(Originally published here.)
On Saturday, a helicopter flying over the small beach town of Lewes, Delaware dropped $10,000 in small bills over a mesmerized populace. The event was one of the last wishes of Leonard Maull, the former proprietor of a bait-and-tackle shop. It also is a neat little demonstration of an idea associated with Milton Friedman and Federal Reserve chairman Ben Bernanke.
When Friedman was asked how the government could stop prices from falling, he repliedthat it could always drop cash out of helicopters. In 2002, Bernanke gave a speechdedicated to answering this question seriously. Japan’s experience with mild deflation made many at the Fed nervous, especially since interest rates had already been lowered so close to zero. There were many discussions about what could be done in those circumstances. Bernanke suggested that monetary stimulus would be most effective if it were paired with tax cuts or some other type of expansionary fiscal policy:
In practice, the effectiveness of anti-deflation policy could be significantly enhanced by cooperation between the monetary and fiscal authorities. 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.
One wag illustrated this concept during the peak of the crisis by creatively editing scenes from Apocalypse Now and The Matrix, among other films. (Let’s just say that the image of Bernanke in aviator sunglasses has stuck with me for nearly five years.) In the clip, Bernanke responds to a screaming Jim Cramer and headlines warning of imminent collapse by leading an air cavalry squadron over Wall Street to dispense what must be tens of millions of dollars in cash. This, we are led to believe, ends the crisis and allows Bernanke to sleep soundly at night. (Breaking Bad’s Jesse Pinkman also randomly threw millions of dollars in cash out of a moving vehicle, although in his case he was motivated by guilt and didn’t feel better afterward.)
There is a meaningful difference between people like Pinkman and the man in Lewes, who were redistributing money they might otherwise have spent, and people like Friedman and Bernanke, who recommended creating new money ex nihilo and then distributing it. Literally throwing cash at people probably wouldn’t be the best way to get the world economy moving again. It would, however, probably be better than what we’re doing now.
(Matthew C. Klein is a writer for Bloomberg View. Follow him on Twitter.)