A beast called government

This is the fifth installment of my weekly column for Mint, Thinking it Through.

There is nothing in the world as dangerous as blind faith. No, no, this is not yet another rant against organised religion: there is enough damnation already scheduled upon me. There is another beast that benefits from blind faith quite as much as religion, and that causes as much harm from our lack of questioning: a beast called government.

Don’t get me wrong, we need government. We need it to take care of law and order, of defense, and for a handful of other things. (I don’t have a very large hand.) But the governments we have, not just in India but virtually everywhere, are vast, monstrous behemoths that are many multiples of the size they need to be. The cost of this, of course, is borne by us: we pay far more tax than we should need to in order to keep government going, and to justify its size the government clamps down on private enterprise and individual freedoms.

Part of our blind faith in government comes from the way we view it. Governments are not supercomputers programmed to work tirelessly for the public interest, nor are they benevolent, supernatural beings constantly striving to give us what we require. On the contrary, governments are collections of people, individuals like you and me, motivated by self-interest. The actions of government are the actions of these men and women, and the best way to understand how they are likely to behave—and therefore, how governments are likely to behave—is to consider their incentives.

Outside of government, we get ahead, whether in our jobs or doing business, by giving other people goods or services that they require. There is a direct correlation between what we give and what we get, and clear accountability: if I overstep my deadline for this column one more time, for example, Mint will surely find another columnist to fill this space!

But the incentives in government are different, and they do not drive a bureaucrat to work in the public interest. This is superbly illustrated in C Northcote Parkinson’s delightful classic, Parkinson’s Law: The Pursuit of Progress. Parkinson, examining the British civil service, found that it tended to expand by a predictable percentage every year, “irrespective of any variation in the amount of work (if any) to be done.” He explained this with “two almost axiomatic sentences”: “(1) “An official wants to multiply subordinates, not rivals” and (2) “Officials make work for each other.”

In other words, it is in bureaucrats’ interest to expand their departments and get greater budgets allocated to them so as to increase their sphere of power. Indeed, mandarins who solve problems and increase efficiency actually risk making themselves, or their departments, redundant. Do we really expect them to be like the proverbial fool on the tree, who cuts the branch he sits on?

If bureaucrats want to increase the power they have, politicians want to build vote banks. That is how they rise in the political system, and it is silly to expect them to stop when they get to power. This means giving sops to interest groups that have supported them when they come to power, and reaching out to others. One illustration that speaks for itself is the Haj subsidy. Indeed, it would be irrational for a politician to focus on anything else but what will get him elected.

But we’re a democracy, so why don’t we just vote such politicians out? Well, to begin with, our system of government has what public choice theorists would call “concentrated benefits and diffused costs.” In other words, what is hundreds of crores of subsidy for a troubled industry or a free TV to a Tamil Nadu voter is just a few paise a year for you. Who do you think is more likely to lobby a politician or bother to go out and vote?

Of course, a few paise a year for thousands of pointless causes each add up to the majority of your tax money, but now we come to another reason for why people don’t vote against government wastage: what economists call ‘rational ignorance’. Besides earning a living, there are many good uses of your time, and finding out a break-up of where your tax money goes would simply take too much of your time. This is exacerbated by the fact that many taxes are indirect and hidden away – indeed, inflation often functions as a form of taxation – and that the politicians you have to choose from, all driven by the same impulses and catering to different interest groups, really aren’t too different from each other.

I had promised last week to elaborate on how a lot of well-intentioned and seemingly sensible government spending actually harms us all, and I shall do so in the weeks to come. I wanted to first highlight how wastage in government is not an aberration, but is written in the DNA of our system, and is integral to its nature. Thomas Jefferson once wrote: “The natural progress of things is for liberty to yield and government to gain ground.” Understanding that process is the first step to turning it around.

Let us trade with Pakistan

My belief in how we should deal with Pakistan was outlined in an earlier post, where I wrote:

I embrace what appears to many to be two contradictory approaches: an uncompromisingly hard line when it comes to terrorism, and a deepening of trade and people-to-people contact. Both work towards the same end.

I remmbering discussing this with Nitin Pai over a series of emails, trying to bring him round to my point of view, and Nitin has now come out with an excellent Op-Ed in Mint that elaborates on my point about using trade to subvert the military’s hold on Pakistan, and explains how the peace process should be re-engineered. Do read.

