It is Daft to Worry About Inequality

This is the 46th installment of Lighthouse, my monthly column for BLink, a supplement of the Hindu Business Line.

Inequality and poverty are different problems, requiring different, even opposite, solutions. India’s problem is poverty.

Let me begin this column with a question, dear reader, which I urge you to read carefully and answer before reading on:

In which of these two countries would you rather be poor: the USA or Bangladesh?

Most people I ask this to go, Duh, of course I’d rather be poor in the US than in Bangladesh. Well, here’s something I’d like you to consider: the USA has far greater inequality than Bangladesh does. A measure called the Gini Index measures inequality across the world, and the USA, Hong Kong, Singapore and the United Kingdom all have greater inequality than Bangladesh, Liberia, Pakistan and Sierra Leone. And yet, that second group of countries is by far poorer than the first group

It has become fashionable these days, especially in elite, privileged circles, to agitate about inequality. But as my question and the data above make clear, inequality and poverty are very different things. Some of the poorest countries in the world are among the most equal. (Some Communist countries of the last century came close to achieving equality in poverty.)

So here’s my contention, in three propositions:

One: India’s big problem is poverty.

Two: The more we reduce poverty, the more we are likely to increase inequality.

Three: It is perverse, therefore, to worry about inequality. We should only keep our eye on poverty, and not worry if inequality goes up.

There is a fundamental fallacy at the root of the obsession with inequality. We think of the world in zero-sum ways. That is, we behave as if there is a fixed pie, and the rich can only become richer if the poor become poorer. In this vision of the world, the more inequality increases, the more abject the suffering of the poor. Redistribution is the only solution.

And yet, this narrative is wrong. The world is not zero-sum but positive-sum. The size of the pie increases with every voluntary transaction. Every time I buy a cup of coffee from a café, both the café and I are better off – otherwise we would not have transacted to begin with. The amount of value in the world has gone up.

The more you allow and enable such voluntary exchange, the more people trade to mutual benefit, and we all become better off. And the larger these economic networks of voluntary exchange, the greater the scope for such mutual enrichment. That is why people migrate to cities from villages, and rarely the other way around.

In fact, within a country, cities are far more unequal than villages are. If inequality was such a bad thing, why would so many poor people vote with their feet by migrating to cities? They embrace this greater inequality because they want to escape poverty.

The reason India remained a poor country for so many decades after Independence is that, with the zero-sum vision of our leaders, we frowned upon free markets. While the rest of Asia shot ahead, we restrained the natural ingenuity and enterprise of our people with our mai-baap vision of politics. We did reform a bit in 1991, but too little and too late. Our poverty levels did go down a bit, though, even as we grew more unequal, illustrating the fact that there is no correlation at all between poverty and inequality.

I don’t want to talk only in terms of abstract ideas, so let me illustrate one way in which reducing poverty would raise inequality. There is consensus among economists today, even left-wing ones, that we have crippled our manufacturing sector for decades with a series of bad laws, such as our labour laws, which don’t allow small businesses to grow, and force much of our nation into the informal sector. These regulations stopped us from becoming a manufacturing superpower like China. What would happen if these restrictions were to magically disappear one day?

You would have growth in the manufacturing industry. There is no question that there would be far more employment generated, which would reduce poverty. You would also have some of these businesses achieving scale and becoming behemoths. Poverty would go down and our per-capita income would go up; but because of the winners at the top, inequality would also go up. Would this be a bad thing? I don’t think so.

The zero-sum instinct is ingrained in us: we evolved in prehistoric times when we lived in small tribes amid scarcity, and the positive-sum view of the world would have been unintuitive. It is also natural to resent the super-rich among us, especially when they behave in ostentatious, obnoxious ways, and game the system with their money, which happens a lot in our crony socialist state. Maybe a country that has eliminated poverty can have the luxury to think about Inequality. But not us.

It is a moral shame that seven decades after Independence, we still have millions of people living in poverty. We need to fight this. We should not be distracted by false metrics.

A Special Cess

This is the 68th installment of Rhyme and Reason, my weekly set of limericks for the Sunday Times of India edit page.

BUDGET

My finances were in such a mess.
I said, “I demand an Amit cess.”
A gentleman named Shah
Said, “Arre bhaiyya, wah.
Super idea, I must confess.”

FIRST PRINCIPLE

Tom Friedman has defended Aadhaar.
He said, “Facebook has your data, yaar.”
Oh, what a clueless gent.
Facebook has our consent,
And consent must be our guiding star.

A Special Cess

This is the 68th installment of Rhyme and Reason, my weekly set of limericks for the Sunday Times of India edit page.

BUDGET

My finances were in such a mess.
I said, “I demand an Amit cess.”
A gentleman named Shah
Said, “Arre bhaiyya, wah.
Super idea, I must confess.”

FIRST PRINCIPLE

Tom Friedman has defended Aadhaar.
He said, “Facebook has your data, yaar.”
Oh, what a clueless gent.
Facebook has our consent,
And consent must be our guiding star.

