Call in the Helicopters: What We Need to Stimulate the Economy

What if the Federal Reserve dropped money from a helicopter?What if the U.S. Treasury and the Federal Reserve stopped trying to stimulate the economy by encouraging more borrowing with quantitative easing -- and instead dropped money into household bank accounts?

In an era of rising concern about massive Federal deficits, such a policy may seem like the wrong idea at the wrong time, but proponents have an interesting argument, which the country should understand without dismissing out of hand.

While the economics jargon can get very heavy in discussions of monetary and fiscal policy, the basic ideas aren't that difficult to understand.

The Current Policy: Shovel Money at Banks

The current policy is called quantitative easing, and the idea is this: By expanding bank credit and lowering interest rates, a central bank (in the U.S., the Federal Reserve) stimulates more borrowing and thus more spending by businesses and households.

The problem with this policy is that none of the funds goes directly into consumers' accounts. If consumers are tapped out or wary of taking on more debt, then bank credit can be expanded to the moon and households won't borrow more money.

So while the Fed, Treasury and the FDIC have shoveled several trillion dollars into the nation's banking sector in various bailouts and guarantees, these actions haven't actually distributed any cash to consumers or businesses. The Fed's rescue operations in the recent crisis have been loans to banks and other financial institutions and purchases of financial assets, not helicopter drops of cash into household accounts.

The Problem With Quantitative Easing

The problem with quantitative easing is fairly obvious to all: It hasn't really stimulated the economy -- which, despite the trillions of dollars spent on bank bailouts, remains in the doldrums.

Put another way, the popular conception of Fed policy as a "helicopter drop" of money is misleading. A real helicopter drop would put money directly into household bank accounts, rather than expanding bank credit that might never get used.

Some policies do put money in consumers' pockets. A trillion-dollar tax cut, for example, leaves more cash in the accounts of taxpayers -- the basic idea behind the Bush tax cuts currently being debated in Congress.

The limits of tax cuts as a way of stimulating the economy are also obvious. As I reported in Why Growth May Still Leave 95% of Americans Behind, rising income disparity means that tax cuts benefit the top 5% and make relatively little difference to the bottom 95%.

Maybe a Real "Helicopter Drop" Is What We Need

Proponents of a "helicopter drop" of money directly into household checking accounts argue that a broad-based distribution of freshly issued cash would directly stimulate spending and thus employment. This is why they recommend replacing the macroeconomic role of bank credit with broad-based direct distributions of cash to households.

What if the Fed and Treasury distributed $4 trillion directly to households rather than using it to prop up bank lending? At least some households would use some of the funds to pay down debt, meaning the money would flow to the banking sector anyway, but with one critical difference: Household debt would actually decline, leaving household balance sheets in better shape and consumers owing less interest every month. That would mean households would have more cash, not just this month, but in future months as well.

With quantitative easing, the idea is to increase the debt load on households. With a helicopter drop of fresh cash, the idea would be to reduce the debt load that's crushing many households. Banks would benefit, too, as more consumer debt would be paid off in full, compared to the current policy of promoting heavier debt loads. The negative consequence of pushing more debt on households is also obvious: More loans become uncollectible and go into default, creating more loan losses for banks.

Directing the Economy Away from Debt

If the cash transfers were broadly distributed, the subsequent spending would be more representative of sustainable demand than other means of stimulus, such as costly, questionably effective "job creation" programs.

Most importantly, the status quo monetary policy distorts economic activity towards debt-based financial assets and debt-financed durable goods such as the "cash for clunkers" program to boost auto sales. According to the proponents of quantitative easing, adding more debt to households is the cure to our economic malaise. But for most households, high debt is the disease, not the cure, and adding more debt to "stimulate spending" is like trying to put out a fire with gasoline.

Some might argue that a direct deposit of freshly issued cash into households would be inflationary. But other economists argue that if inflation is a monetary policy issue, and a helicopter drop of cash is fundamentally fiscal in nature, then the worry over sparking inflation is misplaced.

What seems clear is that expanding bank credit through quantitative easing policies of funneling trillions of dollars into banks isn't working. Putting the same money thrown into banks ($4 trillion) into households would certainly put the money where it could either be spent or used to pay down debt -- both of which are direct cures for over-indebtedness and a no-growth economy.

