Edit: I mean helicopter drops in the original sense. That is, printing money and the giving it away unconditionally and equally to all flesh-and-blood citizens.
The main effect would be a a transfer of wealth from debtors to the indebted, a hit of inflation and an economic stimulus effect.
The economic multiplier would not be as high as something like SNAP (which is about 2.5-3.5x I think), since the middle classes and rich recipients would just squirrel away what they got. Or use it to pay down debts. It would have a higher economic multiplier than pretty much any money that's been funneled into bailouts though.
Whether all this is "good" depends on your perspective.
Practically speaking, though, any potential helicopter drop is going to be so small it will have virtually no effect. At the same time, it'll be demonized every step of the way by the people who would hate the precedent it would set (i.e. anybody who is owed money).
I think whatever your desired effect is there's probably a better tool to achieve it than a helicopter drop. It's a fairly blunt tool.
Edit: I have misinterpreted what you said. I read your first sentence as explaining what was wrong with a helicopter drop of money, because that is what was asked. However you probably didn't mean that to be a list of bad effects, just effects, to set the stage for your real answer which is the multiplier. Which is indeed the most important thing to consider.
In contrast, QE might also stimulate investment. Concretely, we might build a factory or a road. This makes industrial machinery prices (not included in CPI) go up, hence no inflation.
Since the goal of stimulus is to reduce real wages and induce workers to stop turning down productive labor, the former is more useful than the latter. Of course, there are countervailing effects - giving workers money directly can substitute for them getting a job. (See my other post: https://news.ycombinator.com/item?id=10438248 )
The economy cycle doesn't start with investing, it starts at consumers having money and giving them to someone in exchange for a service or product. How could you know what to invest in before there is even demand?
Of course, if you are correct that no one will invest, then all the money from QE will be funneled into consumption. This will have the same effect as the helicopter drop, modulo distribution.
> all the money from QE will be funneled into consumption
They are, after sitting there idly for a while. The bank CEOs have to pay their mistresses and so on.
And distribution is important too. The whole problem of debt deflation is that you have money sitting idly (or better say idly circulating in an endless vortex of financial machinations), not being spent on goods and services.
*They are, after sitting there idly for a while. The bank CEOs have to pay their mistresses and so on...money sitting idly..."
The production is either consumed, invested, spent on government or exported. P=C+I+G+NX. You seem to believe it can be neither C nor I (well sometimes), so are the wealthy spending all their unconsumed income on government or exports?
So you agree that for the investment to be worth it (and thus made), consumption in the future must increase (or at least appear that it will increase to the investor)? That was my point.
> The production is either consumed, invested, spent on government or exported.
I talked about money, not production. Money can be saved, or in today's world more likely, ran around in circles through the financial system, without ever causing more consumption to happen.
If your sole claim about money is that there needs to be a functioning monetary system so that the consumer can easily transfer value to the producer, I agree.
Exactly. That bit was dumb. Hence why industrial machinery didn't shoot up in price like the cost of a 2 bedroom semi in San Fran did.
Housing prices in SF are entirely a self-inflicted ill - NIMBYs causing scarcity. Houston does it right: http://marginalrevolution.com/marginalrevolution/2015/03/hou...
Paying down debt is stabilizing, though, so it's not wasted.
"debtors" and "the indebted" are different names for the same group. I think you mean "debtors to creditors".
There is nothing to explain, since there is nothing wrong with it. Steve Keen did a simulation of policies against debt deflation, comparing austerity (business as usual), quantitative easing (giving money to banks) and helicopter drop (giving money to consumers).
The result was that helicopter drop worked the best, followed by QE, and austerity came last. This is consistent with recent historical data we have on austerity (Japan and Europe) and QE (USA); I am not sure if someone ever attempted helicopter drop in debt deflation (although a similar thing - debt cancellations - happened in history).
If the Fed prints money and gives it to people, getting nothing in return, then the only way to take the money back out is to raise taxes, which will result in deadweight losses.
That said, has hyperinflation ever occurred without the central bank printing money while inflation is above-target? Private holders of money can flood the market with cash, but only the central bank can sustain that flood for a really long time.
As an example of this, consider the semi-"helicopter drop" of money we had during the last recession: the extension of unemployment benefits. It turns out benefit cuts cause workers to accept jobs.
