Central banks around the world have a common problem. They are failures. For the past eight years, central bankers worked tirelessly to generate economic activity. They pushed interest rates below zero and printed trillions of dollars.
And yet, the IMF recently cut its global growth forecast again.
Most economies are stuck in neutral while threats such as the debt crisis in Europe and deflation in Japan keep growing. Now central bankers are talking about a new tool – helicopter cash (free money distributed by a government agency). It won’t work either, but don’t expect that to stop the bankers from trying!
If sort-of free money drove economic growth and inflation, Japan would be on fire. In 1999, government officials created a plan to distribute $6 billion free to qualifying families and the elderly. Averaging about $170 in coupons, residents received coupons that they could spend at local establishments for goods and services, but not cash.
Originally used by Friedman to show the effects of monetary policy on inflation and the costs of holding money, helicopter money is now discussed by economists as a serious alternative to monetary policy instruments such as quantitative easing.
The program provided a brief economic bump, but quickly faded. The problem was that no one expected the free money to keep flowing. It was “once-and-done.â€
We tried the same thing in the U.S.
In 2008, President Bush, working with a Democratic Congress, gave qualifying Americans a tax rebate capped at $600 per person, or $1,200 per household. The money flowed during the spring and early summer, and then the economy plummeted.
I’m not suggesting the small program in Japan, and certainly not the tiny tax rebate in the U.S., could have altered the course of economic history. The problems back then were simply too big to address with small amounts of cash distributed among millions of people. The same is true today.
The Japanese population is dying off. Companies keep older workers employed even when there is no work, which stifles upward mobility and kills productivity. European countries have a host of problems, including aging populations, rigid workforce rules, and banks loaded with non-performing loans.
