How the West fell out of love with economic growth

From The Economist

This year has been a good one for the West. The alliance has surprised observers with its united front against Russian aggression. As authoritarian China suffers one of its weakest periods of growth since Chairman Mao, the American economy roars along. A wave of populism across rich countries, which began in 2016 with Brexit and the election of Donald Trump, looks like it may have crested.

Yet away from the world’s attention, rich democracies face a profound, slow-burning problem: weak economic growth. In the year before covid-19 advanced economies’ gdp grew by less than 2%. High-frequency measures suggest that rich-world productivity, the ultimate source of improved living standards, is at best stagnant and may be declining. Official forecasts suggest that by 2027 per-person gdp growth in the median rich country will be less than 1.5% a year. Some places, such as Canada and Switzerland, will see numbers closer to zero.

Perhaps rich countries are destined for weak growth. Many have fast-ageing populations. Once labour markets are open to women, and university education democratised, an important source of growth is exhausted. Much low-hanging technological fruit, such as the flush toilet, cars and the internet, has been plucked. This growth problem is surmountable, however. Policymakers could make it easier to trade across borders, giving globalisation a boost. They could reform planning to make it possible to build, reducing outrageous housing costs. They could welcome migrants to replace retiring workers. All of these reforms would raise the growth rate.

Growing pains

Unfortunately, economic growth has fallen out of fashion. According to our analysis of data from the Manifesto Project, which collects information on the manifestos of political parties over decades, those in the oecd, a group of mostly rich countries, are about half as focused on growth as they were in the 1980s (see chart 1). Modern politicians are less likely to extol the benefits of free markets than their predecessors, for instance. They are more likely to express anti-growth sentiments, such as positive mentions of government control over the economy.

When they do talk about growth, politicians do so in an unsophisticated manner. In 1994 a reference by Gordon Brown, Britain’s shadow chancellor, to “post neo-classical endogenous growth theory” was mocked, but it at least indicated serious engagement with the issue. Politicians such as Lyndon Johnson, Margaret Thatcher and Ronald Reagan offered policies based on a coherent theory of the relationship between individual and state. gdp’s small coterie of modern champions, such as Mr Trump and Liz Truss, offer little more than reheated Reaganism.

Apathy towards growth is not merely rhetorical. Britain hints at a wider loss of zeal. In the 1970s the average budget contained tax reforms worth 2% of gdp. By the late 2010s policies made half as much impact. A paper published in 2020 by Alberto Alesina, a late economist at Harvard University, and colleagues at the imf and Georgetown University measured the significance of structural reforms (such as changes to regulations) over time. In the 1980s and 1990s politicians in advanced economies implemented a large number, making their economies sleeker. By the 2010s, however, they had lost their oomph: reforms practically ground to a halt.

Our analysis of data from the World Bank suggests that progress has slowed still further in recent years, and may even have reversed (see chart 2). The American government introduced 12,000 new regulations in 2021, a rise on recent years. From 2010 to 2020 rich countries’ tariff restrictions imposed on imports doubled. Britain voted for and implemented Brexit. Other countries have turned against immigration. In 2007 almost 6m people, on net, migrated to rich countries. In 2019 the number was down to just 4m.

Governments have also become less friendly to new construction, whether of housing or infrastructure. A paper by Knut Are Aastveit, Bruno Albuquerque and André Anundsen, three economists, finds that American housing “supply elasticities”—ie, the extent to which construction responds to higher demand—have fallen since the housing boom of the 2000s. This is likely to reflect tougher land-use policies and more powerful nimbys. Housing construction across the rich world is about two-thirds its level in that decade.

Politicians prefer splurging the proceeds of what growth exists. Governments are spending a lot more on welfare, such as pensions and, in particular, health care. In 1979 the bottom fifth of American earners received means-tested transfers worth less than a third of their pre-tax income, according to the Congressional Budget Office. By 2018 the figure was more than two-thirds. According to a report in 2019, health spending per person in the oecd will grow at an average annual rate of 3% and reach 10% of gdp by 2030, up from 9% in 2018.

