Why people are getting free money while we only get £10 off fish and chips on a Tuesday.

Coronavirus has bought out all kinds of policy, some of which only existed in the world of theory but now have seen rapid roll-out. One of the most well known has been the US stimulus cheques whereby every American earning less than $75,000 would receive a one-off $1,200 payment with children receiving $500. Around 166.6m adults are eligible for the cheques coming to a cost of $200bn (roughly the GDP of Greece). So has this worked? What other policy has been used, and what could it mean for the future?

Milton Friedman coined the term 'helicopter money' in 1969 as an illustration for this kind of monetary policy in the way that government is almost dropping money from a helicopter. The theory is intended to be used when interest rates are low, and the economy is still recessionary. In the case of the pandemic, it was an attempt to front-run the impending recession in the low-interest environment we've been witnessing since 2008. In effect the policy boosts spending in the economy as if people have more, then they will spend more. Another theory this can play into is the multiplier effect by which a boost in spending is amplified throughout the economy due to respending by multiple economic agents. Using a basic multiplier effect formula and data from the Boston Fed, we achieve a multiplier of 1.11, making the total addition to the economy from these stimulus cheques $222bn. Here lies an issue with this policy instrument that I'll cover later but on the whole the principle is elementary, people get given money, they go and spend that money, and the economy is kept afloat during a tough time when conventional tools aren't viable.

Looking at the US, we see on the whole cheques have been used for the right reasons and as intended. Most households spent on areas of greatest need such as rent, food and paying for a vehicle. Those spending this extra cash on expenses is markedly higher for those in lower-income brackets with 76.71% of those earning less than $25,000 covering expenses. This makes sense as it's a well-known fact that those with a lower income tend to have little to no savings, so this support was a lifeline in covering bills. Many spoke of how people weren't spending the cheques as designed purely investing it through Robinhood and pumping up the price of Tesla stock. While this has undoubtedly occurred less than 14% of those receiving the money invested or saved some of it with only those in higher income brackets being able to invest it. So as we can see, the policy has helped people, especially those struggling to cover their basic needs. In Japan, we have seen an even more comprehensive approach with every resident in the country entitled to 100,000 Yen or $930. Similarly, this is to boost spending in a country that has even less room to cut interest rates with them being below zero (yes you get paid to borrow money) since 2016.

So why is the UK only giving £10 per person off meals and non-alcoholic drinks, Monday to Wednesday in August when many were hoping for similar money to be coming their way? What are the issues with helicopter money? Firstly, looking at the government response, it's not a case that all those who haven't been giving out free money have left their citizens. Many nations have instead opted for programmes centred around retaining people in work. Many European countries have opted for furlough schemes paying anywhere from 70% of salaries in France to 90% in Denmark and the UK in the middle at 80%. These have separate limitations and criteria, but that is boring and takes away from the topic of free money. So why these schemes? Well, unlike the US that currently sits at a rosy 11.1% unemployment, the UK has just 3.9% with Germany the same and France higher at 7.8%. Nothing is to say these rates won't be similar when furlough schemes end, but for now, people still have jobs to go back to. Also, there are many theoretical problems associated with helicopter money. The primary of these is inflationary pressures. If you have a lot of people with more money who are spending more, then the same good or service will have more dollars chasing it and therefore raising the price. The current situation opens up to the argument that demand is so suppressed that this won't be an issue. However, many still believe all the money being poured into global economies will come back in the shape of inflation down the road. Some also claim that helicopter money causes a lack of confidence in the central bank as it is a sign that it's failed in using monetary policy to control the economy. While this could be argued, I believe that the use of unconventional monetary policy is positive as it shows innovation on the part of the central bank and its willingness to adapt. Some of the backbones of policy now such as QE just two decades ago were outlandish and absurd yet now are critical to central bank response. The main issue I see with helicopter money is the inequality it can lead to. In the US a large proportion of the money is being spent on mortgages and rents. In effect, it is driving money straight back into the pockets of those with assets from those that don't. Banks whose net interest margins are squeezed, and loss provision ratios are skyrocketing are not lending to your average Joe and the money coming in from those using stimulus cheques to pay their mortgage is being used to cover those who aren't paying rather than be put back into the system. While I understand there are other schemes in place to build infrastructure and help business, I think giving out free money is not the smartest of moves. When money is being used to cover necessities that is not a 'stimulus' more so a lifeline for those that have slipped below normal, further to this, we as the younger generation will be the ones paying for all this spending through higher tax and spending cuts, so when $200bn is spent on something that arguably won't provide any structural improvements, in the long run, is there much point?

I want to try not purely present issues, and although I don't have all the answers, there are certainly better ways I can think of spending billions. Firstly, the government was right in targetting support at those who need the most financial aid. But surely it would have been more beneficial to make sure they had jobs to go back to when the pandemic retreats. This could be through furlough schemes, further spending on their business loan packages or targeting those in positions vulnerable to technology. This many could have gone a long way to cover the costs of retraining those whose jobs have changed or will become nonexistent so that the workforce will be more robust for the next evolution of the economy. April saw 23,000,000 unemployed people in the US. Reallocating the $200bn to these people would have seen the average person receive almost $9000 a substantial amount that could be used to both help pay bills and retrain them. This isn't the only solution, and there are always trade-offs. Further, you can't expect full and fast roll-out along with targetted support, but surely this could help address some of the systemic issues in the economy and combat the problems that are just over the horizon.

USA Today Check Statistics - https://eu.usatoday.com/story/money/2020/04/28/how-many-people-will-get-1200-in-every-state/111604090/

Boston Federal Reserve MPC - https://www.bostonfed.org/publications/research-department-working-paper/2019/estimating-the-marginal-propensity-to-consume-using-the-distributions-income-consumption-wealth.aspx

MPC Research - https://www.researchgate.net/profile/Jeffrey_Thompson20/publication/341758379_Estimating_the_Marginal_Propensity_to_Consume_using_the_Distributions_of_Income_Consumption_and_Wealth/links/5ef35d3d4585153fb1b0cbc1/Estimating-the-Marginal-Propensity-to-Consume-using-the-Distributions-of-Income-Consumption-and-Wealth.pdf