The GST Rhymes

This is the 52nd installment of Rhyme and Reason, my weekly set of limericks for the Sunday Times of India edit page.

GST 1

I had been giving Jaitley some grief.
So he came home to give me relief.
“Amit bhai, kem chho bro?
You will be glad to know,
Khakras are now cheap beyond belief!”

GST 2

My CA said, while doing billing,
“Accountants are making a killing.
You are going berserk
With all the paperwork,
But hey, my life is so fulfilling!”

Earlier…

The Paradox of Democracy

This is the 42nd installment of Lighthouse, my monthly column for BLink, a supplement of the Hindu Business Line.

Many political parties are great at campaigning and winning elections. They all botch up governance. Here is why.

I just finished reading How the BJP Wins, an excellent book by the journalist Prashant Jha on the BJP election machine. It left me in awe of Narendra Modi’s political talent and Amit Shah’s management skills. Between them, they crafted a narrative that had wide resonance, constructed a masterplan based on reconfiguring caste alliances, and put together a ground game with booth-level granularity that won the BJP election after election. They redefined political campaigning in India, and the book deserves to be a case study on how to win elections. And as I finished the book, I was left with a disturbing question:

Why is it that the same group of men who are so good at campaigning are so bad at governing?

This is not a partisan question. Every party that has ever been in power in India has aced the campaigning (after all, they won) and provided appalling governance. The problem here is not competence: the BJP showed immense intelligence, ingenuity, will power and hard work on the campaign trail. The problem here is incentives.

The incentives of a party fighting elections are straightforward: they want to win the elections. The spoils of power are tempting, and everyone works hard. But once they come to power, their incentives are not quite so straightforward.

Consider the two things they needed to come to power: money and votes. Let’s start with money. All democratic politics is about the interplay between power and money. You need humungous amounts of money to win elections. Special interest groups or wealthy individuals provide this money. They do it as an investment, not out of benevolence. And when their horse wins, they want an RoI. They used money to buy power; now they want the power to be used to make them money.

So the first incentive for a politician is to make money for the people who gave him money. It’s as crude as that. In a local election, this could mean that a contractor funds a party so he gets pothole repair contracts from them once they come to power. (And of course, he messes up the repairs so he gets another contract the next year.) At a national level, it means policies that affect crores of people get framed to benefit certain funders.

For example, small traders have traditionally been a strong support base of the BJP. What do small traders want? They want to be protected from competition. How does this reflect in the BJP’s policies? They have traditionally been against Foreign Direct Investment (FDI) in retail. What is the impact of keeping FDI out of retail? Less competition, and therefore less value for consumers. So this notional value that the consumer loses, where does it go? To the small trader, naturally. Basically, the government redistributed wealth from common consumers to a special interest group, all no doubt with rhetoric that sounds noble.

At an individual level, think of the big industrialists who backed this government, and the many ways in which the government pays them back will become obvious: the infrastructure projects, the defence contracts, and a million little invisible favours.

Besides funders, the politician in power has to keep voters happy. Specifically, he has to please those particular vote banks that brought him to power. This can happen through direct patronage. It can happen through policies that seem to benefit the vote bank in question. Note that policies that appear compassionate might actually be harmful in the long run.

For example, farmers are a big vote bank. But the average farmer will prefer mai-baap benevolence to deep structural reforms. Imagine a politician telling a farmer: “I will remove the minimum support price, remove all price controls, and abolish APMCs. Like it?” Ya, I know. Forget it and give the loan waiver already.

All politics, therefore, amounts to bribery. Whatever you do in terms of governance is not to make sure the nation is better off, but to give RoI to your investors, and inducements to your voters. Governance does not sell.

Government, of course, does not consist only of politicians but also of bureaucrats. Their incentives are aligned towards increasing their own budgets and power. To the extent that they are rent-seekers, they want to expand the scope of that as well. Why would anyone stop a gravy train they are on?

This, then, is what I call the Paradox of Democracy. A party that needs to win elections can never govern well because it needs to win elections again. And it does this by redistributing wealth from all of its citizens to some of them. I rarely quote myself, but I can’t resist ending this column with a limerick I once wrote:

POLITICS

A neta who loves currency notes
Told me what his line of work denotes.
‘It is kind of funny.
We steal people’s money
And use some of it to buy their votes.’

*

Also read:

Politics = Bribery
The Great Redistribution

Beware of the Useful Idiots

This editorial by me appeared today in Pragati.

Many of the intellectuals who supported Narendra Modi in 2014 should have realised their mistake by now. They haven’t. Here is why.

Almost a century ago, Vladimir Lenin is said to have coined the term ‘Useful Idiots.’ The term referred to those intellectuals or eminent people who gave a movement respectability by association, but weren’t actually respected within the movement itself. RationalWiki defines a Useful Idiot as “someone who supports one side of an ideological debate, but who is manipulated and held in contempt by the leaders of their faction or is unaware of the ultimate agenda driving the ideology to which they subscribe.”

If this sounds familiar, it should. Useful Idiots abounded in Lenin and Stalin’s time – many were sent to the Gulag once their utility diminished – and authoritarian despots since, from Hitler to Mao to Chavez – have had their own set. And of course, if you live in India in 2017, there are Useful Idiots here as well.

