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The helicopter drop

By Karl Smith

Bell407_GNU-FDL.jpg Wiki Commons

A number of economists are concerned that the Federal Reserve can't on its own stimulate demand. I am skeptical here, but with unemployment holding steady at 10 percent I am more than willing to consider alternate strategies.

The most straightforward would be what economists nicknamed the Helicopter Drop. At its core this means that Federal Reserve would print money and the IRS would mail that money to people as checks. It would be as if we dropped money on the nation from helicopters.

In practice, this would likely function through a payroll tax cut funded by issuing long-term bonds that are then bought up by the Federal Reserve.

Most people pushing back against this idea seem to be worried about the long-term solvency of Social Security and that cutting payroll taxes would gouge the Trust Funds assets. At its heart this is an accounting issue that I don't think anyone should be concerned about, but if you are, there is a simple solution: the payroll tax credit.

Under this plan you continue to pay your payroll taxes, yet you receive a tax credit exactly equal to your payroll tax contribution. As with the making-work-pay tax credit we'll reduce withholdings so that workers will see the benefits each week in their paychecks.

I'd be in favor of crediting both the worker portion and the business portion of the payroll tax because it would relieve strain on small businesses and simply pump more money into the economy. Yes, some of that money will wind up on the balance sheets of already cash-heavy corporations. However, a broad simple cut for all workers and businesses means that everyone who cash short gets relief and the government does not have to get into gory details of picking some businesses over others.

Larry Summers famously favored stimulus that was targeted temporary and timely. I favor that which is simple, bold and clear.

Karl Smith is an assistant professor of economics and government at the University of North Carolina and a blogger at

By Karl Smith  | November 5, 2010; 3:59 PM ET
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Hey Karl, on behalf of the relatively few regular posters on this column, it was very good having you here. (I presume EK will be back Monday)

You will I hope excuse my saying that being a university professor seems wasted on you (a high compliment coming from me) Get off the campus and run for office, or start a business or run your own money like economists Jeremy Siegel and Jeremy Grantham have done. (change your name to Jeremy if you have to)

Make your students watch CNBC for two hours each day and then test them at the end, so you can find the time to do double duty.

Just don't wind up like Christina Romer, Dean Baker, or the great intellectual terrorist Paul Krugman. You've got an open mind. Go do something with it!

Posted by: 54465446 | November 5, 2010 7:47 PM | Report abuse

The reason this is a BAD idea is the same reason I'm not allowed to print money and pass it around. It is worthless, dilutes existing dollars value, and WON'T stimulate anything except inflation which is actually running WELL up.

The ONLY people who would support this are those who are CLUELESS as to what money is supposed to represent.

Posted by: illogicbuster | November 6, 2010 9:44 AM | Report abuse

how is a pay roll tax credit going to help? it would only be available when filing taxes. while business might be credited earlier, that won't happen to employees. and we will have to pay for that tax credit some how. since it will cut revenue. so you will either trash funding for SS trust earlier or increase the deficit now

Posted by: willid3 | November 6, 2010 3:20 PM | Report abuse

@illogicbuster - the inflation rate in September was 1.14% and hasn't been over 3% in two years.

Diluting the value of the dollar would:

1) make it easier for households to pay back their debts (your car payment stays at $400 but prices and wages increase, so $400 a smaller piece of the paycheck, e.g.)

2) make our goods more attractive to foreign buyers (better to spend those dollars than hold them)

This is what the Fed is for. Go Ben Go!

Posted by: kuzmatt9 | November 6, 2010 4:44 PM | Report abuse

I guess the only reason that what the Fed does with its monetary policy is not counterfeiting under Title 18 USC is that the institution is above and outside of all federal law, so the question of whether these guys are diluting and debasing the nation's "store of value" can never be raised by an ambitious Justice Department or local US Attorney.

In the same vein, please, some of you really smart people, tell the rest of us why pumping up and issuing "derivatives," with a total "notional value" of what, $700 trillion?, is not the most pernicious kind of counterfeiting? Seems to me that the language of the various sections of 18 USC Chapter 25 would make a pretty clear case. As pernicious as the Iranians who allegedly are using a currency press that was sold to them, by US, to churn out tons of pretty good counterfeit $100 bills to attack the full faith and credit of the United States.

And to some of you, maybe the fix for your fearfulness about the bleeding stump that is the SS "Trust Fund" is to get rid of the "cap" and let the rich folk pay on all their income, like everyone under the cap gets to do. But noooo, that would not be fair to the Wealthy, now would it?

Posted by: jtmcphee1 | November 6, 2010 5:47 PM | Report abuse

Or, we can hire people to do useful things!

That way, we put money into the economy -- and get something...

Seems reasonable to me.

Posted by: rat-raceparent | November 8, 2010 10:23 AM | Report abuse

I have no problem with this suggestion, except for this: How does this help those who are unemployed?

They're not on a payroll and a significant number of the unemployed are not receiving unemployment checks any more either.

Posted by: tomlevy1 | November 8, 2010 12:41 PM | Report abuse

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