Coronavirus: US 'helicopter money' may not avoid US crash but could soften landing
26 March 2020, 19:32 | Updated: 27 March 2020, 07:23
Anyone doubting the need for the $2trn stimulus package approved by the US Senate this week will have been disabused by the shock rise in jobless claims.
The record-breaking 11-year expansion in American jobs, which have seen 22 million people join the US labour force during the last decade, has come to a juddering halt.
A scarcely-believable 3.3 million Americans registered as jobless during the week to last Saturday - smashing the previous record of 695,000 set in October 1982 - and the chances are that, as more of the US goes into lockdown in response to the coronavirus outbreak, there will have been a similar number registering this week.
Uncle Sam's response will be a thumping package that will see cheques of $1,200 sent to all Americans earning up to $75,000 annually or to married couples earning a combined $150,000.
Parents will receive an additional $500 per child.
In order that the support is targeted at lower-income families and households, the pay-outs taper off at a rate of $5 for every $100 earned above those thresholds, before cutting out at $99,000 for individuals or $198,000 for couples with no children.
Other measures include a widening of unemployment benefit that will hand unemployed Americans an extra $600 a week for four months on top of their regular benefits.
It includes some $350bn in loans to small businesses, some $150bn for hospitals and some $500bn for industries, such as aviation, that have been especially hard-hit.
There are also measures aimed at helping the individual states that make up the union, for them to dish out, as well as support for individual towns and cities.
Provisions have been included to pay for the repatriation of Americans overseas wishing to come home and for diplomatic programmes.
The big question, obviously, is whether it will work.
To answer that, you have to look at the purpose of the 868-page bill, namely "providing emergency assistance and health care response for individuals, families and businesses affected by the 2020 coronavirus pandemic".
Not everyone agrees that, despite the vast numbers involved, the package will meet even that rather broad aim.
Dan Sullivan, the Republican senator for Alaska, said: "If there's one thing about this crisis that we've already seen is that new challenges pop up every day, every minute, every hour."
The biggest and most eye-catching element in the package is the cheques being sent to individual households.
This brings to life the abstract concept of so-called "helicopter money", first mooted in 1969 by the legendary economist Milton Friedman, who sketched out a scenario in which a helicopter showers $1,000 on an imaginary community that then goes out and spends the money.
Professor Friedman, who later won the Nobel Prize in Economic Sciences, was trying to illustrate how monetary policy can have a malign impact in stoking up inflation and the idea gained traction during the hyper-inflationary 1970s.
More recently, however, it has been seized on by politicians as a way of stimulating growth.
George W Bush, the former US president, sent cheques to some households following the terror attacks of September 2001 and in the early stages of the global financial crisis.
He and his successor, Barack Obama, have both supported the idea of "helicopter drops" to tide America through the current crisis.
Yet the policy is not without risk.
Not every family may spend the money sent to them.
Others, with great swathes of the US economy seizing up due to social distancing policies, may not even be able to.
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There is also an argument that sending money out in such great wedges may also be a blunt instrument and not sufficiently targeted.
This applies in particular to the additional pay-outs to unemployed Americans.
These, arguably, should have been more carefully targeted to take account of the fact that unemployment benefits vary from state to state.
The same applies to the money being targeted at healthcare providers.
Another key question concerns the speed with which the package can be enacted and, in particular, the support to small businesses.
Many of these will not be able to survive very quickly without cash - and, accordingly, the $350bn or so aimed specifically at small businesses, particular in sectors like retail and hospitality that have been closed down in order to promote social distancing, must be disbursed quickly.
Critics of the package argue that the element in it to support small businesses is not sufficiently big.
And that, frankly, is probably the biggest problem with this package.
As Joseph Song, US economist at Bank of America Securities, puts it: "The $2tn package is the bare minimum needed, in our view. We think Washington will need to ultimately enact close to $3tn in fiscal stimulus, comparable to the response during the Great Recession [of 2009].
"Part of the reasons that fiscal policy will have to remain expansionary is because monetary policy space is much more limited compared to prior downturns."
He argues that further rounds of stimulus will require extra spending on big infrastructure projects and on research and development spending to boost productivity.
Such an idea has historic precedent: one of the hallmarks of President Franklin D Roosevelt's revival of the US economy from the Great Depression during the 1930s was big public works projects such as the construction of the Hoover Dam between Nevada and Arizona and the work undertaken by the Tennessee Valley Authority.
Mr Song also suggests holidays from sales taxes and tax credits for travel-related spending, reminiscent of the Obama-era "Cash for Clunkers" scrappage scheme to support US carmakers, might also be needed.
So the key point about this package is that, while huge, it will probably not be enough to prevent the US economy from tipping into a recession.
It may, however, prevent the recession from being worse and from being longer.