We live in interesting economic times. The world has not recovered from the 2008 recession and all the policies that governments have tried to fix this have not worked. So where do we go from here?

Governments and central banks work to regulate the speed of an economy. They want growth to reflect constantly improving technology and productivity. But too much growth and the economy becomes distorted.

The Keynsian economists, with their simplistic supply and demand view of the world, get this very wrong indeed. Their policies create vicious economic cycles and the Great Depression of the 1930s was made worse and longer because government listened to such economists. It wasn’t until the monetarists of the Chicago School worked out a better model of how the economy really works that we were able to enact more sensible government policies. One thing that Milton Friedman, of that school, advocated was something called Helicopter Money, in one of the great classical pieces of economic writing, The Optimum Quantity of Money. We will get back to this later.

A main reasons for the 2008 disaster was that governments and central banks were looking at the wrong thing. Traditionally the economic distortion that they look for is inflation, either in the cost of household goods or in the level of wages. Both these were well under control in the run up to 2008, so they did nothing. They totally ignored another distortion, one that became immense and out of control, and that distortion was asset prices. Quite simply the cost of things like homes spiraled out of control, harming the life quality of just about everyone on the planet.

The alarming thing is that governments still haven’t fixed this problem. In the 8 years since the recession they have actually made it worse. They have lacked the courage to burst the bubbles. The only cure for a recession is a recession, so that the distortions can be taken out of the economy. This has not been allowed to happen.

The biggest disaster, by far, in the world’s economy is the EU. It is the world’s largest single economy and the Euro is the world’s biggest currency. And it just doesn’t work. For decades its economy has massively underperformed the rest of the world. This is because it is protectionist, locking in low productivity, it is socialist, creating huge inefficiencies, it is corrupt, rewarding an elite whilst harming everyone else, it over regulates, making it incredibly difficult to compete in markets and to generate wealth and it is massively distorted by huge economic mismatches between its regions. The EU drags the rest of the world down with it

The number one tool to manage the speed of an economy is with interest rates. Reduce them and the economy speeds up, increase them and the economy slows down. The problem is that economists reckon that it takes 18 months for each change to work. So either they have an excellent crystal ball or they guess. This is why any group of economist will have widely differing views about what to do next with interest rates.

During the 2008 recession interest rates were reduced effectively to zero, where they have remained ever since. In fact some central banks went for negative interest rates. They charged you to buy their bonds. But all this did not work. The world’s economies remained flat and morbid, bouncing along the bottom. But still asset prices remained high because the low interest rates made it cheap to borrow money. So the fundamental problem wasn’t fixed.

The next trick the central banks and governments came up with was Quantitative Easing (QE). Effectively giving money to commercial banks for them to use in the economy, creating economic activity. The figures involved are eye wateringly staggering. In the USA it reached $4.5 trillion. Obviously this worked to some extent, creating investment and jobs. But the commercial banks had had their fingers very badly burned in the 2007/8 crash and with subsequent government punitive action against them. So they were happiest lending against security. Which made the asset price bubble grow even bigger and more out of control. And it meant that the very richest people became a very lot richer, whilst most working people didn’t.

The distortions are unbelievable. Property prices in the UK lost all contact with affordability. An ordinary 3 bedroom semi in the South East is now more than £600,000, a 15,000 square foot apartment in London is for sale for £150 million, mass produced, secondhand Porsche 911s are selling for more than a million pounds, a Paul Gauguin picture sold for $300 million, stock exchanges are at record highs. And so it goes on. Huge, out of control, bubbles that distort the whole economy and harm the real business of creating goods and services to improve the life quality of ordinary people.

Normally low interest rates and QE would lead to the economic distortions of inflation in wages and consumer prices. But they didn’t. This is because the price of raw materials came tumbling down. Oil is the headline commodity, but metals and much else became a lot cheaper. Also many economies previously susceptible to wage inflation had structural changes which negated this. For instance the EU expanded Eastwards creating an almost infinite supply of high quality cheap labour.

By now the central bankers must have realised that they are the problem, that it is their actions that are damaging the lives of everyone on the planet, just as they did in the 1930s Great Depression. There is ONLY one possible solution and that is to deflate the asset price bubble. And the ONLY way to do that is to put up interest rates. This will hurt the super rich, but they have had trillions in free money for the last 8 years, so it is only fair that everyone else now gets some benefit from our economies. By removing all the immense distortions of high asset values the economies will turn once again to the markets and to producing goods and services for everyone.