I want to make it clear that I am not referring to any of the people I mention in this essay as idiots. I will use the term ‘Useful Idiot’ only in the sense outlined above. Some of the Useful Idiots that will come to mind are accomplished individuals, even giants of their field, and their behaviour is as much poignant as it is deplorable. Some of them are people I admired or liked, and as I look at them, it strikes me that in a parallel universe, I could be in their shoes. We are all frail.

Act 1: The Longing for Better Days

When Narendra Modi spoke of Achhe Din, it had enormous resonance for many people. Here are things reasonable people can agree on: India had been ravaged by over six decades of mostly Congress rule; the bad economic policies of Nehru (otherwise a great leader) and Indira had kept us in poverty for decades longer than we should have; government was basically a mafia, and we were ruled by a kleptocracy rather than served by public-spirited statesmen; the ‘liberalisation’ of 1991, forced upon us by a balance-of-payments crisis, had helped but only a little, as many reforms remained to be done; the current dispensation did not show the will to make reforms; the people of India languished as a parasitic beast called government sucked us dry.

In every tunnel, the eye searches for light. It was easy to be seduced by Modi’s rhetoric. (Much of that rhetoric – ‘Minimum Government, Maximum Governance’ – came from outside intellectuals, and not inner conviction.) It was tempting to give him the benefit of the doubt for the riots of 2002 – after all, it is a liberal principle that a man is innocent until pronounced guilty. It was tempting to see him as the messiah.

I am not saying that the beliefs above are correct. (I myself did not hold them, and was undecided.) I am saying that they are reasonable. It was reasonable to look at 67 years of opportunity cost and ask, What could be worse? It was reasonable to look at the derelict UPA government and ask, What could be worse? I would even say that it was reasonable to recognise that things could indeed be worse under Modi, but consider it a chance worth taking.

With the benefit of hindsight, I feel it is unfair to gloat about the people who got this wrong, as they clearly did. Anyone can be wrong once. But to be wrong repeatedly, when all the facts are before you, when the stakes are so high, is unpardonable.

Many of those who supported Modi did so assuming that the social wing of the Hindutva movement would be kept in check while long-awaited economic reforms would happen. The eminent economists Jagdish Bhagwati and Arvind Panagariya voiced their support of Modi. (Their books contain an excellent diagnosis of India’s condition, as well as a road map for the future.) Many people on the ‘economic right’ (more on this phraseology later) walked into his camp. Modi got a resounding victory, and had the mandate he needed to carry out sweeping changes. He did nothing.

Act 2: Mugged by Reality

I outlined, in a keynote speech I gave a few months ago, all the evident failings of Modi’s government since 2014. I don’t want to spend too much time on them, so a brief summary: no reforms; a move leftwards to a Nehruvian command-and-control view of the economy; a continuation (and even expansion) of most of the flawed schemes of the previous government, often with fancy name changes; maximum government, minimum governance; a rollout of GST, which they had earlier opposed, with so many slabs and exemptions that it was a wet dream for those hoping for another Inspector Raj; demonetisation.

And that’s just the economics. (Saffron is the New Red.) At home, Modi mishandled Kashmir, with violence escalating. And the social wing of the Hindutva Project that he clearly believes in is tearing Indian society apart. Quips about it being safer to be a cow than a woman have become a cliché.

As Arun Shourie famously said, NDA = UPA + Cow.

Many who had supported Modi in 2014 now realised that their optimism was misplaced and the worst-case-scenario was unfolding. Public intellectuals like Sadanand Dhume deserve credit for changing their mind when they were mugged by reality, and for having the intellectual honesty to continue to speak truth to power. But many did not.

Demonetisation (or DeMon) was described by a friend of mine as a litmus test that revealed which intellectuals cared about their principles, and which just wanted proximity to power. DeMon, on which I published many pieces, was the largest assault on property rights in the history of humanity. It led to people dying in queues, businesses shutting down, livelihoods being decimated. There was no way any of its goals could be achieved, and there was no way taking 86% of the money supply out of circulation would fail to devastate the economy. All this was evident from the start. Any economist who supported DeMon lacked either intelligence or integrity. I don’t even know which is the charitable explanation.

Modi is a master of optics, and controlled the narrative to actually make short-terms gains from DeMon. But it was worrying and depressing that so many people who should know better continued in their steadfast support of him. Why did they do so? I posit four reasons.

Act 3: Living in Denial

Here are four possible reasons why these Useful Idiots continued to stay Idiots.

One: Rationalisation

These Useful Idiots, having gone public with their support of Modi, had their reputations and self-esteem at threat. They could not simply change their minds. Also, they badly wanted to be right. So they rationalised away Modi’s inaction. When he did not reform, they called it ‘gradualism’, and pretended that change necessarily had to happen slowly. Let him settle in. Give him time. The political economy is complicated. And so on, despite the fact that the man wasn’t even trying.

