The idea of “Helicopter-Money” has its origin in the
Keynes famous advice to a President of a country of digging and leveling pits
and pay for labor and wages which would create effective demand in the economy
during recessions, i.e., advocating fiscal-policy during low growth. Some
continued this argument with a difference that since this public investment has
not actually created a public-asset to justify time and labor spent on the
project so it may take another forms like helicopter-money or money under the
ground or money in bottles in an attempt to simplify the procedure. Keynes
prescribed fiscal-policy during recessions and liquidity-trap to increase
demand, spending and growth. Nonetheless, he never added that spending should
target inflation which the central-banks are doing rather he assumed that more
spending would increase demand and prices by increasing employment and wages
during recession.
If the central-banks would target inflation people’s
views about real wages might change and they would save more for the future
which means less spending. Whenever, wages or incomes increase the money is
divided between consumption and saving. Poor people’s marginal propensity to
consume is higher than other classes who have a higher propensity to save.
Developed economies have fewer poor people and the majority is well-off and
they spend less and save more out of a given rise in income as far as helicopter
money is concerned. A part of this rise an amount would also be saved and that
depends upon inflation expectations. Higher inflation expectations would
increase savings and it is undeniable that some people might save all. The helicopter
money’s multiplier would be lower than a fiscal-multiplier because this would
increase wages and poor people’s incomes with no employment and with a higher
propensity to consume. Poor people would spend more. Therefore, fiscal-policy
to create public-assets and spending on wages look more enticing.
However, a permanent increase in wages and incomes
would increase spending more. This is called by Paul Krugman as the credibility
problem. The central-banks could not commit for a forever increase in money-supply
because inflation would push them to tighten, but that would rest on the
supply-side and, open and free-trade might help to overcome the problem of
full-employment and more-supply. Nevertheless, if the central-banks could
commit a permanent increase people might spend more. Inflation and inflation
expectation would make them save more and lower prices might make them feel
richer and spend more. A commitment to increase real wages in the long-run
would increase demand. In the short-run, if we commit higher wages and lower
prices that might also increase spending in the short-run. Also true for the
long-run as mentioned before.
Therefore, if fiscal-policy commits full-employment
and wages, and, monetary-policy lower-prices it is likely to increase spending
and growth at a higher pace. Both, policies might do their bit to recover fast.
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