A recent article by Annie Lowrey in The Atlantic argues that governments should follow a policy of helicopter money in the current crisis. As a macroeconomist, I think this is a good idea.
First, what is helicopter money? It is a policy in which the central bank prints money and the treasury spends it or gives it away.
In most developed countries, the central bank cannot give money directly to the treasury which, in turn, cannot tell the central bank what to do. While central banks do print money, they use it only to replace worn-out bills and to buy and sell bonds from private institutions such as banks.
This policy of central bank independence has worked well over the years to keep inflation in check. In countries without it, the central bank faces pressure to print money to cover the government’s budget deficit. If this goes on long enough, the result can be destructive hyperinflation – as has recently occurred in Argentina, Venezuela, and Zimbabwe.
But in the current crisis, we face a different challenge: throughout the economy, many contracts have become unrealistic. Workers and firm owners in affected industries cannot make contractual rent and mortgage payments. Firms cannot pay agreed wages and make agreed payments to their subbies.
In principle, each contract could be renegotiated. But this is hard as one party must trust that the other truly cannot pay. Because of this, renegotiations will be rare. Many contracts will simply be violated, leading to a wave of defaults and lawsuits.
This is where helicopter money can help out. Newly printed money, broadly distributed, will help parties comply with their contracts. The massive social costs of widespread bankruptcies will be avoided.
As the economy eventually recovers, the extra money in the economy may lead to higher inflation than would otherwise occur. But in the current recessionary environment, this worry can safely be deferred until another day.
And as we return to normal times, central bank independence will once again become invaluable. Thus, its suspension must have a built-in expiration date.