Same Old Socialism

Prime minister Narendra Modi’s economic advisory panel has published a report called The State of Inequality in India. This report is prepared by the Institute for Competitiveness. This ironically named institute from Gurgaon has noticed the skewed income distribution of India and suggested the following government’s size enhancing measures, 

the Government should launch a guaranteed employment programme for the urban unemployed and roll out a universal basic income (UBI) scheme to reduce income gaps.

Citing the “skewed nature” of income distribution in the country, the report also recommended steps to raise minimum income and more government spending on the social sector to make vulnerable sections immune to sudden shocks” and “stop their descent into poverty”.

According to the report, raising minimum income and introducing universal basic income are some of the recommendations that can reduce income gap and ensure equal distribution of earnings in the labour market.

“Most importantly, the Government must allocate more percentage of the expenditure towards social services and the social sector to make the most vulnerable population resilient to sudden shocks and stop their descent into poverty,” it said.

Are these recommendations apt for achieving the desired goals? Let us examine these claims. 

First, this policy suggestion of ‘more government’ is nothing but the same old socialism that Indians have been trying these last 70 years without any success but with all kinds of dire consequences. The irony is that these socialist central planning recommendations are coming from an institute which named itself “institute for competitiveness”! The institute for competitiveness, instead of promoting market competition, is promoting full fledged socialism! 

Now, let’s see the economic and other consequences of implementing these policies which are recommended by the wrongly named competitiveness institute. As again, the so-called experts at this institute forgot the broken window fallacy of French economist Frederic Bastiat which urges good economists to not only look at the immediate effect of any policy action on one group but also to examine its long term consequences for everyone. 

Before I start my discussion of these consequences let me remind the expert panel of the prime minister that the ‘skewed income distribution’ is itself an outcome of government and its central bank RBI’s actions in the past. This skewed income distribution doesn’t appear on its own. As I have been telling repeatedly, the central bank RBI’s inflationary policies generate income inequality by choosing the winners and losers of their cheap money policies. Government of India, through its selective policies of favoring people who support them, generates income inequality. To expect this same governmental system to correct income inequality will be a folly, but then this point is beyond the minds of the prime minister’s economic team, which has a vested interest in increasing the size of the government that provides them their bread and butter. 

Will a guaranteed employment program for the urban unemployed reduce the income gap? 

As theory and history both show, unemployment programs only help in lengthening and increasing unemployment. Urban employment program, like MGNREGA for the rural area, will create more unemployment. It will harm the urban people in numerous ways. First, all such government employment programs like MGNREGA are either funded by using tax payers money or via inflation i.e., money printing by RBI. If this scheme is funded by RBI then it will directly result into higher price inflation which will reduce the real income of both urban and rural Indians, and if it is funded by using tax payers’ money then, as the broken window fallacy explains, the opportunity cost will be huge in terms of forgone employment opportunities in the private sector – where jobs are productive as against unproductive government jobs – and reduced future economic growth. As Murray Rothbard said, and I paraphrase, government employment programs are all guaranteed unemployment programs in reality. Third, it will create disincentive for productive work in the private sector. If workers will get easy jobs and free handouts in government employment programs then their willingness to work in the private sector for competitive wages will decrease. Government jobs, as I have said above, are not productive jobs where the produced output is valuable to the consumers. Any job given in the public sector will come at the cost of that job lost in the private sector. This will lower the productive capacity of the already inefficient low productivity economy. The following reductio ad absurdum exercise explodes the fallacy of government employment programs generating any jobs and benefitting the economy in any way. If the government employment programs are so good and if they increase the welfare of laborers then why only give government jobs to a few selected people? Why not employ the whole 47 crore strong labor force in government programs of digging ditches and filling them up again? RBI can print rupees and government can handout 1 crore annual salary to each and every worker. This will definitely result in the welfare of everyone, right? 

Not only will government employment programs funded by RBI or tax payers not reduce unemployment, they will also generate more inequality as I have mentioned above. Remember RBI’s easy money policies are responsible for this wide income gap in the first place. Generating more inflation to fund these urban employment programs will only generate more income inequality. 

Will universal basic income scheme reduce the income gap? 

The same consequences will follow with the government’s programs of universal basic income, which again will be either funded by using tax payers’ money or via inflation. Universal basic income is a scheme where government gives you some lump sum amount every month. You don’t have to work for this money. It is a free (sic) handout. Just like above, a similar reductio ad absurdum exercise will show us that the whole idea of universal basic income is completely illogical and senseless. If a universal basic income, which is simply the government printing and handing out money to people, is going to help reduce the income gap then why give only 5000 or 6000 rupees? Why not give everyone 50 crore rupees and make everyone equally rich? What stops the government and its central RBI from handing out 50 crore to each family? Let’s say an Indian billionaire’s total income is 140 crore rupees. Government should tax all his money and give 1 crore to each 140 crore Indians to make everyone equally rich. This will bring the income gap to zero removing all inequality. Isn’t this a wonderful scheme?

Conclusion

In the end, I have shown above that logically both schemes proposed by the prime minister’s economic advisory team to alleviate the problem of income gap are not only not going to reduce the income gap but, in fact, will further increase it. More government expenditure and programs are not going to reduce any economic problems that we face. Government intervention in the economy is the root cause of our problems. Removing that intervention is our solution, and not repeating the same socialism as suggested by prime minister’s economic advisory team.