Helicopter money as a weapon in the war against the coronavirus crisis

This post was originally intended to be published elsewhere, but ultimately wasn’t. Note that this article is only about helicopter money. However, governments and central banks urgently need to do much more. The state should bail out all businesses. Businesses should hold on to their employees even if they cannot work so the economy can have a V-shaped recovery. The government should pay the workers. I also have other proposals for the ECB, see here and here.

Why the ECB should use helicopter money to fight the coronavirus crisis

The primary objective of the European Central Bank is to maintain price stability. The Covid-19 public health crisis is jeopardizing this objective. The revenue of airlines, bars, restaurants, hotels, travel companies, movie theaters and many other businesses has disappeared overnight. The oil price has crashed. Investments are cancelled because of the uncertain economic outlook. Falling asset prices result in a negative wealth effect. Consumers fear unemployment and cut back spending.

All of these factors put downward pressure on expected inflation.

The ECB can provide credit and adjust interest rates. But such conventional monetary policy tools do not make up for lost business revenue. Loans don’t compensate people’s lost income.

That is why the ECB should hand out helicopter money. Helicopter money (HM) is money created by the central bank that is distributed to the public. It is a gift, not a loan that has to be paid back later.

Helicopter money has several advantages:

1) It enables people to pay the bills

2) People decide how they spend the money, not bureaucrats

3) The ECB is prohibited from financing governments. HM goes directly to people

4) Banks are more likely to extend credit to businesses when they know revenue will bounce back once the crisis is over

5) Government deficits and debt levels are restricted by the Stability and Growth Pact. HM will facilitate the recovery without putting an extra burden on government finances

The catch-up spending will put inflation back to the ECB’s target of below but close to 2 per cent. Furthermore, HM contributes to the achievement of the objectives of the EU. This secondary ECB mandate is explicitly specified in the Treaty on the Functioning of the European Union.

How much money are we talking about?

Emmanuel Saez and Gabriel Zucman assume an output loss of 30% during one quarter due to the coronavirus. This is a 7.5% drop in annual GDP. The euro area has an annual GDP of 12 trillion euro. If the ECB wants to make up for lost GDP, it has to distribute 900 billion euro. For reference, the ECB has assets worth more than 4,500 billion euro on its balance sheet. The Asset Purchase Program (APP) is responsible for 2,600 billion euro of the ECB’s total holdings.

There are 340 million people in the euro area. So the ECB should give on average 2600 euro per person. The money could be allocated according to the share of euro member states in the capital of the ECB. This also corrects for differences in purchase power between countries.

When should payments start?

As long as the economy is in disarray due to the measures against the coronavirus, helicopter money is not very useful. People cannot spend it when shops are closed. National automatic stabilizers and other crisis programs currently offer support for incomes.

However, the ECB can already announce its intention to distribute helicopter money. Make the start of the HM drops dependent on the progress of the medical fight against the virus. For example, the ECB could make the first payment 30 days after there are fewer than ten new Covid-19 cases in Europe.

Practical organization

Eight EU member states don’t use the euro. The national central banks of Bulgaria, the Czech Republic, Denmark, Croatia, Hungary, Poland, Romania and Sweden can pay helicopter money independently from the ECB.

The ECB starts with six monthly installments. After that period, additional payments should be a function of the economic and medical environment. The ECB can continue payments as long as inflation is below target or GDP is not back its pre-crisis level.

The table in the appendix shows that a German family of four would receive 1,905 euro per month. A comparable household in Spain would receive 1,524 euro. This assumes that children and adults receive the same amount of HM per country. If only adults apply for HM, the per capita amount will be higher.

Obviously, the ECB does not have the bank account number of all people in the euro area. Therefore, the payments to individuals should be outsourced to the ministries of finance in the member states. The ECB should pay a 1% fee to the governments for this administrative task.

Objections

There are no financial or political reasons not to do HM. The equity of a central bank does not constrain its ability to act. Helicopter money is a temporary monetary policy tool, not a universal basic income. As soon as the economy stabilizes, the HM drops stop. Finally, critics of helicopter money should specify how the ECB can achieve its price stability mandate with other monetary policy tools.

Appendix

Helicopter money per euro member state. Calculations based on a total amount of 900 billion euro distributed in six monthly payments.