The backseat drivers

The post-1945 consensus, as a result of Keynesian theory, is that a major slump in aggregate demand can be countered by a steep increase in government demand

I love our policy-wonking macroeconomists. They confirm my belief that I am not the only loser in the world. 

Take the Great Indian Slowdown of 2019. All of them are accusing the government of not doing enough to reverse it. But none can agree on what is to be done, how, and how much. 

Offering policy advice is risk-free, which is perhaps why, as Srivatsa Krishna, an IAS officer, has argued, it leads to a ‘tyranny of experts’.

  

In 1991 Manmohan Singh was lucky. The IMF told him exactly what to do and how. He had to listen because the IMF was lending us a lot of money. 

However, that’s not the main thing. Even if everyone agreed on the what and the how much, the question of when, and in what sequence, would remain. But that is a job for managers, not economists.

The post-1945 consensus, as a result of Keynesian theory, is that a major slump in aggregate demand (which is the sum of consumption, investment and export demand minus import demand) can be countered by a steep increase in government demand. 

For Keynes this was the only way of countering the growing appeal of communism to the unemployed. That’s why I have maintained for long that the Keynesian solution was politics, not economics. Being a very clever man he dressed it all up in the plumery of economics. That gave it the much-needed intellectual respectability. 

Print on, McDuff

But what if the government, like this one, doesn’t have the money to do it? How can it increase demand?

Keynes said such governments should make up the deficit by printing notes. But he didn’t say how much, and for how long.

And if that wasn’t problem enough, he didn’t answer another key question: What should these newly-printed notes be spent on? Consumption or investment or both? 

Today half the macroeconomists say spend it on consumption, half say on investment. But the moment a finance minister seeks to do -- or does -- what they are saying, the same lot starts grumbling about the fiscal deficit, inflation, interest rates, bond prices and the rest. As all former finance ministers will tell you, they are damned regardless. 

In the end, though, it’s the finance minister who has to take a call. And for that he or she has to first identify the causes of the slowdown, which is not easy. In fact, it’s impossible because everything is so highly connected. 

Thus, why did people start suddenly consuming less? For a mix of reasons, which means no one knows what to target, how, and how much. Simply throwing money at the problem, like carpet bombing, won’t do. 

Or, why did businesses start investing less? Again it’s a mix of reasons — to which Mr Rahul Bajaj has now added fear — and the same problem arises: What to fix first and how. 

Or again, why did exports stop growing? Slack global demand is one major reason but how do you fix that? Depreciate the rupee? How far and how quickly? Again there’s no clear answer. You can only do it gradually — which is being done — but for the howling crowd that’s bad policy. 

Finally, there are all those non-economic structural and institutional reasons about which no one can do anything. They form the soft liberal infrastructure of the Indian reality.

Sit tight

This is the place India finds itself today. There’s no clarity as to why the rate of growth of industrial output and its consumption, and therefore some services, have slowed down or perhaps even turned negative. All we know for sure is that they have. 

Having seen the gravity of the situation the government finally seems to be on the right track. It has settled down to play a plodding innings after the flurry of policy announcements in September and October. Mercifully it doesn’t have the money to indulge itself. Otherwise who knows what it might have done. 

But now not only is it tightening its own belt, it is forcing everyone else to follow suit by not paying their bills. As a result everyone is broke.

In that sense it’s very nearly a financial emergency of the Article 360 type. Very nearly, because the only ones not suffering income decline are current and former employees of the government. Ironically, 360 mandates that payments to them be stopped first. 

This expenditure forbearance — remember I coined this term — will bear fruit soon. Until then may I request my fellow busybodies for some advice forbearance as well, please?