Confirmation bias also kicked in. Every time he said something they wanted to hear, they clapped vociferously. Every time he did something they would have condemned under previous administrations, they stayed silent. Every time violence erupted against Muslims or Dalits or anyone near a cow, they blamed it on ‘fringe elements.’ They could rationalise everything until DeMon. But how could they continue to do so after that?

Two: The Carrot

The Patronage Economy swung into place after Modi came to power. Ignore the rumours about the BJP’s IT cell having prominent people on their payroll. There were enough legitimate ways to reward cronies. Rajya Sabha seats, Padma Awards, sinecures at government institutions, lucrative directorships in PSUs, seats in the Niti Aayog, and so on. I bought a recent issue of a magazine that supports the BJP, and most of the advertisements inside were by PSUs. Their editor keeps writing in praise of free markets, but is no more than a parasite living off taxpayers’ money. The irony.

To pre-empt the inevitable Whataboutery, let me agree that such a Patronage Economy existed for decades under the Congress as well. But the honourable thing to do then is to dismantle it once and for all. Instead: jobs for the boys!

Three: The Stick

This government is vindictive, and it appears that it will remain in power for a long time. Who would want to mess around? I know of two free-market supporters in Niti Aayog (not Panagariya) who were appalled by DeMon. But they were given orders to support it publicly. Both of them did so, in ways that would make you cringe. Indeed, friends from within the establishment have told me that those orders were given to all their Useful Idiots. Silence was not an option. Even the previously venerable Jagdish Bhagwati debased himself. (In his case, it could have been any of the above three factors. Does it matter which?)

There were Useful Idiots who had spent their lives on the periphery, dreaming of power. Now that they were establishment intellectuals, why would they risk losing that position? For the sake of principles and truth? Come on!

Four: The Lust For Power

For some of us, power is the means to an end. For others, it is an end in itself. Everything you do to get there is a façade. I have been stunned and saddened over the last few months to see how so many people I knew have been transformed by proximity to power. These Useful Idiots never actually believed in anything: their principles were all Useful Principles. Once close to power, they discarded these principles; just as their masters will one day discard them.

A friend I respect told me a few months ago, “Amit, the economic right must ally with the social right. Then we will be an unbeatable force.” I disagreed. Although ‘right’ and ‘left’ are now useless terms, I’d fall into the economic right because I support free markets. I support free markets because I support individual freedom. And individual freedom is incompatible with the agenda of the social right – which, in India, basically means bigots and misogynists. I told my friend that he was wrong, and that people like him would merely give respectability to this ‘social right’, which would eventually spit them out like paan on the roadside. That process has begun.

Arvind Panagariya left Niti Aayog recently, reportedly under pressure from the Swadeshi Jagran Manch, his reputation in shreds. Modi and gang have consolidated their political capital, and no longer need these Useful Idiots. These Useful Idiots will rationalise, will enjoy the trappings of power and money, and will be cautious about pissing off The Supreme Leader. They may even sleep well at night, for self-delusion is the essential human attribute.

I feel sad for what they have done to themselves. But I feel sadder for what is happening to this country.

*

Also read

Saffron is the New Red —Amit Varma and Barun Mitra
The Landscape of Freedom in India—Amit Varma

Bollywood Explains Economics

A few weeks ago, I started a new section in Pragati, the online magazine I edit, called Housefull Economics. The idea behind the section is to use popular culture as a peg to explain fundamental concepts of economics and political philosophy. This is not my personal column—others will also contribute—but I did write the first five pieces for it. Here they are:

1. Ek Baar Jo Maine Commitment Kar Di—Salman Khan explains the importance of constitutional rules. (June 28)

2. My Shoes Are From Japan—Raj Kapoor brings us two important lessons about globalisation. (July 5)

3. Alone in the City—Amol Palekar expresses his discontent at FSI and Rent Control. (July 12)

4. My Love, I Know What You Want—Amitabh Bachchan explains how prices work. (July 19)

5. Why Is There A Commotion?—Ghulam Ali argues against punishing victimless crimes. (July 26)

Politics = Bribery

This essay, which I co-wrote with Kumar Anand, was published in Pragati, the online magazine I edit, on June 13.

A year ago, one of us (AV) wrote a limerick that expresses a fundamental truth about politics. Here it is:

POLITICS

A neta who loves currency notes
Told me what his line of work denotes.
‘It is kind of funny.
We steal people’s money
And use some of it to buy their votes.’

We remembered this limerick now in the context of farm-loan waivers. This weekend, the Maharashtra government announced loan waivers for farmers in the state. A few weeks ago, the Uttar Pradesh government had also announced large farm-loan waivers. This is spreading to other states, and might end up as a Waiver Cascade (WC).

Beyond Moral Hazard

The most obvious unintended consequence of these waivers is what economists call Moral Hazard. Simply put, when farmers know that their loans are likely to be waived, they are incentivised to take loans they do not intend to return. (The same phenomenon applies in the case of the Too Big To Fail banks bailed out by the Fed in the US after the 2008 crisis.) This does nothing to solve the problems inherent in the system, and may even perpetuate them.

