Ryan Cooper begins his piece in the new Washington Monthly magazine with a straightforward pitch:
How would you like to get $2,000 in free money today, fresh off the government printing presses? And what if I told you it wouldn’t just be a nice windfall for you and your friends and family, but that we’d do it for all Americans on an ongoing basis, and that doing so would solve our crippling problem of mass unemployment?
Not long after the financial collapse in September 2008, my friend Duncan Black began recommending that then Federal Reserve Chairman Ben Bernanke should just throw money from helicopters. Despite the fact that Mr. Black is a Brown-educated economist who I personally respect a great deal, I thought his recommendation was one part utopian and one part delusional. I no longer think he is delusional, and Ryan Cooper’s piece explains why.
Black got the idea from Milton Friedman, through testimony given by none other than Ben Bernanke himself.
Milton Friedman suggested that monetary policy could never fail to cure mass unemployment, because as a last resort the central bank could just drop cash out of helicopters—an enticing analogy that former Federal Reserve chairman Ben Bernanke borrowed in a 2002 speech, earning himself the persistent nickname of “Helicopter Ben.”
It was Black who introduced me to the term “Helicopter Ben,” which he initially used derisively as he watched him preside over the Housing Bubble. After the bubble burst, Black began urging Bernanke to live up to his moniker, writing in the USA Today that “The Federal Reserve should give people free money.”
The only potential risk of this is increased inflation, though higher inflation is a potential consequence of any expansionary monetary policy, and the Fed has demonstrated its ability to reduce inflation when necessary. In any case, an additional bit of inflation would be welcome right now, as it would reduce the real values of fixed rate mortgages and help to decrease the number of “underwater” borrowers.
The Great Recession, with its long period of extended high unemployment rates, has caused unnecessary economic hardship for millions. Remarkably, there’s a simple way to help people and improve the economy. Even more remarkably, we aren’t doing it.
If you are like me, you learned about German hyperinflation in the 1920’s at a relatively young age, and you probably were taught that the hyperinflation was caused by the overprinting of money. The idea is simple: the more units of money there are, the less each individual unit is worth. After all, printing money doesn’t create wealth.
But that may not be true. As Mr. Cooper explains, the key to a healthy economy is strong aggregate demand:
The key economic idea undergirding this policy idea is something called aggregate demand, which, stated simply, is the total amount of spending in the economy. During a financial crisis, aggregate demand goes down, since newly unemployed workers have less money and people who manage to keep their jobs reduce their spending out of fear. When people spend less money, sales fall, and businesses are forced to lay off workers, who then spend even less money, and so on. In other words, money goes in circles: my spending is your income, and your spending is my income. If we all simultaneously cut back on our spending—if aggregate demand declines—then everybody’s income declines, too. That is, very crudely, what happened during the Great Depression, when there were millions of perfectly able workers desperate for jobs, while perfectly functional factories lay idle due to lack of customers. It’s also what has been happening, to a milder degree, in our economy since the 2008 crisis.
The government can increase aggregate demand by increasing spending and/or by lowering taxes and fees. In the former case, they replace absent consumers and give businesses someone to sell to. In the latter case, they can let consumers keep a little more of their money in the hope that they will spend it. The more money there is in the economy to buy stuff, they fewer people will be unemployed, the more revenue will come into the treasury, and the less money will go out for things like unemployment insurance and food stamps. Unfortunately, whenever the economy takes a sharp turn for the worse, the natural political reaction is to ask the government to tighten its belt like everyone else. What we wind up with is a movement that demands governmental austerity and claims that it has been Taxed Enough Already, despite taxes being at the lowest level they’ve been since the Eisenhower administration.
