In response to those who claim that people will “hoard rebates or cash”, Bryan Caplan writes:

Why are [people] saving in the first place? Once again, there are two theories:

Theory #1: People just don’t have anything they want to buy. They’re satiated, so no matter how much extra income they get, they’ll just sit on it.

Theory #2: People want a buffer. They aren’t comfortable with their current asset cushion, so they’re saving in order to return to their comfort zone.

Theory #1 is wholely implausible. There’s tons of stuff that people still covet. The truth, then, lies in Theory #2: People will start spending again once they feel like they’ve got enough breathing room.

If theory #2 is the truth, then there is no situation in which “helicopter drops” could fail to boost demand, save for a puzzling situation where we run out of gasoline, or paper and ink…but then again, just put some zeros behind peoples’ bank account balances. That doesn’t even require a helicopter!

And if it doesn’t work the second time, take another flight. And another. At some point, people will no longer demand excess cash balances, and will begin spending like crazy. If the Fed credibly commits to permanently increasing the monetary base in this way, it would certainly change NGDP expectations.

P.S. This logic only works for “helicopter drops”, with dubious effectiveness for tax rebates (you can’t credibly commit to cutting taxes forever, after all). Also: no, I don’t think this is an optimal solution to recessions.

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