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SKARBECK: Rekindling economic growth may require novel thinking

May 14, 2016

Ken SkarbeckWhile the U.S. economy paddles its way forward in a low-growth world, economists and other big thinkers are pondering what strategies are left for policymakers should the country fall into recession.

Since the credit crisis, the Federal Reserve has embarked on an unprecedented series of maneuvers, lowering interest rates to near zero and conducting three rounds of quantitative easing, all intended to increase bank lending to stimulate the economy. Most observers agree these tactics have reached the end of their usefulness. Banks have been cautious in their lending as they build capital to comply with new regulations, and frankly, the demand from consumers and businesses to borrow money hasn’t been strong.

So policymakers might have to resort to other means to stimulate a stalling economy. One of the more radical ideas is the concept of “helicopter money.” Back in 2002, former Fed Chairman Ben Bernanke gained the nickname “Helicopter Ben” when he referenced a quote from the late economist Milton Friedman on how to combat deflation. Friedman in his 1969 book “The Optimum Quantity of Money” described a helicopter flying over a community that “drops an additional $1,000 in bills from the sky.”

Last month, Bernanke revisited his 2002 speech in a blog he writes for his current employer, the Brookings Institution. He again suggests that helicopter money could be a valuable tool to use as a last resort by governments whose debt is already too high. Bernanke notes that the probability of using it in the United States seems extremely low, but blogs, “Nevertheless, it’s important that markets and the public appreciate that, should worst-case recession or deflation scenarios occur, governments do have tools to respond.” Bernanke suggests it might be better used in Europe and Japan, which are struggling to reach their inflation targets.

So, what is helicopter money? Bernanke acknowledges the imagery of the term is disconcerting to people, and instead has dubbed the strategy the “Money-Financed Fiscal Program.” The essence of the strategy is to expand fiscal policy by increasing public spending or implementing a tax cut. However, the money to finance the fiscal stimulus is not obtained by issuing more government debt. Instead, the Fed credits the Treasury, thereby directly increasing the money supply.

Note that this would mean a significant increase in the Fed’s power by moving into the arena of fiscal policy and usurping duties that have historically been the province of Congress.

Bernanke’s blog argues this would be extremely effective in influencing the economy via direct public works spending, increased household income, and a temporary increase in inflation.

The need to upgrade our infrastructure has been a nagging issue in the United States. A study published this month by the American Society of Civil Engineers warned that U.S. gross domestic product would underperform by $4 trillion over the next decade if the country continues to underinvest in its infrastructure. The organization gives the condition of U.S. infrastructure a grade of D+.

We know that, at some point in the future, the economy will experience a recession. The use of helicopter money would be a last resort, but as famed bond manager Bill Gross wrote in his May Investment Outlook, “I suspect politicians and central bankers will choose to fly, instead of die.”•

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Skarbeck is managing partner of Indianapolis-based Aldebaran Capital LLC, a money-management firm. He can be reached at 818-7827 or ken@aldebarancapital.com.

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