But you can see the problem with this. If we get rid of QE and we put up interest rates we take the stimulus out of the economy, so things will slow down even more. We are in a trap. More QE and low interest rates and we get a distorted economy with asset price bubbles. No QE and high interest rates and we put the brakes on economies that are already incredibly lethargic. Either way we are headed for an immense crash. What we need is a third tool to use to control the speed of the economy. Which brings us back to Milton Friedman’s Helicopter Drop.

At its simplest in a Helicopter Drop is a one off event. The government prints new money and gives a big lump of cash to everyone, say $10,000 each. Some people will use this to pay off debts, some will invest it and some will spend it on goods and services. The economic stimulus is huge, obvious and instant and it is incredibly efficient because each individual makes their own spending decision. All normal economic activity is boosted, except for asset values. And because the new money is spread evenly in society, everyone benefits.

Obviously a helicopter drop is inflationary, but so, in theory are low interest rates and QE. And they haven’t been (except for asset values). The way our economies are working just now they could easily handle the stimulus of a big Helicopter Drop. And because it is a one off the inflationary effect is largely unsustained. A lot of the world’s top economists now think that a Helicopter Drop is the fastest and most efficient way to recover from a financial crisis.

Another, perhaps fairer, way to create a helicopter drop is to give everyone a huge negative tax hit. But there are even more subtle ways. One of my favourites is to print cash and to buy out the state pensions of everyone up to, say, 40 years old. State pensions are not represented by capital, the new private ones would be. This has the huge advantage that all of the helicopter drop money ends up invested. And it would be a huge step in getting the government out of the pension business.

So why haven’t we had a helicopter drop? Australia did! In December 2008, during the world recession they dropped $8.8bn. And in February 2009 they dropped $12bn. And it worked, Australia steered through the world recession better than just about any other economy.

Out of academic interest here is how Australia did it (please feel free to skip):

• Pensioner payments of $1400 for single pensioners and $2100 for pensioner couples. The Australian aged pension is subject to income and assets tests. Other pensions include the disability support pension and the service pension. 
• Carer payments of $1000 for every recipient of Carer Payment, which is a payment provided to people providing constant care to a person with a disability.
• Child payments of $1000 per child for families eligible for Family Tax Benefit A (FTB-A). FTB-A eligibility depends on family income and the number of children, and ceases at around $100,000 for a one-child family, or at about $125,000 for a three-child family. Child payments were also provided for dependent children receiving Youth Allowance and certain other means-tested study payments.
• Tax Bonus for Working Australians: A payment based on taxable income in the 2007-08 tax year. The payment was $900 for individuals with taxable incomes of $80,000 or less, $600 for individuals with taxable incomes of $80,001-$90,000, and $250 for taxpayers with incomes of $90,000-$100,000. In Australia, tax is assessed on an individual basis, so it was possible for both adults in a family to receive the payment. This payment was estimated to cover 8.7 million taxpayers (about threequarters of all taxpayers).
• Back to School Bonus: $950 per child for low-income and middle-income families receiving Family Tax Benefit A who have school-aged children (ages 4-18). This payment was estimated to cover 2.8 million children.
• Single-Income Family Bonus: $900 per family to those families entitled to Family Tax Benefit B (around 1½ million families). FTB-B eligible families are single parents or couples where the primary earner has an income of less than about $150,000, and the secondary earner has an income below about $20,000 (both thresholds vary according to the number of children).

As you can see they clearly put a lot of thought into the social as well as the economic effects. So these are the sorts of policies that can be embraced by social democrats as well as by free market capitalists.

A further huge advantage of a Helicopter Drop is that the taxation on all this new economic activity creates a huge boost for government income. And, to an extent, the government can reduce their (highly inefficient) spending, replacing it with (highly efficient) spending by the public. It is win, win, win.

As you can see it is pretty inevitable that we enter the brave new world of Helicopter Drops. We are still in the 2008 recession. But we will only really reap any benefit if we simultaneously raise interest rates. And in the longer term we are going nowhere until there is massive reform of the EU, to reduce the real harm that it does. In fact if the EU is broken up completely and replaced with a free trade agreement the world would be a far better place, with more wealth generated for everyone.