Amar Trivedi

I read the article Creating a consumption class out of the poor the other day. It is an interesting article. In the first part of the article, the author rightly points out what is wrong with subsidies. I completely agree with Mr. Jagannathan on his opposition of subsidies and why they fail to deliver the intended results. Subsidies have not helped the central planners reduce poverty or helped poor get intended relief. It is a classic case of State failure.

Unfortunately, Mr. Jagannathan then argues that cash instead of subsidies is a better idea and points to success of National Rural Employment Guarantee Act (NREGA) as evidence. From the NREGA website, here is what NREGA is about:

The Mahatma Gandhi National Rural Employment Guarantee Act aims at enhancing the livelihood security of people in rural areas by guaranteeing hundred days of wage-employment in a financial year to a rural household whose adult members volunteer to do unskilled manual work.

Essentially, the idea is to provide work to able bodied rural people instead of food. According to the author, by giving cash for manual work, we will be able to create a new “middle” or as the author puts it, consumption class. This consumption class then will help the economy and since the new class will have money, they will ask for better service.

I completely disagree with this premise as it is wrong at so many levels:

1. By merely substituting cash for subsidy on food, fertilizer and kerosene, a new middle class be created.  This is a fallacy because the provider is still the government. By merely removing inefficiencies in distribution of grains and other subsidies we cannot claim that we are doing better by giving cash to rural population. At the end of the day, government does not produce money – it essentially takes money from some and redistributes it to others (they can “produce” money by printing it but that is NOT true money) .

2. In fact, we are not even eliminating inefficiencies. We are only moving one type of inefficiency to the other. If  the government is bad at managing warehouses what makes us think that it will be better at managing work hours of workers? How about where and how projects are allocated?

As Mises pointed out, without the free markets, there is no way to efficiently allocate resources. Why are we digging wells or building stuff in places where we may or may not need them? If there is a real need (and government has no red tape) for the wells in Palanpur, Gujarat, someone will build them and make the money. Theses moneys when circulated in the economy will create a true middle class.

3. If we can provide employment to unskilled laborers and turn them into consumption class, may be we should also eliminate use of heavy mechanical machinery in all PWD work. Why use road-rollers for building roads? Give unskilled laborer a spoon and provide employment to millions of people. Isn’t that a great idea?

Essentially, a country’s economy is not defined by its consumption class but by it savings. Way to build a robust economy is not by increasing government spending but restricting (and almost eliminating) government spending. The days of Keynesian economics are over. India has already tasted the sweet fruits of TRUE free markets.