Black holes and governments

Black holes and governments
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First Published: Tue, Feb 10 2009. 10 16 PM IST
It’s an old story now: A crisis materializes, governments pledge to defeat the crisis, governments unleash spending measures. The trouble is such crises can become the black holes of taxpayer funds—sucking in lots of cash, and yielding nothing.
On Thursday, external affairs minister Pranab Mukherjee equated the climate crisis to the financial crisis, noting, “The large amounts of public funds that are being deployed to address the financial crisis is a testimony to the fact that we can, given the requisite political will, generate similar funds to tackle climate change.”
At first glance, comparisons between a crisis whose meteorological effects are yet to be fully seen and another whose effects are already hurting appear strange. But Mukherjee has hit the nail on its head: Governments can be persuaded to mobilize similar funding. It’s a different matter that that may not be wise.
Consider, for example, US government spending on the financial crisis so far. It’s unclear if the $700 billion Troubled Asset Relief Programme has yielded positive results; every month, there are fresh capital injections for banks. American International Group (AIG) has been given multiple government lifelines: $120 billion in September, $38 billion in October and $40 billion in November. Has bailout after bailout helped? AIG stock currently trades at $1.04. Washington’s $800 billion stimulus, replete with protectionism and family-planning measures, is now on its way.
Though governments are yet to act as vigorously on climate change, spending may be equally wasteful. Danish environmentalist Bjorn Lomborg presents the best-case scenario: For every dollar of spending, the return is only 90 cents. It would then take the world 90 years to diminish carbon emissions by just 18%, demanding $800 billion of today’s money to reduce the temperature by as little as 0.4 degrees Fahrenheit over that period. Worse, carbon taxes and cap-and-trade schemes can altogether alter investment incentives.
If targeted smartly, government action can achieve beneficial results. But, masked by the urgency of a crisis, this spending can easily turn into profligacy.
If the credit crunch or climate change is any indicator, a crisis is where public funds come to die.
Is government spending on crises wasteful? Tell us at views@livemint.com
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First Published: Tue, Feb 10 2009. 10 16 PM IST