World, Economy, Latest on coronavirus outbreak

To save the world: Citizen's income vs. helicopter money?

Not only dramatic monetary policies but also broader income support for all citizens is needed

Aysu Bicer   | 20.03.2020
To save the world: Citizen's income vs. helicopter money?

ANKARA 

Governments and central banks around the world have started unveiling financial rescue packages amid rising concerns over the negative impact of the novel coronavirus on economies, yet it seems a more citizen-friendly approach is needed.

The world has been going through extraordinary times due to the pandemic's devastating impact on people's lives and national economies.

The virus has killed more than 9,800 people so far, with over 242,000 cases confirmed worldwide as the situation deteriorates day by day.

Restrictions on travel, trade and everyday life will seriously impact corporate debt markets as well as people's well-being.

Many economists observed that the spread of coronavirus crumbles global demand growth, rising risks over global markets.

This is the reason why governments around the world have started unveiling packages enabling additional support for their health systems, incentives for businesses or restructure public receivables.

One of the measures that also come to the agendas of governments is helicopter money and to many economists this is right time for it to be applied.

Time for helicopter money?

The U.S. Federal Reserve, or Central Bank, and others across the globe have cut interest rates, introducing the most expansive monetary policy practices, with governments imposing expansionary fiscal policies.

In theory, these interventions should have calm markets down, stimulating economy but in practice it showed vice versa.

Now, with market volatility increasing, academics along with well-known economists have started raising concerns over the limited effects of monetary policies.

This is the reason why, some economists, therefore, propose that nonrepayable money transfer from the central bank to the government, which is ‘helicopter money’.

Coined by the American economist Milton Friedman in 1969, helicopter money refers to a last resort type of monetary stimulus strategy to spur inflation and economic output.

It includes printing large sums of money and distributing it to the public so that people can spend more and boost the economy.

It also requires both monetary and fiscal policies to be carried out together, meaning central banks and governments cooperating with each other.

"Although it is questionable whether it will work or not but it is quite easy to implement an expansionary monetary policy," said Ceyhun Elgin, an economics professor from Columbia University, told Anadolu Agency.

However, he said, the state treasury must find additional resources to implement its expansionary fiscal policy.

In the current situation, it will be very easy for the U.S. Treasury to find money because we are in an environment where the market begs the American Treasury as 'borrow from me', he also noted.

"For Turkey, at least for now, the situation is not the same, so the state’s cheap borrowing is unlikely," he said, adding, money expansion, which can normally be financed through taxes or borrowing, will be limited in the current environment.

Therefore, it is suggested the central bank could direct nonrepayable credit to the government's account for the amount of the additional transfers, a money- financed fiscal intervention.

There also concerns raised as to the implementation of such a policy. One of them is the possibility of the violation of the principle of central bank independence.

It is also thought that this policy could be a source of an inflation bias, leading to alterations in people behavior.

What is universal basic income?

The next step for governments may be to look at ways of increasing the basic welfare level, such as universal basic income (UBI), to ensure that all individuals are able to meet their personal needs.

UBI is spoken in the context of this crisis and some economists believe its timing could not be better.

The World Bank defines UBI as "a transfer that is provided universally, unconditionally and in cash” that “holds an attractive promise of change across many lines."

Currently, no country has a UBI in place, although there have been and still are several small-scale pilots and a few larger-scale experiences in countries such Finland, Italy and Iran.

"Universal basic income can be put into practice by governments," Elgin said.

At least governments could pay some income to the people whose income is decreasing or reset through the crisis, he noted, adding in doing so they see a practical example of how this policy works.

Having said that he stressed an environment where people do not go out to spend, giving money would not solely ease the situation in sectors such as services, tourism and entertainment.

It may be useful, therefore, for the state to act as "buyer of the last resort", that is, the government will create demand for these sectors.

"Of course, this is a short-term policy proposal," he stressed.

'People's quantitative easing'

We need some sort of income support for all our citizens, whether employees or employers. Perhaps one might call it a truly People’s Quantitative Easing (QE), said Jim O'Neill, a well- known British economist.

In a piece for U.K.-based think tank Chatham House, he suggested that policymakers in big economies should consider a specific dramatic economic policy gesture.

"It may not be warranted from all G20 nations, although given the uncertainties and the desire to show collective initiative, I think it should be G20 driven and inclusive," he said.

He argues that traditional economic policies are not quite and solely helpful in coping with such a big crisis. So governments should not utterly depend on the expansion of central bank balance sheets.

"At the core of these views is the notion of giving money to people, especially lower income people, directly paid for by central banks printing money," he noted.

Since the crisis is exceptional, including huge demand-supply shocks and sending shockwaves all around the world, governments should not expect too much from monetary policies.

By giving an example from the U.S., O'Neill said the Fed is legally restricted from conducting a direct transfer of cash to individuals or companies.

He suggested that by issuing a special bond, fiscal authorities could overcome this obstacle and central banks could buy such bonds, resulting in money transferred to individuals and business owners.

UBI beneficial for society

Probably with schemes like UBI the economic conjuncture and macro settings play a great role.

Back in 2014 Janet Yellen the former FED Chairwoman addressed the issue in her speeches at a time the monetary authority was on the verge of normalizing her policies.

No doubt in an environments when under-privileged communities endure a hard time as in this current COVID-19 pandemic UBI has a greater potential for working to the benefit of the society.

However when times get back to normal and the world economy still couldn't reach a satisfactory inflationary level questions may arise.

As in a deflationary setting UBI type schemes may create moral hazard problems since motivations and values for hard-work, self-sacrifice, would probably come under danger loosing their meanings when citizens shift to free riders behind UBIs.


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