Friday, December 05, 2008

Is An Electronic "Helicopter Drop" Feasible? (Part 2)

I first posted on this last January. Here is the link Is An Electronic "Helicopter Drop" Feasible?. Basically, people have debit cards with a zero balance. If the FED wants consumer spending to increase, then it puts money in everyone's accounts. I initially stated that there could be a time limit, so it gets spent quickly, tyring to avoid the policy lag problem. (some people have called Ben Bernanke "helicopter Ben"-this may not be fair, but "helicopter drop" is an old term that I recall from grad school in the 80s).

Here are some additional thoughts on this:

People could have two accounts. In one, they would have to spend the money by the end of the month. In the other the money could build up so you could buy a durable like an appliance. As before, you can't convert these accounts to cash. But the stores can.

We could prohibit them from being spent in grocery stores, so people just don't save money from their own paychecks and then use these accounts to buy necessities.

Some economists say that we need to create inflationary expectations to get AD increasing again (or at least reduce deflationary expectations so things don't get worse). Getting this kind of spending going so quickly might help.

Some articles that I am reading say the FED can basicially create as much money as it wants. It has added over $1 trillion to its balance sheet in the last year. So this would just be another way to do it.

This is consistent with the FED's interest in helping consumers which we see in its buying of credit card debt.

Bank's excess reserves are very high ($600 billion). But not enough is being loaned and spent. So we may need other ways to stimulate AD. Paul Krugman said the other day that it might take awhile to get the fiscal stimulus plans in place. Maybe something like this would work faster.

State sales tax collections might rise. States need money now, so this might help.

If businesses know that consumers will be spending, then they might be more willing to invest and not layoff workers.

The debit cards could be activated like other debit and credit cards. You call the FED and tell them your SS# and you can start spending.

We might have to give people more money each month than the fall in consumer spending to make sure they just don't save their own money and then use the debit cards to buy their normal goods.

The government gives out money anyway, like in unemployment insurance and welfare and food stamps.

It is possible that when economiy start to slide into recessions people might anticipate that the FED will put money in their accounts, so they will delay purchases. But knowing that consumer spending is going to rise might also affect expectations in positively, too. Also, some research suggest that unemployment insurance keeps people unemployed longer but no one calls for ending that program.

Maybe this could only be done if there are 3 straight months of falling consumer spending and it would have to be unanimous or close to it on the FOMC.

1 comment:

Ralph said...

I agree that it is highly desirable to have some way of giving households money and TIMING when they spend it. The debit card idea is a bright idea: I haven’t come across it before. But I just don’t see it working. Preventing people spending the money in grocery stores would be bureaucratic. Plus there are dozens of other household expenses that people could spend their debit card money on in a way to replaced normal weekly spending: in effect, the households that wanted to save would manage to save anyway.

I just don’t see the alternative to dishing out money and trying to get the quantity dished out correct: enough to pull out of the recession, but not so much that inflation takes off after the recession.