Decision makers are now having to choose between intensifying the shutdown and the continued functioning of the economy – critical and urgent decisions. The epidemiological and health considerations in favor of social isolation and shutting down activity are being weighed against the claims of serious harm to the economy. How is it possible to prevent death and illness while also preventing the paralysis of life?
There’s no doubt the coronavirus crisis will cause huge economic damage. Many employees will lose their jobs, the self-employed will lose their source of income and tycoons will lose their companies. Certain sectors of the economy will be badly hurt for years, especially tourism and the airlines, as well as restaurants and cafes. It’s akin to the damage caused by wars and major natural disasters.
The longer the pandemic lasts, or if there’s another outbreak, the greater the damage will be. The direct damage to both production and consumption will be joined by problems like the failure of financial institutions, credit crises and bankruptcies, and negative developments will feed each other.
At the personal or family level, very little can be done. But at the governmental level, it’s possible and necessary to do a great deal.
For instance, the government could mail checks to households, as was done in Hong Kong and Singapore, and is coming soon in the United States as well. It should help companies, and especially small businesses, through subsidies and interest-free loans. It should increase the size and duration of unemployment compensation. It should make massive and very belated investments in relevant medical equipment, hire additional medical staff and pay them more. It could grant tax relief. And so forth.
Do these steps contradict a responsible fiscal policy? For years now, leading economists worldwide have thought that it’s both possible and necessary to expand budgets and finance them through government debt.
But the policy I’m proposing is more far-reaching. It has recently been advocated by economists like Jordi Gali of Pompeu Fabra University in Barcelona, who is one of the world’s leading experts on monetary economics. This proposal doesn’t involve raising taxes, nor does it involve issuing government bonds, since that would lead to raising taxes in the future.
The policy I propose is known by the colorful name of a “helicopter drop” – a phrase coined by Milton Friedman to describe a helicopter flying above a town and dropping $1,000 bills on it. In the current century, other leading economists have proposed this policy under certain circumstances, like the ongoing recession in Japan.
The fact that interest rates in many countries have been nominally zero since 2008 bolsters this position. And a helicopter drop would let us shut down the economy for health purposes and extend the shutdown for as long as necessary to flatten the epidemiological curve of COVID-19’s spread.
How would such a policy be implemented? The central bank would finance the government’s aid activities. Or in plain language, the Bank of Israel would print money for this purpose.
Before readers faint or reach for their smelling salts, I’ll note that this policy became taboo because printing money to cover government spending led to galloping inflation in the 1970s and 1980s. Based on the lessons learned from this bitter experience, laws were passed against printing money profligately. The central bank’s independence and its separation from the needs of the Finance Ministry and the budget became cornerstones of economic policy worldwide, including in Israel. A vast quantity of economic research in the 1980s and exhaustive work by central bankers inculcated this norm.
The answer to these arguments is that we’re currently in the midst of a huge crisis, a genuine emergency. This wouldn’t be a permanent policy change; when the emergency ends – from an economic standpoint, not just a health standpoint – the usual norms will return. The party that will carry out both the deviation from the norm and the return to it will be the Bank of Israel, to which this norm is very important. Gali’s research shows that this policy would be much more effective than financing aid through debt. The Bank of Israel’s control over the process would prevent future finance ministers from trying to take it over and employ it even when there isn’t an emergency. The process would be accompanied by fast-track legislation that would ensure the Bank of Israel’s control and remain in effect for only a limited time.
But wouldn’t this involve creating something from nothing? The economic model underlying this proposal is known as the New Keynesian model, and it is accepted today by most central banks worldwide. It’s based on the assumption that not all production inputs (workers, capital) are actually employed, and that prices don’t rise or fall all at once, but gradually. These conditions palpably exist during the coronavirus crisis.
This policy is meant to deal with a real crisis of declines in both supply and demand. And it will enable both of them to rise again later on, when workers and capital return to production.
It’s important to remember that we have been living in an environment of near-zero inflation for some time now. The vast monetary infusion following the 2008 financial crisis didn’t lead to an increase in inflation in any country. Under the current circumstances, my proposal also isn’t likely to produce significant inflation, in contrast to the traumas of the past, when printing money was inflationary.
And what if it turns out that the demon isn’t actually so bad and the horrifying economic scenarios end relatively quickly? Then the helicopter drops will end sooner, and the helicopter will return to its base without distributing all the shekels it is carrying.
Prof. Yashiv teaches at Tel Aviv University’s Berglas School of Economics.
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