But this essay is not about farm-loan waivers per se. Nor is it about agriculture in India, which has been crippled by decades of bad policy. Instead, we want to talk about politics.

Redistributive Bribery

As we described in our recent essay on public choice economics, politicians come to power on the back of a) special interest groups and b) vote banks that they pander to. Once in power, they pay these groups back – with our money. Most governance amounts to a transfer of wealth from the people at large to special interest groups or vote banks. We call this Redistributive Bribery.

Farm loan waivers are an obvious example of this – the money to pay for the waivers does not fall from the sky, but comes from all of us. But practically all government action falls into this framework, whether or not money is directly involved. Most regulatory measures and government schemes follow this pattern, which is not hard to figure out if one thinks about who the beneficiary of each such action is.

To illustrate, here are four categories of Redistributive Bribery, with examples.

One: Direct Subsidy to a Vote Bank

Farm-loan waivers are an example of this. Farmers are an important vote bank everywhere, and this noble action for their benefit makes many non-farmers feel noble and compassionate. It probably hurts the farmers more than it helps them, by trapping them in a cycle of dependency, but that’s unintuitive and unseen.

Note that we are not picking on any party. Farm-loan waivers predate the BJP. Because the Congress has been the most successful party in our history, it has also done the most pandering. The BJP’s accusations of pseudo-secularism, which found resonance with many, was essentially a claim that the Congress was pandering to Muslim votebanks with measures like the Haj Subsidy. The Samajwadi Party in UP wooed the same vote bank with our money.

Another recent example is of Devendra Fadnavis announcing that his government will redevelop a group of chawls by building 16000 “affordable homes”. These come at the cost of Rs 16000 crore, at one-crore-per-home. You can bet that the beneficiaries of this largesse will vote for Fadnavis – and that those who the money is taken from won’t even notice.

There is no end to this sort of direct subsidy to vote banks. Free televisions, free laptops, free rice – they are all Redistributive Bribery.

Two: Direct Subsidy to an Interest Group

Interest groups spend lots of money getting their favoured politicians into office. Naturally, they want a return on investment. And politicians are keen to deliver, for they need funds for the next election also. It’s a cycle. And one of the two ways through which this happens is direct subsidies.

This can take various forms. Companies getting soft loans from Public Sector Banks, many of which turn into NPAs, is one example of this. So is the acquisition of land by the government to give to big businesses, such as in Gujarat, when then Chief Minister Narendra Modi helped set up the Nano plant. Some of this land can be got dirt cheap, as in the case of Modi’s Gujarat and the Adani group. The allocation of natural resources can fall under this category, as does the granting of government contracts for various things.

Having used the money of these interest groups to get to power, politicians then use that power to generate more money for the interest groups. That’s the whole game.

Three: Regulation to Favour Vote Banks

Wait, you say, surely regulation isn’t redistribution. Well, it mostly is, though in an indirect and unseen way. Consider Rent Control.

Rent Control is a regulation meant to benefit a particular vote bank: renters. But think of its long-term effects. It removes the incentives of property owners to look after their property, and buildings become dilapidated over time. It is a disincentive to new construction in areas where rent control is in effect. It distorts the market and reduces supply, thus driving up prices for everyone not already living in a rent-controlled property. Those lucky few enjoy the benefits paid for by the loss of many, most of whom don’t even realise what they’ve lost.

For all practical purposes, it is a redistribution of wealth from the many to the few. Indeed, think of other regulations that favour a specific votebank, and you’ll find that at its heart, it amounts to redistribution. Whatever the noble stated intent might be, it’s done for votes and is, thus, bribery.

Four: Regulation to Favour Interest Groups

Small traders and businesses have been a crucial support group for the BJP. No wonder, then, that the BJP opposes Foreign Direct Investment (FDI) in retail. Putting a cap on FDI is a great example of how regulation amounts to redistribution. Consider the effects of such a protectionist measure.

The more the competition, the more consumers benefit. When FDI in retail is not allowed, the market is less competitive than it would otherwise be, and consumers lose value. Maybe the goods they buy are not as cheap as they would otherwise be. Maybe they cost the same, but provide less value for money. All of us common people, consumers, citizens, are thus losing value, which has been redistributed away to a specific interest group.

(Again, it’s not just the BJP. Consider that Arvind Kejriwal, who also depends on this base for both votes and money, also opposes FDI in retail. There is only one plausible reason for such bad economics, which is that voters and donors need to be bribed. So much for being anti-corruption.)

It’s not just restricting FDI in retail: All protectionism, without exception, amounts to redistribution of wealth from the common masses at large to special interest groups. Another example is black-and-yellow cabs and auto unions lobbying the government against Uber and Ola. The ban on surge pricing in Uber came out of such lobbying, and we have seen the effects in Bengaluru: a shortage of cabs, as always happens with price controls. Consumers suffer, and the value they have lost has gone to that one interest group.

Concentrated Benefits and Diffuse Costs

All political parties engage in Redistributive Bribery. It is the oldest scam in politics — and perhaps even the basis of it. So why do we put up with it? We do so because while the benefits are visible, the costs are not.