Politics is increasingly an arms race with promises of more money for health care and social protection. “Thirty or 40 years ago it was taken for granted that the elderly were not good candidates for organ transplantation, dialysis or advanced surgical procedures,” Daniel Callahan, an ethicist, has written. “That has changed.” Greater wealth has enabled this. Yet politicians rarely ask whether an extra dollar on health care is the best use of cash. Britons in their 90s receive health and social care that costs the country about £15,000 ($17,000) a year, about half Britain’s gdp per person. Must budgets rise year after year to meet growing demand, even as the price of providing that care is also likely to increase? If yes, where is the limit?

People may see spending on health care and pensions as self-evidently good. But it comes with downsides. More people work in an area where productivity gains, and therefore improvements in overall living standards, are hard to induce. Perfectly fit older people drop out of work to receive a pension. Funding this requires higher taxes or cuts elsewhere. Since the early 1980s government spending across the oecd on research and development, as a share of gdp, has fallen by about a third.

Much of the extra spending comes at times of crisis. Politicians are increasingly concerned with preventing bad things from happening to people or compensating them when they do. The enormous system of credit guarantees, eviction moratoriums and debt forgiveness introduced during the pandemic brought bankruptcies and defaults to a halt. This was radical, but also the thin end of the wedge.

In America, for instance, the federal government has assumed huge contingent liabilities. It guarantees an ever-larger quantity of people’s bank deposits; it forgives student loans; it offers a wide variety of implicit and explicit backstops to everything from airports to highways. We have previously estimated that Uncle Sam is on the hook for liabilities worth more than six times America’s gdp. This year European governments have fallen over themselves to offer financial support to households and firms during the continent’s energy crisis. Even Germany, normally Europe’s most disciplined spender, has allocated funding worth 7% of gdp for this purpose.

No one cheers when a firm goes bust or someone falls into poverty. But the bail-out state makes economies less adaptable, ultimately constraining growth by preventing resources shifting from unproductive to productive uses. Already there is evidence that fiscal help doled out during the pandemic has created more “zombie” firms—those which are going concerns, but which create little economic value. Governments’ huge implicit liabilities also mean higher spending in times of trouble, which reinforces the trend towards higher taxation.

Grey power

Why has the West turned away from growth? One possible answer relates to ageing populations. People who are not working, or are near the end of their working lives, tend to be less interested in getting richer. They will support things which directly benefit them, such as health care, but oppose those that only produce benefits after they are gone, such as immigration or homebuilding. Their turnout at elections tends to be high, so their views carry weight.

Yet Western populations have been ageing for decades, including during the reformist 1980s and 1990s. Thus the change in the environment in which policy is made may play a role. Before social media and 24-hour rolling news it was easier to implement tough reforms. The losers from a policy—a business exposed to greater competition from abroad, say—often had little choice but to suffer in silence. In 1936 Franklin Roosevelt, speaking about opponents to his New Deal, felt able to “welcome” his opponents’ hatred. Now the aggrieved have more ways to complain. As a result, policymakers have more incentive to limit the number of people who lose out, resulting in what Ben Ansell of Oxford University calls “countrywide decision by committee”.

High levels of debt have also constrained policymakers’ room for manoeuvre. Across the g7 group of rich, powerful countries, private debt has risen by the equivalent of 30 percentage points of gdp since 2000. Even small declines in cash flows could make servicing the debt harder. This means politicians quickly intervene when anything goes wrong. Their focus is keeping the show on the road—avoiding a repeat of the financial crisis of 2007-09—rather than accepting pain today as the price of a brighter future.

Quite what would push the West in a new direction is unclear. There is no sign of a shift just yet, beyond the misguided attempts of Mr Trump and Ms Truss. Would another financial crisis do the job? Will a change have to wait until the baby boomers are no longer around? Whatever the answer, until growth speeds up Western policymakers must hope their enemies continue to blunder. 

