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Alba Iulia
Thursday, June 4, 2020

“Helicopter money”, the US strategy to stimulate the economy amid the coronavirus pandemic

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The United States approved a package of stimulus measures for $ 2.2 trillion to alleviate the effects of the coronavirus on its economy and which includes direct injections into the pockets of citizens with the aim of reactivating consumption, which is known as “helicopter money

The economic impact of the Covid-19 pandemic has already caused that in the last two weeks nearly 10 million Americans have lost their jobs and unemployment has skyrocketed to 4.4%. The week before, the US Congress approved a stimulus plan that includes giving 1,200 dollars to many Americans or increasing regular unemployment benefits, among other measures.

It is the largest stimulus plan in the history of the country and represents around 10% of the US gross domestic product (GDP).

What is helicopter money?

It is an expansive monetary or fiscal policy that can be applied by governments or central banks that consists of giving money directly to citizens in order to stimulate the economy in a period of recession or when interest rates are at zero.

It is a term used in the 70s by the Nobel Prize in Economics Milton Friedman which explains what would happen if a helicopter were to throw money at citizens.

The theory, which he believes would revive consumption, is back on the table at a time when central banks are starting to run out of ammunition.

Who is it for in the USA?

The fiscal stimulus package approved by the US Congress It is triple the one that was put in 2009 after the outbreak of the financial crisis, which then amounted to $ 700 billion.

Includes an item of nearly $ 250 billion that will be reserved to make direct payments to individuals and families of $ 1,200 for those with an income of less than $ 75,000 a year, to which will be added $ 500 for each child under 17 years of age .

It has another $ 350 billion in small business loans and $ 250 billion more to expand unemployment insurance benefits. It also provides $ 150 billion to support local and state authorities, and another $ 130 billion to strengthen the health system, which in some places, such as New York State, is beginning to be saturated.

What are the main advantages?

If there is sufficient productive capacity and the population does not save the money received, stimulates consumption, which would reactivate the economy. Also, would stop the fall in prices in moments of deflation.

What are the drawbacks?

According to experts, the first is market distortion, since citizens could start consuming goods and services that they did not consume before. Also, would mean a devaluation of the currency, which makes imports more expensive, something that does not favor countries like Spain – very dependent on gas and foreign oil – and that can generate inflation.

Can it be implemented in the European Union?

There are different criteria among the member states on what type of measures to apply to combat the economic crisis caused by Covid-19, so coordinated action in this regard seems difficult.

Nevertheless, the different governments can apply a general tax cut to the self-employed, SMEs and companies to reactivate the capacity of the productive fabric and the citizens, which would increase demand.

However, in a country like Spain, with a deficit problem, it should be accompanied by a reduction in public spending. Some experts point out that it may be time to end administrative duplication and other unproductive expenses that do not pull the economy.

(With information from EFE)

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