Home Why No One’s Going to Give You Free Money

Why No One’s Going to Give You Free Money

Posted by on January 11th, 2016.

free money

One of the big problems facing many of the world’s major economies is the fact that inflation remains low. The annual growth in prices, which is fuelled by consumer spending driving up demand, is barely present in the Eurozone and lagging behind expectations in the UK. Central banks are trying desperately to get consumers to spend more money, using tricks such as low interest rates and quantitative easing to incentivise spending.

Yet aren’t these monetary tools turning a short stroll into a marathon? Isn’t there an easier way to get people to spend more money? It starts with a very simple concept – give everyone some cash.

Low Interest, QE and the Current Stimulus System

Central banks like the Bank of England (BoE) and the European Central Bank (ECB) use various tools to try and get us to spend more. Key among those tools is cutting interest rates. When rates are low there isn’t much point in anyone (from large companies to consumers) saving money, so they might as well spend it. Banks can theoretically even impose negative interest rates, which would see us having to pay a fee for money left in our account; a kind of reverse overdraft where we are punished for being in the black.

The other option is quantitative easing. Central Banks buy bonds from governments or companies (basically loaning them money) which gives them extra capital to invest. This extra investment creates more jobs, meaning more people have more money, increasing the amount we can all spend. The European Central Bank has been injecting €60 billion a month into the Eurozone economy since March 2015, yet inflation continues to remain well below its target of just under 2%, prompting many economists to wonder whether it’s working.

It may be a system that has been used for decades, but doesn’t it miss an obvious step? If you want to make it so that consumers have more money, just give them more money.

Money, Money, Money

On the face of it, there seems to be no reason why this system wouldn’t work. Through quantitative easing, central banks are electronically creating new money which they then invest to indirectly boost the amount of money in circulation. The objective of this is surely to put more money in the hands of consumers, so why not – you know – just put money in the hands of the consumers?

The idea is called ‘helicopter money’, a term coined by Milton Friedman, who posited the original thought experiment and imagined a central bank supplying the cash from a helicopter. Supposedly everyone would jump around trying to grab the falling money, sort of like the end bit of the Crystal Maze.

Could ‘Helicopter Money’ Actually Work?

Imagine if the Bank of England (BoE) decided to electronically credit everyone with £10,000 overnight. What would you do with the money? The chances are your mind has already begun listing the things you could buy, the places you could go, or the debts you could clear. People would likely buy a new car, refit their kitchen, refurnish a room in their home, or just buy themselves a load of treats. Even very money-savvy people, who might stretch the money out (spending a little on a restaurant meal or a new gadget every now and then) would still be pumping that money back into the economy.

Small business owners might choose to invest their allowance, helping them to be in a stronger position and therefore creating new jobs. Others might pay off a chunk of their mortgage or clear their credit cards. So even once the original cash was all spent, the impact of it would free up more money in future. Someone with no credit card repayments to make is free to spend that money on other things – or rack up more debt, of course.

Is it actually different to QE?

‘Helicopter money’ doesn’t have to be ‘free’ money. Several proposals involve the government of the country issuing the HM raising a new tax further down the line to recoup the money it gives away. The theory of ‘Ricardian Equivalence’ suggests that consumers anticipate things like future taxes and save money in order to accommodate these changes, rather than spending it.

Under this model, consumers would simply save their HM allowance in order to be able to afford to pay the new taxes when they are levied in the future. One of the best ways of looking after this money would be to buy a government bond – essentially a loan to the government, which the government pays interest on until the end of the bond (or ‘maturity’) when the holder of the bond (the consumer in this case) would be repaid the original value of the bond in full. In this situation, you essentially have QE, as creating money to buy government bonds is exactly what central banks do.

Is it Too Good to Be True?

Probably. There are a lot of complications when it comes to giving everyone free money. For starters, there are the political implications. Central banks decide monetary policy, but would they also be allowed free reign over when to distribute free money? It seems like an enormous power to place out of the government’s control, but a government who decided when to do it would be little better. Imagine the political leverage that could be gained over the electorate if the government casually dropped hints that it would give everyone more ‘helicopter money’ if they won the next election, or if people voted a certain way in the referendum.

The second problem is that it doesn’t necessarily combat the underlying problems which hold economic growth and inflation back. A one-off cash injection might raise inflation and investment temporarily, but consumers wouldn’t be able to sustain that level of spending in the long term once their ‘helicopter money’ allowance had been used up. It might make a small long-term improvement (as mentioned above, some people would clear their debts, others would invest in their businesses) but probably not to the extent where the country entered a golden economic age. The underlying factors keeping inflation low are a lack of infrastructure and low wages. These things aren’t going to be improved by handing out some cash, so we’d quickly be back in the same position as we were before, albeit with new shoes and a big telly.

Also, let’s be honest, it’d be a bit of a social taboo to give away free money. It could undermine the idea that you need to work hard and earn your rewards. Some of those at the top might resent those at the bottom getting a ‘handout’, even if it was for the good of the country. Different political parties would have different attitudes towards ‘helicopter money’.

Don’t Look to the Skies for an Answer

As much as we’d all love to wake up with a surprise £10,000 in our bank account – and some economists argue that it’s a worthwhile policy to try – it’s highly unlikely it’ll ever happen. For one thing it breaks a major social taboo: money has to be earned. For another it is only a temporary solution and on top of that, it’s unlikely you’ll be able to do it just once, so people will eventually start to expect and maybe even plan for it.

Soon you become at the mercy of consumers, forced to bail them out with free cash in order to control debt and prevent mass bankruptcies. Just like QE, ‘helicopter money’ could become a permanent measure, creating a weak economy that relies on stimulus rather than its own independent strength.

It’s still a great idea, isn’t it? In reality, though, the closest we are likely to get to ‘helicopter money’ is if we have a friend with a drone who can sprinkle us with pennies.

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