When a poor farmer is given a loan waiver or a small trader is protected from rapacious multinationals, we all clap, feel compassionate and give ourselves a pat on the back for nobility. But we don’t see the full picture, because we cannot see the losses. If the government imposes tariffs on foreign producers of widgets, and domestic producers benefit from the reduced competition, we don’t see the value that all of us lose because of this. Indeed, it is not even possible to calculate it. The loss from much regulation and subsidy is often more than the gain, because incentives change for all involved. A positive-sum game becomes a zero-sum or negative-sum game.

Economists refer to this as ‘Concentrated Benefits and Diffuse Costs.’ To take the example from our previous essay on Public Choice, if Company A gets a subsidy of Rs 1.3 billion from the government, it has plenty of incentive to lobby for it. None of us common Indians will bother, because its only one buck each.

What’s the Plan of Action?

In theory, politicians are supposed to get elected by promising and delivering good governance. In practice, they bribe their way to power in the ways described above. They were meant to be angels, but are actually vampires. We’re stuck in a horror movie. What are we to do?

Well, we need to think more deeply about who pays for the costs of every government action. We all do. This includes the poorest among us, since everyone pays indirect taxes, and suffers from the absence of the better world that is not allowed to come into being. If this outrages you, express that outrage. There is nothing else to be done.

*

Also read: ‘Wonder Woman, the God of War and Public Choice Economics.’

Wonder Woman, the God of War and Public Choice Economics

This essay, which I co-wrote with Kumar Anand, was published in Pragati, the online magazine I edit, on June 8.

The most beautiful moment in the film Wonder Woman is a small, human moment. Diana Prince, out in the real world for the first time, makes her ice cream-eating debut while rushing somewhere in a crowded marketplace. Blown away by its taste, she turns to the vendor with a surprised smile on her face and tells him, “You should be very proud!” She learns one important truth about the real world: ice cream is awesome. Later in the film, she learns another.

(Spoiler alert: we give away a crucial part of the plot in the next paragraph, so stop reading if that matters to you. But do come back later after watching the film!)

The reason Diana aka Wonder Woman steps out in the real world is that she hears that a terrible war is raging, and concludes that it is caused by the God of War, Ares. She has been raised by the Amazons to kill exactly that one God when he returns to action, and she now decides to fight him and end this war. She heads forth into battle, decides that German General Ludendorff is Ares, and goes off to fight him. She catches him, kills him, and then finds to her astonishment that the war continues to rage around her. Killing the God of War made no difference.

Moments later, she discovers that the God of War was someone else, not Ludendorff. But killing that dude won’t make a difference either, because of one essential truth: Humans are human. They are flawed; they will fight. You don’t end war by killing the God of War.

The film ends on a syrupy, sentimental note, as she finds notes of redemption in these flawed humans, but that moment of dissonance she faces before that was familiar to us. We, too, have faced that dissonance in our lives, when a God died and we realised that the problems in our world are rooted in human nature. That God was Government.

Public Choice Economics

We grew up in India as believers in the biggest religion in the world: the religion of Government. Like all religions, this one claims to reveal the One Big Truth, and worships the biggest God of all. It holds that Government is the solution to all our problems. Put in rational terms, we are taught that markets are imperfect, market failures are inevitable, and we need Government to set everything right. This was economic orthodoxy until recently.

But in the middle of the last century, a new academic discipline sprung up that aimed to unmask the true nature of this false God: Public Choice Economics. Pioneered by scholars such as Gordon Tullock and James Buchanan, Public Choice Economics had one key insight to offer: that governments aren’t supernatural entities, but consist of humans. And humans respond to incentives. Therefore, to understand government, we must understand the incentives of the people it is made up of.

Incentives, Incentives, Incentives

Now, markets also consist of humans responding to incentives. But these are good incentives. Markets are networks of voluntary exchanges that are basically a positive-sum game: in every voluntary transaction, both parties benefit, else they wouldn’t be transacting. The only way to make a profit is by adding value to someone’s life. The greedier you are, the harder you work to make others better off. These are great incentives.

There is nothing voluntary about government. It has a monopoly on coercion and violence, and its very existence is an act of coercion – no one pays taxes willingly, or asks to be licensed and regulated. Now, we believe in a limited government (with its consequent coercion) to the exact extent that you need to protect individual rights and provide the rule of law that markets (aka society) need to function. But leave aside the broader philosophical point and just consider the incentives of the humans in government. Those are all messed up, because unlike markets, they are zero-sum or negative-sum, and the easiest way to make money is not to improve the lives of others, but to exploit them.

Let’s break up the different types of incentives at play with government.

The Money Incentive

Milton Friedman famously expounded on the Four Ways of Spending Money, which you can see summed up in the table below. (You can read about it in a piece one of us wrote recently.) In a nutshell, government brings together the worst conditions for spending money – you are spending someone else’s money on someone else, and are likely to care about neither the money being spent nor the service being provided. These are the worst possible incentives.