The empty rituals of daily lives

Tabish Khair in The Hindu

Just as religious rituals move the practitioner away from the immensity of faith, secular rituals move citizens’ attention away from real issues


Serious religious thinkers have tended to distinguish between ritual and religion. Some, of course, have distinguished between spirituality and religion too, mostly because they have associated religion with rituals.

Now, rituals have their uses, as long as we employ them in the full awareness that they are arbitrary and man-made. This applies to secular matters as well as religious ones: I like my ritual of a morning cup of coffee with a biscuit or two, but I do not assume that this is god-ordained or that my day will not commence unless I have my cup of coffee. So, I am not talking of rituals of this sort. I am talking of rituals that are made ‘essential’ to either religion or secular life.

The matter with religion is clear enough. The reason why religious but nonconforming thinkers, like Kabir, railed against rituals was that they perceived how rituals are used, in the name of religion, to control, influence and exploit people. They also felt that rituals are worldly matters and have nothing to do with the divine. The priestly classes insist on rituals, as if god would care about the colour of your dress, the posture of your prayer, the number of your beads, etc. Rituals proliferate in religions because they allow the priestly classes to control and exploit ordinary believers. Instead of being used as an option, the coffee cup ritual becomes a necessity imposed on the ordinary believer, often at great cost.

Rituals in secular life

This much is clear enough about religion, and explains why so many religious thinkers — apart from the accredited priestly classes, whether mullahs or pandits — tended to criticise rituals or blind observance of rituals. But how, you might be asking, do rituals work in the secular sphere? Because such rituals are not confined to religion. They also exist in secular life, and are used by various ‘priestly classes’ to mislead, control and exploit ordinary people. I suspect that basically religious people, conditioned to associate belief with rituals, are likely to be misled by rituals in secular life too.

A ritual in secular life is like a ritual in religion: it is demanding, obsessive, unavoidable, essential. It is the one thing that you ‘need’ to do in order to have a good life (in this world or the next, or both). Or so the priestly classes claim. Because when you really look at this ‘essential’ ritual, it falls apart. It is not necessary; you can do without it. You can understand the world in other ways, live your life differently. But no, the priestly classes claim, you have to practice this ritual — or you will suffer and probably be damned for all eternity!

Rituals of prosperity

Think of the rituals that we are surrounded by in ordinary secular life. Think, for instance, of all those economic figures trotted out by national economists in all countries to show that the nation is progressing. GNP. Average national income. The rising value of shares in the stock market. These are rituals of prosperity, because if you really look into them, they mean nothing. Or they mean nothing because they have been turned from actual, though limited, indicators into sweeping rituals: empty practices.

A rise in GNP, the average national income, or the share market can indicate some types of prosperity, but these are not enough — and they are misleading when trotted out in ritualistic fashion by politicians. In each case, there is a good chance that some people might be gaining and many more losing. Take the situation of Amazon: the company is thriving, but, at least in the U.S., it is reputed to offer its workers a very meagre wage package and unsatisfactory working conditions. To think that the profits being made by Amazon is percolating down to its workers is to make a mistake. But that is the mistake we make when we simply note the net value of Amazon or the rise in its shares. Such figures play the role of empty rituals.

With countries, the matter is even more complex, as the prosperity of a country depends on factors other than financial ones. Hence, politicians who give us general figures and averages, whether correct or not, are indulging in empty rituals.

Of course, figures are not the only rituals practiced by politicians in power, the apex of the secular priestly classes. For instance, it is a ritual to construct a highway without making a sustained effort to improve the existing highways, to create a super-city without a sustained effort to improve the urban infrastructure in existing cities, to raise the statue of a great leader and ignore the best aspects of his example.

These acts and decisions are rituals because they are empty and misleading. Just as a ritual in religion moves the practitioner away from the endless immensity of faith to a delusive shortcut, a ritual in secular life moves citizens’ attention away from all the real issues and offers a soupçon of misleading satisfaction. I fear that we Indians might or might not be a spiritual people, but we do have a certain tendency to indulge — and let others indulge — in empty rituals in religious as well as secular life.

