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鈥楬elicopter drops鈥 will not lift Japan out of doldrums
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The world economy is struggling. But adverse global conditions should not lead central bankers to neglect the risks of untested policies 鈥 above all the 鈥渉elicopter drops鈥 that many are proposing.
Conceived in 1969 by Milton Friedman as part of a thought experiment 鈥 not an actual proposal 鈥 helicopter drops got their name from the fantastic vision of fresh money being scattered from a helicopter whirring overheard. But the point of helicopter drops 鈥 or what former US Fed Chair Ben Bernanke recently called a 鈥渕oney-financed fiscal program鈥 (MFFP) 鈥 is simply to distribute newly printed cash directly to consumers, such as through tax rebates.
Over the last half-century, central bankers have ruled out the use of MFFP. But in the current environment of weak aggregate demand, below-target inflation, and slow or no output growth, economists worldwide have been seeking deus ex machina 鈥 a search that, for some, has led to the heliport.
Among the most prominent advocates of MFFP is Adair Turner, whose latest book, Between Debt and the Devil, provides an insightful thought experiment on the use of helicopter money. Turner and his fellow MFFP advocates seem to believe that placing more money in the hands of the public is practically always welcome.
Too much demand
But MFFP could easily produce too much demand.
Turner believes that Japan would benefit from helicopter drops. In his view, MFFP is the ideal solution to spur demand, without further augmenting Japan鈥檚 already-heavy debt burden.
But Japan鈥檚 large public-debt burden is dangerous precisely because of its potential to spur inflation, through the monetization of the debt. In this context, introducing MFFP 鈥 a policy that is even more likely to destabilize prices 鈥 seems dangerous.
Japan has made this mistake before. In 1931, after more than a decade of deep deflation, Finance Minister Korekiyo Takahashi used debt-financed fiscal expansion to bring about a domestic economic revival. But Takahashi knew when it was time to rein in spending, and in 1934 he attempted to do just that.
His focus on reducing military expenditure, however, attracted strong opposition from army officers, who assassinated Takahashi in 1936. His successor allowed the military budget to swell, funded by newly created money. This stimulated rapid inflation, which was brought under control only after the reconstruction following World War II.
Today, the job-to-applicant ratio stands at 1.28, its highest level since 1991. The wages of part-time workers are, for the first time in Japan鈥檚 history, rising faster than those of full-time employees.
And, although GDP is growing very slowly, and even turning negative from time to time, gross national income continues to rise steadily.
It seems clear that Japan should not risk triggering inflation. Indeed, even Turner has offered an alternative proposal. He recommends that Japan continue its current method of monetary easing and postpone its forthcoming consumption-tax hike.
While fiscal stimulus and monetary expansion do not always have to go hand in hand, under current circumstances in Japan, this proposal makes sense.
Koichi Hamada is Professor Emeritus of Economics at Yale University and at the University of Tokyo. 漏 Project Syndicate 1995鈥2016. Shanghai Daily condensed the article.
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