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To use an example from the piece we linked to above, consider the question of why Mumbai’s roads always have potholes. The municipal officer in charge has a tenured job, zero accountability, and his incentives are aligned to making sure that he picks the most expensive contractor so he gets the biggest kickback, and that the repairs are done so badly that future repair work is necessary, with all the kickbacks they entail. This is inevitable not because that government officer is a bad person, but because the incentives are what they are.

The Bureaucrat’s Incentive

Consider the incentives of bureaucrats. What motivates them? In the words of economist William Niskanen: “Salary, prerequisites of the office, public reputation, power, patronage… and the ease of managing the bureau.” In other words, they want to expand their scope and power, which usually has no connection with the work they are supposed to perform.

Parkinson’s Law illustrates the state of the bureaucracy beautifully: “Work expands so as to fill the time available for its completion.” The two implications of this, according to C Northcote Parkinson, after whom the law is named:

One: “An official wants to multiply subordinates, not rivals.”

Two: “Officials make work for each other.”

This is why government departments tend to grow endlessly and not get anything done. Here’s an example of this: Have you heard of the Churchill Cigar Assistant?

The Politician’s Incentive

The politician’s aim is simple: he wants to come to power. For this, he needs lots of money. (A humble corporator’s election expenses can run to many crores.) Where does this money come from? It comes from interest groups who want to use the coercive power of government for their own ends. You could be an industrialist who wants mining contracts, or soft loans from public banks that private banks would never give, or protectionist measures to safeguard your business from competition, or state subsidies of some sort, and so on.

These interest groups use their money to get their favoured politicians to power. (Canny interest groups will keep politicians on all sides happy.) Those politicians, once elected, use their power to generate more money for those interest groups and themselves. All of this comes at the expense of the common citizen.

If Company A wants a subsidy of Rs 1.3 billion, consider that every Indian pays an average of one rupee for this subsidy: too small for them to care, even if they figure out what is happening. Public Choice economists refer to this as a case of ‘Concentrated Benefits and Diffuse Costs.’ Company A will lobby vigorously for its 1.3 billion, but the common citizen will just let the one rupee go.

While the example above is of a direct subsidy, most regulation actually has the effect of indirectly redistributing money from relatively poor citizens to relatively rich interest groups. (Read ‘The Great Redistribution’ for a sense of the process.) And all electoral politics comes down to using money coerced from all of the people to bribe a specific section you consider your vote bank: consider the rash of farm-loan waivers across India right now. (Don’t get us started on the incentives that puts into play. Groan.)

The Legal Mafia

Instead of thinking of the idealised notion of government, we should see it as what it is: a legal mafia. You give one set of people power over another. Power corrupts. This set of people soon realises that the easiest way to make money is by Rent Seeking: exploiting this power they have over others. (This beats profit-seeking through voluntary exchange, which requires you to actually add value to people’s lives, which is harder.) They leech off others, extracting hafta.

In theory, government is a noble defender of our rights. In practice, it is an ever-growing parasite. This is not an unfortunate accident, but the norm. It is embedded in the DNA of government.

Government Failure

Priests of the religion of Government often talk about why government is necessary because of market failure. We have two points to make here. One, the case for market failures is overstated, and those that take place usually do so because of the interference of government. Two, no one talks about Government Failure. Because of the incentives involved, Government Failure is actually not just pervasive, but also inevitable.

Look around you and tell us one thing that the government of India does properly. (From its stated aims, that is. If you look beyond those, we concede that it does an outstanding job of sucking our blood dry.) Its biggest failure is perhaps in its core function of ensuring the rule of law. It is our case that India does not have a rule of law, especially for the poor, and we somehow get by despite the government because of a) frameworks of societal trust, and b) sheer dumb luck.

As an illustration of that, consider the police’s reaction to the recent case of a woman who was abducted by three men in an autorickshaw. These men threw her infant child out, killing him in the process, and then gang-raped her. She went back to her baby’s corpse, carried it in the metro to a doctor, and refused to believe that the child was dead. When she went to the cops to complain, they refused to register her rape case. Why? Because they were too busy organising security for a presidential visit.

This is not an aberration. This is typical of India. Every time that poor woman buys something, for the rest of her life, the government will cut taxes that it will then redistribute to rich industrialists and interest groups. This is India, under the spell of this evil religion of Government.

The Problem is not the People

We often point to government misdeeds with shock and horror, and then demand that action be taken on the individuals responsible. To think this solves the problem is as delusional as Diana killing Ares and expecting that the problems of the world will be resolved. The individuals in the government are just human beings responding to the incentives before them. The real problem is the system. And the key problem with the system lies in power. When you give one group of people power over others, nothing good can come out of it.

The job of government is to safeguard the rights of its citizens, and not to run their lives. The whole idea of a constitutional republic is that the constitution places limits on the power of the state. But the state, after all, is run by people. People crave Power, and even a libertarian utopia will creep towards fascism unless there are strong safeguards in place. As that old saying goes, the price for our liberty is eternal vigilance. But before even that, it is important to recognize what the problem is, and what we need to be vigilant of. Public Choice Economics provides a framework for understanding that.