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ingfp

What money? If you have 100 trillion in debt and can't pay it back and someone loans you 50000.00 to fix the problem.....do you really think the problem of 100 trillion is going away? Fair tax and new reps in both houses. One more thing, if a lobbyist shows up show the SOB the door.

September 22 2010 at 8:46 PM Report abuse rate up rate down Reply
EWALZHAO

With the money that 'WE' gave the banks we could have paid off almost every mortgage in America. The bank would have still gotten the money but Americans could have some help figuring out where they will get the money to retire. Now the mortgages are still there and no one is buying anything new.

August 26 2010 at 6:43 PM Report abuse +1 rate up rate down Reply
EWALZHAO

With the money that 'WE' gave the banks we could have paid off almost every mortgage in America. The bank would have still gotten the money but Americans could have some help figuring out where they will get the money to retire. Now the mortgages are still there and no one is buying anything new.

August 26 2010 at 6:43 PM Report abuse rate up rate down Reply
Vanessa

banks car companies and insurance companies get TRILLIONS what do they prpose to give the working class taxpayer$600.00??? that we will have to claim on our 2011 tax returns? That will put us in a higher tax bracket so that we will end up owing instead of gaining? they should of thought of this BEFORE they did the bailouts. IDIOTS...

August 26 2010 at 5:15 PM Report abuse +1 rate up rate down Reply
donran42

This idea of giving money to individuals instead of the corporations is so simple and makes so much sense is it any wonder the politicians can't comprehend it. Most of the money would end up in corporate hands at the end of the day, but in a good way. Because individuals would spend it where it did them the most good. Mortgages would get paid, goods would be purchased, vacations would be taken. Business would flourish & the government would be collecting taxes on all this stuff putting money back into the coffers. The caveat I would insist on is that it went to tax paying citizens and an increase in senior benefits. Welfare recipients already get government money and illegals don't qualify.

August 26 2010 at 5:03 PM Report abuse rate up rate down Reply
ronafishon

$780 Billion divided by 337 million us citizens is only about $2700.00 per person. not $250,000. They need to quit taxing us to death, stop corruption in the government, abolish the Unions, and place huge tariffs on imported goods. You people driving imported cars, buying Chinese crap, and supporting stores like Wall Mart are also part of the problem. Buy American, the job you save may be your own!

August 26 2010 at 4:51 PM Report abuse +2 rate up rate down Reply
JOAN

the tail is wagin the dog one more time yet agian!where is our capital our grants why should a forty or fifty year old have to return to college to reap the benefits of stimulas or grants? same old dance no new steps. the crooks get paid and a pat on the back.while we get a coke and a smile and a handie kiss off.

August 26 2010 at 3:23 PM Report abuse +1 rate up rate down Reply
joycejrf4ever

I said this to my family and several friends when all the economic trouble started. Give each Legal American 1 million dollars. For each child it is to be put in trust for education and to start there life. There would be no more welfare, no free medical, no section 8. This was it. Learn to handle your money and stay out of debt. People with a million dollars got nothing. Ilegals got nothing. People could have paid off there home or bought one, which would have helped the banks. New business could have been started. So much good could happen. Sure we would have had the one's that blew it all, but with the understanding there was no more free ride. Either work for it and pay for it or do without. We bailed out the wrong people at a terrible price and I don't think they have learned a thing. JOYCE

August 26 2010 at 12:43 PM Report abuse -1 rate up rate down Reply
1 reply to joycejrf4ever's comment
anthomerritt

SILLY GIRL we don't have any more money we are in the red trillions to the reds.TRICKS ARE FOR KIDS

August 26 2010 at 10:57 PM Report abuse +2 rate up rate down Reply
FCI Fincl Serv

This is the opposite of Reaganomics! This is common sense and will work! Instead of making the RICH, RICHER, this will stimulate the economy from the bottom up! If you add spending power to the lowest economic levels, it will be used to purchase necessities (food, clothing, home improvements, health care) and all levels of the economy grow. Everyone benefits!

