Helicopter Drop (Helicopter Money)

What Is a Helicopter Drop (Helicopter Money)?

A helicopter drop refers to a term first coined by Milton Friedman as a rhetorical device intended to abstract away the effects of any monetary policy transmission mechanisms in a thought experiment regarding the addition of cash to the bank accounts of all citizens — as if dropped from a helicopter overnight.

In recent decades this term has come to refer to a figurative application of Friedman's metaphor, as a type of monetary stimulus strategy that increases the quantity of the money supply and directly distributes cash to the public in order to spur inflation — or rising prices — and economic growth. Helicopter drop policies have become a common feature of the response from policymakers to large scale economic shocks since 2000.

Understanding a Helicopter Drop (Helicopter Money)

A helicopter drop is an expansionary fiscal or monetary policy that is financed by an increase in an economy's money supply. It could be an increase in spending or a tax cut, but it involves printing large sums of money and distributing it to the public in order to stimulate the economy. Mostly, the term "helicopter drop" is largely a metaphor for unconventional measures to jump-start the economy during deflationary periods, which consist of falling prices.

While "helicopter drop" was first mentioned by noted economist Milton Friedman, it gained popularity after former Federal Reserve (Fed) Chair Ben Bernanke made a passing reference to it in a November 2002 speech, when he was a new Fed governor. That single reference earned Bernanke the sobriquet of "Helicopter Ben" — the nickname that stayed with him during much of his tenure as a Fed member and chair.

Bernanke’s reference to a "helicopter drop" occurred in a speech that he made to the National Economists Club about measures that could be used to combat deflation. In that speech, Bernanke defined deflation as a side effect of a collapse in aggregate demand, or such a severe curtailment in consumer spending that producers would have to cut prices on an ongoing basis to find buyers. He also said the effectiveness of anti-deflation policy could be enhanced by cooperation between monetary and fiscal authorities and referred to a broad-based tax cut as “essentially equivalent to Milton Friedman’s famous ‘helicopter drop’ of money."

Examples of a Helicopter Drop

Japan, which faced stagnant growth throughout the 21st century, toyed with the idea of helicopter money in 2016. Once again, Bernanke was at the forefront of the conversation when he met with Japanese prime minister Shinzo Abe and Bank of Japan's Haruhiko Kuroda to discuss further monetary policy options, one of which was issuing large scale, long-dated perpetual bonds. In the ensuing months, Japan did not formally implement a helicopter drop but instead opted for further large scale asset purchases. 

A notable recent example of a helicopter drop policy is the direct-to-taxpayers stimulus payments made by the Trump administration, combined with simultaneous QE by the Fed, in response to the economic crisis induced by various government lockdowns of the economy during the COVID-19 pandemic. Initial payments of $1,200 per taxpayer were authorized under the CARES Act in March 2020. Another round of stimulus containing $600 payments was then passed in December of 2020.

The Fed and the COVID-19 Pandemic

Some could argue that the Fed's stimulus measures in response to the COVID-19 pandemic and the resulting recession could be considered helicopter drop money. In response to the economic hardship facing the United States, the Fed took unprecedented steps to stabilize the financial markets and the banking system as well as provide direct support to small businesses. The result was an injection of trillions of dollars into the U.S. economy.

The Fed's stimulus actions were carried out through multiple facilities, including the following:

Paycheck Protection Program

The Paycheck Protection Program Liquidity Facility (PPPLF) was established to help small businesses keep workers on their payroll. The Fed supplied money or liquidity to participating financial institutions so that the banks could, in turn, lend the money to small businesses. Since the money has to be repaid, it might not be the purest example of helicopter money, but repayment has yet to be completed.

Main Street Lending Program

The Main Street Lending Program, which included five credit facilities, was established to support and provide loans to both small and mid-sized companies that were financially sound before the COVID-19 pandemic. The program ended on January 8, 2021.

Corporate Bond Purchases

One of the Fed's programs, in coordination with the U.S. Department of the Treasury, created a facility to directly purchase existing investment-grade corporate bonds of U.S. companies. The facility was called the Secondary Market Corporate Credit Facility (SMCCF) and represented the first time in the Fed's history that the central bank bought corporate bonds and exchange-traded funds (ETFs) that contained bonds.

The Fed's purchases reduced the outstanding supply of bonds, enabling companies to issue new bonds to raise capital or funds. Stimulative actions of injecting money into the economy by buying bonds and the issuance of loans swelled the Fed's balance sheet from $4.7 trillion on March 17, 2020, to more than $7.3 trillion by January 5, 2021.