducing helicopter money of some form in September, and although it didn’t, there is still much argument that it could be a viable means of stimulating the growth and inflation.
ING’s findings seem to suggest otherwise.