No Law Against Helicopter Drops


Paul Krugman worries that there’s a legal problem with re-inflating the economy through helicopter drops of money:

So to do the equivalent of a helicopter drop, the Fed would have to work with the Treasury: it would have to buy government debt, and the Treasury would then hand out the money.

But the Treasury can’t do this without enabling legislation.

And enabling legislation can’t pass without Ben Nelson.

I think that with a modicum of creative thinking the Fed could get around that. True, the only thing the Fed can do is buy assets. But who’s to say what constitutes an asset? They could start up a Sock-Backed Lending Facility (SBLF) that offers “loans” of up to $1,000 per person in exchange for a pair of socks as collateral. Citizens who fail to repay the loan default ownership of their pair of socks to the Fed but don’t otherwise face any consequences. That’s not the same as literally dropping money from helicopters, but it’s about the same.

The important thing, as Krugman was saying earlier, isn’t so much what exactly you do but how you frame it in terms of expectations. You don’t want people to think of this as an early government tax refund that’s going to have to be repaid soon enough. People need to see that you’ve got a wacky bunch of characters running the central bank who are determined to keep printing up cash and trading it for socks until the economy re-inflates back to the trend level. The idea isn’t just that you want people to spend the $1,000 (or go buy new socks), it’s that you want to purge the economy of the excessive demand for money and get people thinking they’d like to trade their money for something else—consumer goods, fixed investment, blah blah.

Now it seems the Fed isn’t inclined to do this, but it can be encouraged to change its mind. The problem is that you can’t have the President of the United States running around talking about belt-tightening. The country isn’t stricken by a crop plague that’s inducing a famine. We’re not at 9 percent unemployment because we’ve become a society with less skills or capital goods than we had ten years ago. If there’s less stuff to go around, then everyone has to tighten their belts. But our shortage is a shortage of money and demand and the government doesn’t fix that by tightening belts, it fixes it by creating more money and more demand.