The God we need

Wonder Woman ends on a needlessly sentimental note (according to only one of us, ie, AV!), but it is a film after all, with superheroes and Gods. We don’t have those in the real world. If we did, though, we would need only one God for the world to function perfectly: the God of Incentives. We would name him Milton.

Legalise Prostitution to Fight Trafficking

This essay, which I co-wrote with Manasa Venkataraman, was published in Pragati, the online magazine I edit, on May 24.

It would be amazing if prostitution was legal in India. Over here, we use the law as an enforcer of morality, and prostitution is considered deeply immoral. The word itself is a pejorative. ‘Whore’ and ‘randi’ are used as terms of abuse, and the choice cuss word for our age is ‘presstitute’, implying that the press is prostituting itself, as if we are not all prostitutes.

All of us trade on our skills or assets to make a living. Writers sell their writing skills. Lawyers get paid for legal expertise and experience. You could be a construction worker or a fashion model or a software engineer or a banker, and you’d be doing the same thing that a prostitute does: trading on a part of yourself to the mutual benefit of both parties involved. Why, then, is prostitution effectively banned in India? (Strictly speaking, it is soliciting in public which is banned, which in practical terms renders prostitution itself effectively illegal.)

Also, what is the impact of this on our society?

The Moral Dimension of Banning Prostitution

A few years ago in a talk show, Kiran Bedi insisted that all prostitution involved coercion. No woman would want to be a prostitute of her own volition, she argued. On the show with her were actual members of the flesh trade, who laughingly told her she was wrong, and that they had joined the profession of their own free will. Bedi refused to engage with them, and just blocked them out. The dissonance was too much.

There are other jobs as well that one would hate to do. (Working crazy hours in a sweatshop or toiling in a farm as a labourer under the hot sun or spending one’s best years underground in a toxic mine.) Why do people willingly do them, then? It is because, of the options open to them, they feel that this is the best. If they had a better option, they’d go for it. They don’t. It’s sad, but it is what it is.

To deny them of their No. 1 choice, therefore, is to condemn them to alternatives they consider worse. This is repugnant and immoral. If there are women who would willingly become prostitutes, then to ban prostitution is to rob them of choice. It is an attack on their personal autonomy. It strips them of dignity, far more so than any customer could by having consensual sex with them.

‘Consensual’, of course, is the key word there, and the nub of the confusion. What implications does criminalising prostitution have for consent?

The Practical Impact of Banning Prostitution

Prostitution, per se, is a victimless crime. What happens when you criminalise it is identical to what happens when any other victimless crime is banned. (Such as drinking alcohol, gambling or inhaling cannabis.) The underworld gets involved, and that’s when the shady business starts.

In the context of gambling, you will note that matchfixing happens wherever gambling is illegal. Spurious liquor thrives when bootleggers are the sole source of alcohol. An unholy nexus springs up between the underworld and local politicians (The Bootlegger and the Baptist, basically), and everyone else suffers.

In the context of prostitution, this means that the business is all underground, and therefore not regulated. No safeguards can be instituted by either industry organisations or the government. Most importantly, the rights of the women working in the business cannot be protected. They can be coerced into the business, and exploited while in it.

Everything that is appalling and unwholesome about prostitution is actually true of trafficking. There is a difference between prostitution and trafficking, and criminalising the former enables and abets the latter. But Indian law seems not to understand that difference.

Prostitution vs Trafficking

The Oxford Dictionary defines prostitution thus: “The practice or occupation of engaging in sexual activity with someone for payment.”

India’s Immoral Traffic (Prevention) Act defines prostitution as “the sexual exploitation or abuse of persons for commercial purposes.” The italics are ours.

In other words, Indian law, like Kiran Bedi, assumes that coercion is a given. According to the law, prostitution and trafficking are the same thing. If we accept this definition, it would seem natural that prostitution should be banned. But the definition is wrong!

Why is our law like this? Is this some kind of patriarchal virtue-signalling? Is this Victorian morality at play, part of a weird colonial hangover? These questions are moot. Whatever the reasons are, for both our law and our social attitudes towards prostitution, we must move forward. And there is hope.

The famous Justice Verma Committee report categorically stated that voluntary sex work does not equal exploitation, contrary to our penal code. And the Gujarat High Court gave a great judgement recently when it ruled that a transaction between a sex worker and her customer is purely commercial, and when both parties have consented to it, the law has no business interfering.

What does legal prostitution look like?

What would happen if prostitution was legal? Take a look at Amsterdam, famous for its red light areas, and where the law’s approach to it is based on the simple yet sophisticated model of consent. Under Dutch criminal law, there are specific protections covering coercion and violence against prostitutes, and the whole business is above-ground and relatively respectable. Social attitudes towards prostitutes are similarly enlightened. (The causation probably goes both ways.) We do not think that ‘presstitute’ would be a pejorative term over there.

India will not turn into Holland overnight if prostitution is legalised. But there is both a strong moral and practical reason for decriminalising it. The moral reason is that the law would then cease to prevent women from making decisions about their own bodies. The practical reason is that it will get the underworld out of the business, and make trafficking less likely. It is a no-brainer. It is about time.