“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’

Friedman’s purpose was to discuss the short- and longer-run effects of monetary policy in normal times. Recently the idea of helicopter money has been extended to refer to policies that aim to revive sluggish economies or prevent economic meltdowns in times of crises. This note is an attempt to clarify some of the issues that need to be considered in this latter context:

1. How should transfer of purchasing power be accomplished? By direct money transfers to individuals or households; By lowering taxes; By price subsidies; etc.
2. What is the intended purpose of the policy? To shore up aggregate demand; To focus on individuals who have lost jobs as a result of the current pandemic; To keep firms from bankruptcy; etc. To be sure, these objectives are of course not independent of each other.
3. Who should be the recipient of the ‘helicopter drops’? The entire population as in Friedman’s example; Only those who lost jobs; Only those with an income below a certain amount; SMEs generally; etc.
4. Which official sector agency should be in charge? The central bank; the Central (Federal) Government; Local Governments

The analysis will show that helicopter transfers should be well targeted, and that the fiscal authorities should be in charge. Let’s deal with each of the issues in turn.

1. Helicopter money by any other name …
   Distributing purchasing power can be accomplished by different means. For an individual who has a job and pays income taxes, a direct transfer of 100 dollars is essentially equivalent to a one-time tax cut of the same amount. But for the unemployed who has no income and therefore pays no income tax, the two methods are vastly different. For this reason, the direct transfer appears to be preferable.A subsidy to retailers in exchange for a commitment to lower prices on (essential) goods would increase purchasing power of customers. This type of measure is already practiced in some jurisdictions in the case of petrol, for example. To do it on a grander scale is likely to be a practical nightmare, and the room for abuse would likely to be substantial.Those who are skeptical about the government’s ability to increase purchasing power by direct transfers, tax reductions, subsidies and the like sometimes argue that ‘there is no such thing as a free lunch’, so that the government transfers of any type essentially takes purchasing power from some individual and gives it to someone else. The aggregate effect is therefore null as the transfer has to be paid by someone. This misses the point that in a time of high and increasing unemployment, an increase in spending by one individual means increased income for someone else who in turn will spend more. Incomes for everyone will increase. So, even if it isn’t completely free, the lunch is very low cost and highly beneficia.

2. What is the intended purpose? and 3. Who should be the recipients?
   The Coronavirus pandemic is on course to create unprecedented increases in lay-offs, unemployment, bankruptcies, and other economic dislocations. Which of these should be the primary target for ‘helicopter money’?The primary objective of government transfer should be to ensure that individuals who have lost their jobs are able to meet basic needs such as paying for food and necessary medicines, rent, utility bills. We can think of this as a humanitarian objective of preventing the temporary, but potentially protracted, effects of the pandemic from leading to permanent hardship due to malnourishment, deterioration of health, and homelessness. This implies that transfers should target the unemployed.If the intention is to shore up aggregate demand in the economy more generally, a universal transfer scheme may be tempting. But this is likely to be inefficient because a transfer of 100 dollars to a high-income household is not likely to have the same effect on aggregate spending as a similar transfer to a low-income household that lives from pay-check to pay-check. In other words, the transfer should target households that are likely to spend most of it. This quite apart from the fairness aspect of transfers to high- versus low-income families.What about lowering payroll taxes to keep firms from laying off employees? Such tax relief would help offset some of the loss firms face when demand dries up, enabling them to keep operating longer. It would also encourage firms that are doing well to hire additional workers, even if temporarily.But lowering payroll taxes has two drawbacks. One is that it would not be of any help for individuals who have lost their unemployment, and the second is that when demand is insufficient, firms are not likely to regain employees even if payroll taxes are reduced. The first of these drawbacks could be mitigated by making tax relief or an employment subsidy conditional on a commitment by the firm not to reduce its work force, but to address the lack of demand more targeted stimulus policies are needed.But what if the objective is to prevent an employer from bankruptcy? Would a payroll tax decrease not do the trick? It could help, but it would not be the most effective policy. A low-interest rate loan would be preferable as it would not have to be across the board, but could target firms that can show a need for such a loan to stay afloat. The loan could either be given directly by a government agency or by banks, in which case the government would provide a guarantee in exchange for some oversight on how the loans are allocated.Finally, a word about incentives. Will giving transfers to those who become unemployed not reduce incentives to work? This argument is specious in the best of times, but if it is used to refuse such transfers in times of crisis, it is both cruel and likely to aggravate the crisis. That said, authorities should at the right time establish an appropriate exit strategy.

