May 11, 2016:
You’re talking kickbacks in the AgustaWestland helicopter deal, right?
Nope. I’m talking about the chatter over the metaphorical dumping of heaps of money from mechanised whirlybirds onto people below. It’s what passes for economic policy prescription in parts of the world these days, and everyone — from RBI Governor Raghuram Rajan to a somewhat ill-informed actor Kamal Haasan — has a robust opinion on it.
Seriously, Kamal Haasan?
We’ll get to that in a bit. Focus on the larger issue, will you?
So , what’s ‘helicopter money’?
It’s a theory propounded by monetarist economist Milton Friedman in 1969. In his paper, ‘The Optimum Quantity of Money’, he offered a fascinating thought experiment by exploring the consequences of dropping money from a helicopter upon a community in which the ‘quantity of money’ had earlier been constant.
So, everyone gets richer and lives happily ever after?
Nope. Friedman argued that while each individual in the community may perceive the money from the sky as a bonanza, everyone in the community is, in fact, worse off than they were earlier.
Worse off with more money?
Yes, because while everyone now seems to have more cash, the community as a whole has no additional store of food, fuel or machineries on the ground. So prices of goods and services will go up as ‘too much money’ chases ‘too few goods’.
As Scottish economist-philosopher David Hume observed in 1742, “augmentation (of money) has no other effect than to heighten the price of labour and commodities”. What you’re left with is just an illusion of wealth. As currency trader Stanley Ku states in his book, Helicopter Money, “A helicopter that continually drops pieces of paper… among its people is not saving anyone. It is most probably taxing the people.”
Makes sense. So why talk ‘helicopter money’ now?
Governments and central banks are always metaphorically dropping ‘helicopter money’ in the interest of stimulating consumption demand or, in more extreme cases, to fight a disinflationary cycle (in which prices go down). Every time the government offers tax breaks for individuals and corporates, it amounts to a shower of ‘helicopter money’. (Except that the benefits flow disproportionately to high-income earners at the expense of those lower down the economic ladder.)
In recent weeks, there have been reports that policymakers in the economically enfeebled EU are considering the ‘helicopter money’ option to stoke demand. And analysts and commentators have, for the most part, welcomed this idea.
Where does Raghuram Rajan stand on this?
On his current travels in Europe, Rajan has been tom-tomming his contrarian view: that ‘helicopter money’ may fail to stimulate demand if people respond by saving the handout, not spending it. It’s a contingency that Friedman provided for while formulating his ‘helicopter money’ theory.
Umm, and Kamal Haasan?
Quite bizarrely, the actor has recently injected himself into the economic discourse, but his articulations, while well-intentioned, come across as low on economic rationale. After the Chennai floods of December 2015, an anguished Kamal Haasan vented against ineffectual governments and economic inequity and said in an interview that instead of spending ₹4,000 crore on, say, a corporate project, the government should “distribute” the money among 120 crore Indians. “That would make all Indians tri-crorepatis,” he reasoned. The arithmetically-challenged nature of the prescription apart, this is the same ‘helicopter money’ fallacy that Friedman and Rajan have debunked. It’s a reminder of the demerits of celebrity insta-punditry on areas beyond their domain expertise.
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(This article was published on May 11, 2016)
