Bring on the Helicopter Money–and Gut the Fed

You would not think that there would be any worthwhile ideas in an article entitled “Bring on the ‘Helicopter’ Money.” Written by hedge-fund manager Daniel Arbess in today’s Wall Street Journal, the article contains a very good idea buried among many bad ones.

Arbess argues that quantitative easing is failing because there is a lack of demand for credit, so that Fed policy is “pushing on a string,” as it were. In addition, Arbess contends, fiscal policy is acting as a “headwind” to the economic recovery because of higher payroll taxes and rising health care costs.

To combat such “monetary impotence” and “fiscal paralysis,” Arbess recommends a “helicopter drop of money” directly into the economy. In technical terms this is today called “overt monetary finance,” which means that the Fed would bypass the banking system and credit markets in creating money and send the new money directly to the Treasury where Congress would decide on how to use it. Since it is illegal for the Fed to purchase debt directly from the Treasury, this procedure would be considered “a direct equity investment” in the Treasury. Sure this policy poses the obvious risks of inflation in the hands of an undisciplined Congress, but Arbess believes that these risks are “manageable” and that this mechanism offers “an optimum combination of fiscal and monetary stimulus without increasing private or public debt.” Thus, Arbess’s main concern seems to be to expand government spending without further bloating Federal deficits and the national debt.

Of course these are all very bad ideas and are based on the crude and destructive Keynesian notion that money and spending–more paper tickets or their electronic substitutes changing hands–will lead to the creation of more real goods and jobs. But the Fed has created $2.3 trillion (M2) since 2008. What makes Mr. Arbess think that creating dollars through a different channel will alter the result? Furthermore, what is retarding the economic recovery is not the Federal budget deficit or the size of the national debt per se. It is rather the amount of resources that the Federal government is prying from the hands of productive entrepreneurs, investors and laborers, and siphoning out of the private economy into wasteful subsidies to domestic special interests, the financing of unnecessary wars, the feeding of an insatiable and gigantic military machine, and the payment of the salaries of the unproductive politicians and bureaucrats who oversee it all. This is the true burden dragging down the economy and is measured by precisely total government spending that Mr. Arbess so desperately seeks to increase. It matters very little whether such spending is financed by taxes or by deficits funded by debt issuance and money creation.

The one good idea in the article is overt monetary finance, but for different reasons than Mr. Arbess gives. Arbess sees this measure as only a temporary “crisis-fighting tool” that will be stowed away as soon as the economy recovers. But as a permanent policy, it would be a wonderful device for wresting control of monetary policy from un-elected, secretive, and pseudo-scientific Fed bureaucrats and placing it under a Congress subject to popular scrutiny and elections. Of course this would not be an ideal system, which would be a hard money consisting of a market supplied commodity like gold. But it would have a number of significant advantages over the present Fed-dominated system. First, as just noted, money creation by Congress would be far more transparent and understandable to the public than the arcane procedures by which the Fed expands the money supply. Second, the injection of new money directly into the economy via government purchases of goods and services would avoid the continual and systematic distortion of financial markets and the interest rate currently caused by Fed open market operations. This process of “simple inflation” as Mises called it would, therefore, certainly produce rising prices but would not generate business cycles of recurring booms and busts. Finally, the Fed could no longer operate as a bailer-outer of last resort, surreptitiously bailing out gigantic domestic and foreign financial institutions in the absence of discussion and consent by Congress and the knowledge of the public.

For a more detailed discussion of the pros and cons of placing the Fed directly under Congressional control see my article The Flipside of the Trillion Dollar Coin.


  1. Wait a minute, I think I see what Dr. Salerno is doing. He’s emphasizing the crux of Austrian business cycle theory, to wit, that only the injection of bogus money into the *Walrasian loanable funds market* generates the distinctly Austrian crack-up boom (i.e., lowering the nominal interest rate below the Natural rate with the resulting lengthening of the structure of production, Cantillon effects to the arrangement of relative prices and the simultaneity of the inevitable bust). That means the culprit is central bank monetization of government debt or other investment-type assets. But as otherwise deleterious as it certainly is, dumping “helicopter money” generally elsewhere into the economy at random strictly speaking doesn’t foster the boom/bust cycle, at least not of the Austrian kind. That’s all Joe’s saying. I suppose it’s understandable that some people might get upset with this article’s rhetoric appearing to minimize *any* monetary inflating, but it doesn’t *advocate* helicopter inflating; it’s just putting it in its place. Rothbard talked about the relatively innocuous instances of, for example, the general price inflation accompanying the historical Spanish gold influx, or a price deflation accompanying production outstripping the money supply. They foster other distortions in the economy, but not the boom/bust cycle beyond normal business fluctuations.

  2. I can’t believe what I just read. I have had my differences with Joe Solerno but never in my wildest dreams (nightmares) would I have imgines he would suggest that congress control monetary policy. Oh, how the world has changed. I live in a Bizzaro world.

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