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.

Is An Electronic "Helicopter Drop" Feasible?

Economist Mark Thoma wrote about something called a "helicopter drop" on his blog last Sept. It was called "The Repo Man" The idea is that the FED (Federal Reserve Board), simply drops money out of helicopters so that people would spend it. We might do this if there is not enough aggregate demand (AD) in the economy. The FED might have lowered interest rates to stimulate spending, but businesses and consumers might be afraid to spend more even at these lower interest rates. So the argument is that if we are all just given cash, we would spend it.

But what if people don't spend it, the cash they recieve? Mark Thoma said that even the money they just stuff into cookie jars might make them take more risks, which could increase AD. But supposing that even that does not happen and there is no effect on AD, that everyone just holds it? Then I guess the drop does not work.

But suppose that everyone has an account with the FED and we are all given debit cards that initially have a zero balance. If the FED saw the need for a quick stimulus that they know would be spent, they could simply announce that everyone citizen now has $100 (or whatever amount is appropriate) in their account and they have some fixed, finite time period to spend it, say 1-3 months. If you don't spend that money, use the debit card, then after the deadline your account reverts back to zero. Maybe it would not be all citizens, just those who earned below a certain amount the previous year. Maybe the FED debit card could only be used in department stores and grocery stores if people are worried about what it gets spent on. People could not get cash back or withdraw the value in cash from the FED.

All consumers would have an incentive to spend it fairly quickly and we could get a quick stimulus to the economy with no time lag issues (other than the time it takes for the FED to realize the policy is needed). Once people started spending money, the FED would have to pay the stores the money that we spent in some similar fashion to the way current debit cards work. The FED would simply use a computer to put the money in everyone's account. They would have to create new money to pay the stores.

I know this might seem like a crazy idea and there could be all kinds of technical and logistical issues. Fraud and theft could be problems. There would be a cost of creating the debit cards and running the program.

Update: My department chair here at San Antonio College, Bruce Norton, said that people who get money put into their debit card accounts might spend less out of their paycheck than they normally do if they can spend the money in these accounts. They would put $100 from their paycheck into the bank (something they would not normally do) and can spend the money from the debit card. So it is possible that this increase in the money supply will not lead to an increase in AD. But it would be no worse than any other money supply increase. And if people in lower income groups get this money, their MPCs (marginal propensity to consume) may be higher than it is for other people, so they might be likely so spend it. Also, if we don't have enough AD, some of the people getting this money will be unemployed, so they are likely to spend it (I am not suggesting getting rid of unemployment insurance or other programs like this).