4. Which official agency should be in charge?
   In Friedman’s original helicopter money metaphor, it was the central bank that distributed the money to the public. But as we have argued, a ‘helicopter drop of money’ in the current situation is essentially a form of fiscal policy in most cases with intentional distributional effects. As such it should primarily be the responsibility of fiscal authorities. Involving the central bank would unnecessarily involve it in fiscal policy and distributional issues best left to be decided by elected officials. Central banks should not stand on the sidelines, however. They should make sure that the financial system is operating smoothly by providing market with liquidity through access to central bank funding. This is what central banks are attempting to accomplish by lowering interest rates in jurisdictions where there are already not at an effective lower bound, zero or otherwise. The recent decline in policy interest rates are best viewed from this perspective and not from a perspective of shoring up aggregated spending by households and firms. In times of heightened uncertainty, spending is not likely to respond significantly to lower interest rates.What level of government should be responsible for the transfer policy, central or local government agencies? This is a question that does not have a clear-cut answer. On the one hand, hardships and need may vary from locality to locality, and local authorities may be best placed to determine who is most at risk, and who, therefore should be most closely targeted with the transfer policy. But central authorities may need to coordinate and ensure that some local governments will not attempt to free-ride on neighbors. This could, for example, be the case when the place of work differs from the place of residence. In this case, which local authority should be responsible for providing necessary support for laid-off workers? In addition, the aggregate demand multiplier effect, whereby your spending is my income and vice versa, implies a central solution. Indeed, it would even call for international coordination of stimulus activities.

5. A quick summary.
   • Extraordinary circumstances necessitate extraordinary measures. The metaphorical helicopter money drop mentioned some fifty years ago should be part of such measures. Not literally, but in the form of transfer payments to those most harmed by the coronavirus pandemic.
   • Monetary transfers, preferably in the form of cash grants, should first of all target individuals who have lost their jobs as a result of the economic fallout of the pandemic.
   • In addition, more general cash transfer should be considered as a way to shore up aggregate demand in the economy, and thereby limit the size of the inevitable increase in unemployment. These cash transfers should be skewed towards lower-income households which are more likely to spend them rather than high-income households whose spending is likely to be little affected.
   • Suggestions that transfers associated with lost jobs will create incentives not to seek employment should be forcefully rejected as specious and cruel.
   • Governments should consider guaranteeing low-interest loans to firms that are at risk of bankruptcy. The loans should be administered by the banking system.
   • Fiscal authorities should take the lead in providing transfer payments. By intention, such transfers have distributional effects, and should therefore be the responsibility of elected officials, not central banks.
   • Central banks should support governments’ efforts by providing the necessary liquidity to the economy to prevent finance from becoming a destabilizing source of its own.
   • International cooperation will be needed both on the fiscal and monetary policies to limit externalities associated with demand spillovers and financial contagion.

Prof. Hans Genberg is a Professor of Finance at the Asia School of Business and is the Senior Director of Banking and Finance Programs of the Master in Central Banking Program. He has published considerably on issues related to exchange rate regimes, reserve management and capital markets development, having worked in senior roles at the South East Asian Central Bank (SEACEN) Research and Training Centre, the Hong Kong Monetary Authority (HKMA) and at the International Monetary Fund (IMF).

Hans also has extensive academic experience, having been Professor of International Economics from 1979 to 2008 and Head of the International Economics Department from 1989 to 1998 at the Graduate Institute of International Studies in Geneva, Switzerland. Hans holds a Ph.D. in Economics from the University of Chicago.

He can be contacted at hans.genberg@asb.edu.my.
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