Down with the cult of GDP

Catherine Colebrook in The Guardian


 

‘We don’t properly understand how new forms of “intangible assets” – such as software and databases – are affecting the economy.’ Photograph: Bloomberg via Getty Images


This morning at 9.30am, the Office for National Statistics will release its latest estimate of UK economic output – gross domestic product, or GDPfor short. The figures, which will be revised when better data becomes available, will be endlessly discussed and analysed, and will form the basis for economic commentary and policy in the months ahead.

At their best, economic indicators such as GDP can be a viewfinder through which we see the economy. After all, we need statistics to shed light on economic imbalances and unfairness, and help citizens and policymakers understand what needs to be done to put them right. But as an economist, I’m always aware that reducing the unimaginable complexity and diversity of the economy to a single number – or even a series of numbers – can dehumanise or even misrepresent what is really happening in people’s lives.

Getting that full, accurate picture of the economy has always been difficult. But the pace at which disruptive technologies are changing our economy is shifting the nature of the challenge from one year to the next. There’s now a real risk that the favoured selection of go-to economic indicators doesn’t capture the impact of those new technologies on economic behaviour and trends.

For instance, digitalisation – the increasing prevalence of information and communication technologies, and of the internet in work and social life – is having a rapid and profound impact on the economy. One challenge it poses for economists is that it is moving whole swaths of activity beyond what we call the “production boundary”, which is captured by GDP. We need to find new ways of measuring these if we are to obtain an accurate picture of what’s actually happening in the economy.

Profit-shifting by companies to minimise their UK tax liabilities is a well-known phenomenon, and it’s likely to be increasing our current account deficit, as it means companies sending income to lower-tax countries. We need to understand the effect of this better, and find ways to measure and account for it. We also fail to properly understand how new forms of “intangible assets” – such as software, databases and knowledge acquired through research – are affecting the economy, while the way in which technology adds value to goods and services is also changing.

Public policy to steer the economy will succeed in its aims only if it is informed by both accurate economic indicators to provide the macroeconomic context, and credible evidence of its impact via robust evaluation, so we need to keep investing in our public data if it is to remain relevant. But it’s not just a case of improving the statistics we currently focus on. Our reliance on a small number of production indicators narrows economic debate and perpetuates the myth that economic growth encompasses all other economic goals. Simply tracking GDP and a small number of production statistics is not enough; and it may even undermine progress towards a more just economy, as it distracts attention from the issues that really matter.

If we want to understand whether the economy is really delivering for its citizens, we need some new indicators. The Institute for Public Policy Research (IPPR), where I am the chief economist, is proposing a dashboard of five outcome indicators, to be updated annually, which would directly measure our progress against the outcomes the public wants the economy to deliver – broadly shared prosperity, justice and sustainability. Our chosen indicators are the distribution of the gains from growth; poverty rates among children and adults; levels of wellbeing among individuals at different income levels; the gap between the median income of the poorest region of the UK and the richest; and the gap between projected carbon emissions and the cost-effective path to decarbonisation.

Together, these indicators reveal how broadly the economy distributes its rewards, whether it is succeeding at reducing poverty, whether people feel satisfied with their lives, and our progress at moving to an environmentally sustainable model of growth. Our suggested indicators are not the only ways of measuring these goals, but between them, we believe they would capture the current performance of the economy in achieving the outcomes that matter most. If the economy doesn’t show improvement by the metrics we have chosen, it isn’t working.

The Gujarat muddle - Why does Gujarat have indifferent social indicators, in spite of having enjoyed runaway economic growth and relatively high standards of governance?

JEAN DRÈZE

  

APAN INCOMPLETE TALE: In the 1980s, Gujarat already had the Public Distribution System, the mid-day meal scheme in primary schools and the best system of drought relief works in the country. The 'Gujarat model' story fails to recognise that these achievements have little to do with Narendra Modi. Photo: AP

Gujarat’s development achievements are moderate, largely predate Narendra Modi, and have as much to do with public action as with economic growth.

As the nation heads for the polling booths in the numbing hot winds of April, objective facts and rational enquiry are taking a holiday and the public relations industry is taking over.