It comes out of a massive abuse of preference curves, a model that itself have some massive assumptions bouncing around (like that if your income increases, you will not switch preferences completely, just keep buying more of one or the other).
As for cutting benefits makes workers accept jobs, no surprise there. Cut benefits and it is accept anything or starve. Basically it is wage-slavery.
(Involuntary unemployment is when workers are employed at a wage K, and other workers are unemployed but have a reservation wage of K.)
Given that you agree with my factual claim (that giving people money directly causes unemployment), what do you disagree with me on? Is it just my mood affiliation that you dislike?
+ As opposed to a central bank engineered recession.
Classical (not Keynesian) economics does explain how a demand shortfall causes voluntary unemployment. It also explains how helicopter drops + substitution effect can cause voluntary unemployment. Involuntary unemployment is the tricky bit.
+ Post-war economists are obsessed with linear equations and closed form solutions that look like the 'laws' the guys in the physics department rely on. However once you take into account that wages (and rents!) are sticky, that means changing a workers wages from $10/hr -> $11/hr is different than $11/hr -> $10/hr. And then you're nice happy linear equations go out the window and you enter the land of Chaos theory.
I'm glad we are in complete agreement (apart from mood affiliation).
Problem is that the economy isn't really picking up and so now the bill is passed on to our children and grandchildren to pick up.
It has often seemed to me that if you truly believe in Keynesianism, the fact that the economy is still in the crapper and has been for nearly a decade now really shouldn't surprise you, because we've really only used the bits of Keynesianism that happen to be convenient to our ruling class. If you don't do what Keynesianism tells you to do, you shouldn't expect the results it promises.
(Again, I'm not really a big believer in either true- or political-Keynes, but still, one is a serious economic theory and the other is a convenient fiction.)
> we've really only used the bits of Keynesianism that happen to be convenient to our ruling class.
where I would remind that it is not just about convenience to ruling class; much of it is about populism (paying out popular social transfers from state coffers, and not collect unpopular taxes) which is rewarded with votes.
Ever see Canadians complain about the value of their loonie in threads online? I see it constantly, they complain because they've lost purchasing power. What happened? The USD soared when the Fed stopped debasing it so aggressively with QE, and the Canadian economy went into recession because commodities are priced in dollars (leading to a double whammy).
The US effectively did helicopter drop trillions of dollars. The Fed's balance sheet presently represents a housing, bank, government and stock market bailout.
The bottom 50% don't own much in the way of assets however, so when you debase their purchasing power and send the value of the dollar plunging (post 2002 or so), their standard of living falls significantly. The rich could mostly care less, within reason, because their assets can often be shifted to better returns based on what's happening at the moment. Average worker incomes however cannot be shifted, they simply get eroded.
This is fundamentally why the median US worker has seen almost zero inflation-adjusted income increase in 40 years, post Nixon's choice to debase the USD. No coincidence the cost of everything has soared (including commodities), perfectly timed from that fateful decision.
It's also no coincidence that every nation's GDP simultaneously skyrocketed - priced in dollars - when the Fed began debasing the USD around 2002/03. In vague terms that represents the vast loss of purchasing power that the dollar experienced, to the benefit of pretty much everyone else. It's also why, when the dollar turned back the other way after QE stopped, emerging economies like Brazil crashed so hard and fast (as the USD pulls capital out of Brazil like a gravity well), and it's why China is bleeding such large sums of capital right now (as occurred on a smaller scale across Asia the last time the dollar went on a big bull run in the 1990s, leading to the Asian economic crisis of 1997).
If you're the Fed and you run actual 3% to 4% persistent inflation (while lying and pretending the CPI is accurate at say 2%), and worker wages climb by 1% to 2% per year - then over 20 years the average worker gets destroyed.
In pretty much every country a helicopter drop has been tried, it has led to inflation in relative proportion to the size of the drop. Inflation harms the poorest the most (see: Venezuela, Argentina, Zimbabwe, Russia, Brazil). The US is a bit of a special case in that regard, because it can export some of that inflation to the world via the global reserve currency, which helps blunt the amount of inflation that immediately hits the domestic economy. That inflation often finds its way back however, which we may see shortly with China liquidating its treasuries.
That's not a blanket truth. Inflation is good if you don't have savings. It's bad if you do.