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Never Tell Me That A Helicopter Drop Of Cash Is Unrealistic…

September 27th, 2013 · 17 Comments
Macroeconomics · Policy

I can’t remember whether this is something that is discussed in the typical undergraduate curriculum, but in grad school there were certainly plenty of references to “helicopter drops” of cash- sometimes to fight deflation, sometimes to implement lump-sum subsidies, who knows- I’m pretty sure I stopped paying attention to the actual concept as soon as I started picturing my professor as the Red Baron:

Anyway, the “helicopter drop” reference is something that is generally attributed to our monetarist and Chicago School friend Milton Friedman, who, in order to make a point about inflation being a monetary phenomenon, stated that price deflation (i.e. negative inflation, or a decrease in the average or aggregate price level) could be prevented (or, equivalently, inflation achieved) by dropping sums of cash onto the public via a helicopter. (This is the basic idea behind the quantity theory of money.)

More recently, Ben Bernanke made an offhand remark about a theoretical helicopter drop back in 2002 as part of a speech on fighting deflation risks:

A broad-based tax cut, for example, accommodated by a program of open-market purchases to alleviate any tendency for interest rates to increase, would almost certainly be an effective stimulant to consumption and hence to prices. Even if households decided not to increase consumption but instead re-balanced their portfolios by using their extra cash to acquire real and financial assets, the resulting increase in asset values would lower the cost of capital and improve the balance sheet positions of potential borrowers. A money-financed tax cut is essentially equivalent to Milton Friedman’s famous “helicopter drop” of money.

So, of course, Bernanke became known as “Helicopter Ben,” since financial journalists like to latch onto things that make good headlines, and, luckily for us, other web sites have higher graphics budgets than this one:

I guess I shouldn’t be surprised, since dropping money out of a helicopter sounds ridiculous on its own, but dropping money out of a helicopter as economic policy doesn’t seem to strike most people as the most sane of approaches (even though it’s not nearly as crazy as it sounds).

Anyway, I totally have a point here…and it’s this:

Real, honest-to-goodness tens and twenties fluttered onto the gravel parking lot from a helicopter hovering above. It was a sight so bizarre, some people didn’t believe it was happening at first.

“Nobody really knew what was happening until it happened,” Kara Miele, an Irish Eyes employee, told HLN affiliate WBOC. “You could see that they were yelling that it was money, and then everyone knew it was money. And then the customers ran over and we ran over.”

There was a mad dash for the cash as it landed in the gravel and the canal, and floated around into nearby streets and trees. It seemed like a recipe for chaos, but Miele said people seemed far too excited to argue over the bills.

“Nobody was like fighting with each other for it, but everyone was just scrambling, trying to grab everything they could.”

The crazy stunt was actually a heartwarming last wish from a local man. Leonard Maull operated a local bait and tackle shop in Lewes and died about a year ago.

Bill Berry, who is an accountant and a trustee for Maull’s estate, confirmed that Maull had the random act written into his will: He wanted $10,000, in $5, $10, $20 and $50 bills, flown over the harbor and dropped for strangers to enjoy.

Instructors, feel free to use this as a rebuttal when your students tell you that a helicopter drop of cash is totally unrealistic. You could also use this scenario to start a discussion on whether this guy’s actions helps Bernanke out nowadays or not. (Hint: This parable is particularly relevant to the scenario.)

Tags: Macroeconomics · Policy

17 responses so far ↓

  • 1 Jeff // Sep 27, 2013 at 12:19 pm

    Minor quibble:

    s/could be achieved by/could be prevented by/

    (or search and replace in a non-vi editor…)

  • 2 Dustin // Sep 27, 2013 at 12:32 pm

    I thought the other economic notion here was that because of corruption and inefficiencies in distribution networks, it would be better to just dump money over poverty or crisis stricken areas, rather than give it to the governments to manage. I like Steve Hughes’ joke: “Don’t give the poor money. Give it to me. I’ll see that they get it”.

  • 3 econgirl // Sep 27, 2013 at 12:55 pm

    @ Jeff: Of course- I am convinced that I am so unused to writing about deflation that things go haywire and my brain and my hands don’t know how to cooperate. 🙂

  • 4 BZ // Sep 27, 2013 at 1:18 pm

    @Dustin — that’s close, but not exactly. Many economists believe expansionary monetary policy is best when it does not distort economic structures by making them stray too far from actual consumer preferences and resource usages. Such distortions can happen (and indeed, some cynics suggest is supposed to happen) under current Fed distribution. To eliminate this effect, economists sometimes talk about a magic money fairy that causes everyone’s bank account to double evenly. Now, I could be wrong, but my understanding is that the helicopter drop is supposed to be a more practical metaphor for talking about inflating the money supply without distorting the economy.

  • 5 Tim // Sep 27, 2013 at 1:50 pm

    If you ever get a chance, check out the movie “The Magic Christian” (http://www.imdb.com/title/tt0064622/)

    It is related to handing out large amounts of cash…

  • 6 bdbd // Sep 27, 2013 at 1:53 pm

    The more modern usage is “drone money” or a “drone drop of cash”

  • 7 Brett // Sep 27, 2013 at 4:20 pm

    You could always do it like a weird stimulus check from the Federal Reserve, although trying to sell that politically would be a nightmare – “You’re just printing money and giving it to people?”

  • 8 Frederic Mari // Sep 30, 2013 at 7:19 am

    I am quite surprised that you seem against drops of cash as per the Ask.com take on the parable of the broken window suggests…

    The point is and remains that, during crisis due to AD drops, we have capacity sitting idle…

    While destruction is a suboptimal way to get that capacity utilised (and money drops are thus preferred), the general point remains.

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