Narendra Modi’s personality, for one, has been repackaged for mass approval. From an authoritarian character, steeped in the reactionary creed of the Rashtriya Swayamsevak Sangh (RSS) and probably complicit in the Gujarat massacre of 2002, he has become an almost avuncular figure — a good shepherd who is expected to lead the country out of the morass of corruption, inflation and unemployment. How he is supposed to accomplish this is left to our imagination — substance is not part of the promos. The Bharatiya Janata Party (BJP), too, is being reinvented as the party of clean governance, overlooking the fact that there is little to distinguish it from the Congress as far as corruption is concerned.

Spruced up image

Similarly, Gujarat’s image has been spruced up for the occasion. Many voters are likely to go the polling booths under the impression that Gujarat resembles Japan, and that letting Mr. Modi take charge is a chance for the whole of India to follow suit.

Some of Mr. Modi’s admirers in the economics profession have readily supplied an explanation for Gujarat’s dazzling development performance: private enterprise and economic growth. This interpretation is popular in the business media. Indeed, it fits very well with the corporate sector’s own view that the primary role of the state is to promote business interests.

However, as more sober scholars (Raghuram Rajan, Ashok Kotwal, Maitreesh Ghatak, among other eminent economists) have shown, Gujarat’s development achievements are actually far from dazzling. Yes, the State has grown fast in the last twenty years. And anyone who travels around Gujarat is bound to notice the good roads, mushrooming factories, and regular power supply. But what about people’s living conditions? Whether we look at poverty, nutrition, education, health or related indicators, the dominant pattern is one of indifferent outcomes. Gujarat is doing a little better than the all-India average in many respects, but there is nothing there that justifies it being called a “model.” Anyone who doubts this can download the latest National Family Health Survey report, or the Raghuram Rajan Committee report, and verify the facts.

To this, the votaries of the Gujarat model respond that the right thing to look at is not the level of Gujarat’s social indicators, but how they have improved over time. Gujarat’s progress, they claim, has been faster than that of other States, especially under Mr. Modi. Alas, this claim too has been debunked. Indeed, Gujarat was doing quite well in comparison with other States in the 1980s. Since then, its relative position has remained much the same, and even deteriorated in some respects.

An illustration may help. The infant mortality rate in Gujarat is not very different from the all-India average: 38 and 42 deaths per 1,000 live births, respectively. Nor is it the case that Gujarat is progressing faster than India in this respect; the gap (in favour of Gujarat) was a little larger twenty years ago — in both absolute and proportionate terms. For other indicators, the picture looks a little more or a little less favourable to Gujarat depending on the focus. Overall, no clear pattern of outstanding progress emerges from available data.

In short, Gujarat’s development record is not bad in comparative terms, but it is nothing like that of say Tamil Nadu or Himachal Pradesh, let alone Kerala. But there is another issue. Are Gujarat’s achievements really based on private enterprise and economic growth? This is only one part of the story.

When I visited Gujarat in the 1980s, I was quite impressed with many of the State’s social services and public facilities, certainly in comparison with the large north Indian states. For instance, Gujarat already had mid-day meals in primary schools at that time — decades later than Tamil Nadu, but decades earlier than the rest of India. It had a functional Public Distribution System — again not as effective as in Tamil Nadu, but much better than in north India. Gujarat also had the best system of drought relief works in the country, and, with Maharashtra, pioneered many of the provisions that were later included in the National Rural Employment Guarantee Act. Gujarat’s achievements today build as much on its ability to put in place functional public services as on private enterprise and growth.

Misleading model

To sum up, the “Gujarat model” story, recently embellished for the elections, is misleading in at least three ways. First, it exaggerates Gujarat’s development achievements. Second, it fails to recognise that many of these achievements have little to do with Narendra Modi. Third, it casually attributes these achievements to private enterprise and economic growth. All this is without going into murkier aspects of Gujarat’s experience, such as environmental destruction or state repression.

