Mr Lin goes to Washington
Justin Lin is apparently poised to become the World Bank’s next chief economist, following the departure of Francois Bourguignon. Lin is an inspired choice for a number of reasons. First and foremost, this is the first time that the bank has appointed an economist from a developing world. Second, the appointment recognizes the importance of China. Third, Lin is an institution builder. (I was his guest at the China Center for Economic Research and was very impressed with what he has built there.) Fourth, Lin is a risk-taker. (How else can one interpret his defection to mainland China from Taiwan in 1979 by swimming across the strait?) And Lin is a very good economist on top. All are reasons to be happy about.
Eighteen days a year
Most newspapers have pointed out that of the 100 days of employment a year that the National Rural Employment Guarantee Scheme guarantees to anyone who asks for it, the poor get only 18 days on average. This is not the true scope of the leakage in the system.
In fact, if the government wanted to spend Rs100 and the bureaucrats manage to spend only Rs18, then they have unwittingly saved Rs82 of our money. They should get an award for this or something. The real leakage starts after that. It is anybody’s guess how much of the Rs18 actually reaches the poor.
Given that the comptroller and auditor general of India says the system of checks and balances does not work, it is entirely possible that the actual amount reaching the real poor is negligible.
What the 18 days figure tells us is how utterly our system of governance has broken down. It has collapsed so much that our politicians and civil servants cannot even milk the government machinery for their own benefit. That thought is really scary, and in a way gives me hope.
Science of stimulus
Love that word—stimulus. It sounds so scientific. With the right stimulus, you can even make the leg of a dead frog twitch.
A heart attack victim gets the stimulus from those chest paddles and bam. Back to life. My online dictionary defines stimulus as something that “rouses or incites to activity.”
Sounds like the perfect prescription for an ailing economy. But if politicians know how to stimulate the economy, why wait for a recession? If you can make the economy grow, why wait for bad times?
One answer is that a healthy patient doesn’t need medicine. But the other possibility is that it’s all hot air. Maybe we don’t know how to make a $14 trillion economy move very quickly. And if we did, it would take a lot more than an injection of even $125 billion.
There’s that scientific language again—an injection. The politicians are always going to inject some amount of money into the hands of consumers and into the economy, like a doctor giving a life-saving blood transfusion.
But where does the economic injection come from? It has to come from inside the system. It’s not an outside stimulus like the chest paddles or the transfusion. It means taking money from someone or somewhere inside the system and giving it to someone else.
The standard stimulus package doesn’t change incentives. It’s a cheque from the government. The hope is that the receiver will spend it. But when you just send out cheques from the government, whoever gets stimulated is likely to be offset by someone who gets unstimulated.
The money has to come from somewhere. If you raise taxes to fund the plan, the people who are taxed are poorer and they’ll spend less.
If you borrow money to fund the plan, the people who buy the government bonds have less money to spend and that offsets the stimulus. It’s like taking a bucket of water from the deep end of a pool and dumping it into the shallow end. Funny thing—the water in the shallow end doesn’t get any deeper.
And even the people who get the money often save more of it than they spend.
That’s why stimulus schemes based on giving people money have a poor track record of energizing the economy. Usually, the only thing that gets stimulated is a politician’s approval rating.