August 26 2010 at 11:40 AM Report abuse +2 rate up rate down Reply
1 reply to FCI Fincl Serv's comment
anthomerritt

YOU MEAN EVERYONE BUYS SOMETHING THATS MADE IN CHINA.READ WHERE EVERYTHIG IS MADE THAT YOU OWN.(WE GET A PENNY THEY GET 99)

August 26 2010 at 10:59 PM Report abuse +1 rate up rate down Reply
stiresrick

trickle-up-now.the 300% solution. by rick the painter. current comparisons,of coal generated electricity so called (grid parity) verses residential solar and/or wind is a flat out lie. its like comparing apples to potatoes, consider, all articles I've read state that's its cheaper by cents per kilo watt hour to produce coal fired electricity as opposed to residential solar and/or wind generated electricity,and at first glance, those numbers seem accurate, 3to4 cents per kilo watt as opposed to 5to7 cents per kilo watt hour.pay back time (ROI) of three to seven years.recouping installation costs. consider this,average house hold pays about $260. a month for utilities or $3100 per year, not counting for inevitable rate increases. that will cost your household $31,000 over the next ten years,or $93,000.00 over the life span of a good residential solar or wind generating system, the average home uses about 1000 kilo watts per month, depending on region in the U.S. 1000 kilo watt systems costs around on average $26,000 even with current available Federal and some State and utilities incentives, out of pocket costs are running $6,000 to $15,000,with the lack of Nationwide, Fair Price ,Net Metering, a up dated smart grid and tax deductible financing installing residential systems for most lower and middle class families remains out of reach. If by making financing available through energy efficient mortgages, energy improvement mortgages and FHA 203k mortgages for the installation of residential systems along with removing net metering road blocks and up dating our grid. the U.S. can quickly convert to renewable home owner, owned electrical generation.which not only will increase the value of our homes,create a tax break for interest portion of said loans,fix our monthly expenses at a lower rate, freeing up income, jump start the economy,reduce our dependence on coal and natural gas,which could then be used to fuel our transportation needs and thereby reduce our dependence on imports.19% of our coal is shipped over seas and it is predicted that coal will increase in costs up to 69% over the next five years. if you could roll over your your current utility bill into a lower,tax deductible monthly payment,increase the value of your home, jump start our economy,reduce green house gasses, and reduce the deficit ,and so much more why wouldn't you? a $10,000 interest deductible mortgage,would cost around $60 per month,opposed to $260 going to the utilities.ok, now for the 300% part, you could, with financing and upgraded grid with nationwide,, net metering, replace your natural gas,propane or heating oil space and water heating needs, with efficient electric systems,further reducing your monthly costs,ie. instead of installing a system capable of replacing your current electrical needs,expand systems capability not only to cover space and hot water needs,but also have surplus generation,enough to charge a plug in vehicle if wanted,basically charging it for free.these numbers are dependent on fed. state and utility incentives,which means we would have three partners involved.in order for this program to remain solvent (incentives)funds must be replenished,here's how, install systems not only capable of providing for the households needs,1000kw/100% but expanded to 300% to 3000kw.break down would look like this 1000kw monthly use increased to 1500kw to provide for space and hot water conversion,that would leave 1500kw provided to the grid, which would be split 1/3 each,between the utility which would sell that to their commercial customers,in order to replenish their incentive funds,the remaining,1/3 to state,1/3 to fed.currently we are paying taxes in order for state and governments to purchase electricity what if we provided the electricity instead ?with a mortgage to cover installation costs being around $60 per month, a 300% system would cost around $180 per month, $80 less than current monthly average..by rolling monthly utility bills into a tax deductible mortgage,you have reduced fixed monthly payment,not subject to utility increases and a tax deduction buy sending a portion of your surplus electricity to state and federal governments their incentive programs would also be replenished.even homes that are currently upside down should be able to qualify for energy efficient mortgages because the increased value of the home after installation and reduce out of pocket expenses of the homeowner.now look at this. a 1000kw/100% system takes about eight man days to install so a four man crew could install 2.5 systems per week or 125 per year with 50,000 four man crews,6,250,000 1000kw systems could be installed per year ,with 150,000 four man crews could install 6,250,000 3000kw/3000% systems per year or the equivalent of 18,750,000 homes electrical use per year.

August 26 2010 at 10:57 AM Report abuse +1 rate up rate down Reply