At the end of the day, Gujarat poses an interesting puzzle: why does it have indifferent social indicators, in spite of having enjoyed runaway economic growth for so long, as well as relatively high standards of governance? Perhaps this has something to do with economic and social inequality (including highly unequal gender relations), or with the outdated nature of some of India’s social statistics, or with a slackening of Gujarat’s earlier commitment to effective public services. Resolving this puzzle would be a far more useful application of mind than cheap propaganda for NaMo.

The malaise that drove down the rupee

V. SRIDHAR in the hindu

  

 

Desperate attempts to woo foreign capital by boosting investor sentiment is unlikely to result in a lasting solution to India’s currency travails

The recovery of the rupee and the euphoric rebound of the markets in the last few days would appear to suggest that the economy is back on track again. Nothing could be more wrong. The flurry of policy announcements in recent weeks is based on the diagnosis that the relentless slide of the rupee, attributed to the widening Current Account Deficit (CAD), can be arrested if and when capital inflows — as investments or borrowings — fill the gap.

Reserve Bank of India governor Raghuram Rajan’s recent announcement allowing banks to borrow from global capital markets at a time when interest rates are rising because of the expected reversal of the United States Federal Reserve’s easy money policy is tailored to this logic. Indian banks can now borrow up to 100 per cent of their combined net worth and long term borrowings from the international market (compared to 50 per cent earlier) and then “swap” them with the central bank. This is expected to augment the supply of foreign exchange by an estimated $30 billion, which is about one-tenth of Indian foreign exchange reserves. The markets reacted euphorically, but the risks of the country borrowing its way out of trouble have been much less appreciated.

The two-track policy — of making India more attractive to foreign investors by deepening “reforms” and of borrowing more — is fraught with serious consequences. The policy response suggests that the ongoing crisis is only a temporary blip in the Great Indian Growth Story. But it appears that the seeds of the crisis were sown in that very story.

THE GREAT CREDIT BINGE

A striking feature of the story is that Indian corporates borrowed like there was no tomorrow — from not only Indian banks but also from overseas capital markets. Consider this: between 2003-04 and 2010-11 the Indian corporate sector’s share of net bank credit increased from 31 per cent of Gross Domestic Product (GDP) to over 37 per cent. In fact, since 2006-07, their share has been consistently higher than net bank credit to the government.

Infrastructure companies’ (power, roads and telecom) share in total bank credit increased from about 9 per cent in 2003 to more than 33 per cent in 2011. The spectacular increase is responsible for the mounting burden of non-performing assets in the Indian banking sector today. According to an oft-cited report in the media, prepared by the Credit Suisse Group in 2012, the debt of 10 Indian corporate groups whose interests range from oil and gas and steel to infrastructure increased from about Rs. one lakh crores in 2006-07 to Rs. 5.4 lakh crores in 2011-12 — a compounded annual rate of 40 per cent.

ASSET BUBBLE

The fact that private fixed investment did not increase at the same pace is perhaps because a large portion of the credit was diverted by Indian companies to what would appear to be an asset bubble — in land, shares in companies and other speculative assets. The clamour by corporate lobbies that interest rates be lowered has no respect for economic logic, given the state of the country’s external balances. They fail to appreciate that the era of cheap-credit fuelled growth is well and truly over.

But this increase in domestic credit was dwarfed by the remarkable increase in the inflows of foreign capital following the global economic meltdown in 2008.

The share of capital inflows — external borrowings, foreign direct investment (FDI) and foreign institutional investors (FII) — increased from about 5-6 per cent of GDP to about 9 per cent in 2011. The share of costlier short-term borrowings (almost entirely by private companies) in overall borrowings increased from 4.5 per cent in 2002-03 to 25 per cent in 2012-13. Companies, lulled into borrowing at illusorily low interest rates, have been surprised by sharp increase in the rupee-denominated value of their loans.

FDI ILLUSION

Inflows of FDI registered a spectacular rise — from $9 billion in 2005-06 to $33 billion in 2010-11. Popular understanding is that while FII investments are volatile, FDI is much more stable, long term in nature and contributes to improving the competitiveness of recipient nations. However, the story of India’s dalliance with FDI is shockingly different and raises serious doubts about whether the ongoing attempts to woo investors is sustainable or even desirable.

A study co-authored by Biswajit Dhar, Director General, Research and Information Systems for Developing Countries, based on a painstaking dissection of every FDI project entailing an investment of $5 million and more between 2004 and 2009, provides shocking insights that prove that a large proportion of FDI is just as volatile and transitory as portfolio capital. The study that considered 2,748 projects, which accounted for almost 90 per cent of all FDI in the 2004-2009 period, found that the lowering of norms prescribing the minimum level of equity stake in an “FDI invested” project — from 40 per cent to 10 per cent — offered perverse incentives to capital flowing in the garb of FDI.

Less than half of the investment was actually FDI; private equity, venture capital and hedge funds, which are volatile and normally associated with short investment horizons, accounted for 27 per cent; and about 10 per cent was actually portfolio investment. Over 10 per cent of the “investment” was round tripping by Indian entities, which funnelled money back through tax havens in order to take advantage of tax concessions and other inducements available to FDI projects.

A large proportion of the investment was by entities masquerading as investors committed to the long haul or investments that enhanced the productive capacity. Indeed, manufacturing, which advocates of FDI said would be a key beneficiary, received only one-fifth of the investment; but even in this case portfolio and other short-horizon investors accounted for almost 40 per cent of the total investment. Interestingly, while much attention has been focussed on the rising import of oil and gold, little attention has been paid to the fact that the trade deficit in manufactured goods has widened from $1.5 billion in 2004-05 to $45.5 billion in 2011-12 (about 2.5 per cent of GDP).

If there is any truth in the old cliché that a crisis is also an opportunity, surely this is a time to rebalance the Indian economy on a more sustainable path that allows policymakers to use levers that are more easily within their control. Of course, this would require import curbs and other measures suited to these hard times. But rebalancing would also require the use of measures such as the fiscal deficit, which have been for far too long a strict no-no in the policymakers’ handbook.

THE FISCAL DEFICIT OBSESSION

The stubborn opposition to the good old-fashioned Keynesian logic of using a fiscal deficit to get the economy back on its feet is grounded in the apparently intuitive logic that equates a government deficit with a household deficit. A classic example of such misguided thinking is evident in the loud opposition to the Food Security Bill. Quite apart from the fact that such a measure would provide a measure of security to the poor, the implementation of the legislation promises economy-wide benefits.

First, the guarantee of subsidised food grains, which constitutes a significant proportion of the consumption basket for most people, will have the immediate effect of increasing their disposable income. This is not trivial, given that the growth of consumption expenditure has halved between 2009 and 2012.

Second, the provision can play the role of an economic stabiliser because food prices determine the floor wage level, which is why they are termed a wage good. The guarantee would thus not only help in controlling food prices but also stabilise wages. Indeed, it is perplexing that industry lobbies are attacking the provision of an enhanced social wage, from which they stand to benefit significantly.

Third, if the fiscal deficit is run in an imaginative way, even more can be achieved. For instance, coupling the food guarantee to the MGNREGA can help in the construction of a countrywide network of godowns for the Food Corporation of India.

Of course, a cash transfer scheme would negate much of the potential economy-wide benefits that would accrue from the implementation of the food security legislation.

Unemployment matters more than GDP or inflation

Jobless figures are the one major economic indicator that measures people. And they demonstrate the toll in misery across Europe

• 
• • Mehdi Hasan
  • guardian.co.uk, Sunday 4 March 2012 21.00 GMT

Illustration by Andrzej Krauze

 

There is a spectre haunting Europe – the spectre of mass unemployment. On Thursday it was announced that the eurozone's unemployment rate had risen to a record high of 10.7% in January. That's 16.9 million people out of work across the 17-nation euro area.

Across the 27-member European Union unemployment is also topping 10% for the first time: a jaw-dropping 24.3 million jobless. The sheer size of the continent's growing army of unemployed workers is difficult to comprehend.

Spain holds the EU record, with unemployment at 23.3%, or 5.3 million people – and rising. "This is the terrible cancer of our society," said Rafael Zornoza Boy, the bishop of Cadiz, last week. Yet prime minister Mariano Rajoy's new (and conservative) government's pleas to give Madrid some leeway on spending cuts fell on deaf ears at Friday's EU summit of fiscal self-flagellists in Brussels. Then there is poor Greece, where EU-imposed cuts have left one in five unemployed and have driven up the suicide rate by 40%. Austerity is, literally, killing Europeans.

Poll after poll shows voters across the EU care much more about the jobs deficit than they do about the budget deficit. Nonetheless, the proverbial Martian, landing in Brussels last week, would have been stunned to witness the complacency and indifference of the continent's political elites to the crisis of spiralling joblessness. EU leaders continue to fiddle – over borrowing limits, fiscal compacts, treaty changes – as their economies crash and burn. The austerity gamble hasn't paid off. Fiscal consolidation has failed to spur growth or boost employment.

Fiscal stimulus, on the other hand, works. The US has had 23 consecutive months of private-sector job growth, with 3.7m new jobs created over the past two years thanks to Barack Obama's American Recovery and Reinvestment Act. US unemployment benefit claims are now at a four-year low.
But Europe's political and financial elites – led by austerity junkies such as "Merkozy", the European Central Bank's Mario Draghi and, of course, our very own David Cameron – pretend not to notice. Here on the jobless side of the Atlantic, the only solution to austerity-induced unemployment, it seems, is more austerity. In Brussels, eurozone finance ministers threatened to impose swingeing fines on those member states, such as Spain and the Netherlands, that may miss their budget deficit targets. If insanity, as Albert Einstein is said to have once remarked, is doing the same thing over and over again and expecting different results, then our leaders have gone mad.

The irony is that mass unemployment itself is the biggest barrier to deficit reduction. Basic economics teaches us that the best way to cut borrowing levels is to get people back to work and paying taxes. Or as John Maynard Keynes put it: "Look after unemployment and the budget will look after itself."

But Europe's crisis isn't just about economics. Unlike GDP or inflation, unemployment is the only major economic indicator that measures real human beings, rather than growth or prices.

Having a job isn't just about earning a living or paying taxes; it's about human dignity and self-worth. The human and social costs of unemployment are well-documented: financial hardship, emotional stress, depression, lethargy, loss of morale and status, shame, sickness and premature death. Then there is the hopelessness that often leads to rising crime, disorder and social unrest. We can probably expect a new wave of riots and violence in the continent's city centres.

The tragedy is that there is nothing unavoidable about Europe's unemployment crisis. The US is proof that even the most modest of fiscal stimuli can create jobs. But politicians in Germany, where mass unemployment in the 1930s helped the Nazis seize power, refuse to countenance any loosening of the fiscal purse strings inside the EU, arguing that such a move would increase borrowing costs and might panic the bond markets. Yet, as the Nobel-prizewinning economist Christopher Pissarides has written, "a small rise in gilt interest rates is a small price to pay for more jobs".

Here in the UK, where unemployment stands at a 17-year high of 2.7 million (or a staggering 6.3 million if the "underemployed" are included), our own do-nothing chancellor, George Osborne, continues to proclaim that "the British government has run out of money". Really? Perhaps he should have a word with Mervyn King. Over the past three years, the Bank of England governor has, with a mere tap on his keyboard, authorised the creation of £325bn of new money, out of thin air, through a process of "quantitative easing" (QE). This, however, has so far been used only to bail out the bankers. Why not use it to bail out millions of jobless Britons?

If we assume it would cost £26,000 (the median salary for UK workers) to create each new job, the cost to the government of putting a million people back to work would be £26bn – or around half of the latest £50bn tranche of QE released by the Bank last month.

How many more of Europe's jobs will be sacrificed at the altar of deficit reduction? How many more lives ruined, families impoverished and communities destroyed in pursuit of growth-choking, job-killing, self-defeating austerity? It is unacceptable for governments to stand by as dole queues lengthen. Unemployment is not a price worth paying. Nor is it a price that has to be paid.