Singur: Media bias or media ignorance?

ATimes of India report begins:

Protests against Bengal’s industrial revitalisation could receive a new fillip after the suicide of a 62-year-old cultivator, an organiser of the Krishi Jami Raksha Committee (KJRC) in Singur, who lost nearly an acre of land to the Tata Motors project.

This is either dishonest reporting or shoddy journalism, and I shall give the benefit of the doubt to the reporter and assume that it is the latter. The protests at Singur are not against “Bengal’s industrial revitalisation” but against the forceful appropriation of land by the government. As I wrote in an earlier post on eminent domain and Singur, it really does not matter if the farmers got compensation: if they did not want to sell, it is theft.

Now, eminent domain might be justifiable as a last resort for matters of public use, such as building roads, but it is outrageous when it is applied to take land from poor farmers and give it to a rich industrial house. The irony here is that Tata would probably have been willing to negotiate with the farmers for the land directly, but by law, farmers aren’t allowed to sell their agricultural land for non-agricultural purposes. Yes, that’s right: even if Tata was willing to talk to the farmers and negotiate with them, and farmers were willing to sell, it would have been an illegal transaction. So Tata had no choice but to go to the government, which, of course, is not into negotiating, and simply took the land by force.

I entirely agree with Shruti Rajagopalan when she writes here that the fundamental right to property, revoked in 1978, should be reinstated in our constitution. An “industrial revitalisation” is only sustainable when property rights are sacrosanct. Otherwise it’s a mockery.

Pervez Musharraf’s incentives

Headlines like “India-Pak terror pact sinking fast” exasperate me. Whaddya expect? As I have written before, the India-Pakistan peace process is a charade. While it is in General Pervez Musharraf’s interest to talk peace with India, as it makes him appear responsible in the eyes of the international community, it is equally in his interest to continue the conflict, which Pakistan’s military needs for its sustenance. All talk, no walk, in other words.

Similar incentives drive Musharraf’s actions as far as the War on Terror is concerned. As I wrote here, appearing to be America’s ally gets the foreign aid flooding in (1, 2), which Pakistan’s economy desperately needs. However, if al-Qaeda and the Taliban are actually defeated, then that aid will begin to dry up, as Musharraf and Pakistan will no longer be needed so badly.

In each case, Musharraf is doing what any rational person in his place would do. The only way to solve either problem is to change his incentives. And, much as the mandarins in New Delhi may shudder at the thought, the Americans can do that far better than we can.

The next few months will be interesting.

(Some earlier posts on Musharraf.)

Why Liz Hurley is good for India

Because the economy benefits from her marriage to Arun Nayar. Times of India reports:

The hospitality sector estimates that the Jodhpur wedding [between Nayar and Hurley] should cost about Rs 1 crore.

I’m assuming that with so many foreign guests coming down, and some of them perhaps being tempted to return later, the indirect benefits of the wedding will be even greater than that. And much of the money spent may not have been spent within India if not for Liz Hurley. Thus, however much we may envy the rich their ability so spend so ostentatiously, we should actually encourage them to do more of this, because it ends up creating jobs for people at the bottom of the ladder throughout the hospitality industry.

Also read: “Lavish weddings are good for the economy.”

Your maid funds Unani

This is the latest installment of my column for Mint, Thinking It Through. It is an elaboration of my concerns behind my ongoing series, Where Your Taxes Go, and I’d like to thank all the readers and bloggers who have sent me links for that. Keep them coming, and keep expressing your outrage on your own blogs as well.

These are good times for Unani. In his latest budget, the honourable P Chidambaram allocated Rs. 563.88 crores for the Department of Ayurveda, Yoga and Naturopathy, Unani, Siddha and Homeopathy. I kid you not, I am not making this up for your satirical amusement. That departments exists. And you work your ass off, and make sacrifices, so that it can be funded. You and your maidservant.

On my blog, I have a section called “Where Your Taxes Go,” where I document strange instances of how our taxes are put to use. There is much there that is trivial and amusing—a moustache allowance for a havaldar in Lucknow, compensation for a bank employee mistakenly declared dead, salary for an 11-year-old teacher, relocation of monkeys from New Delhi to MP (only Rs. 25 lakhs). There is also much there that underscores the irresponsibility of our politicians—toilet refurbishment allowances for Jharkhand legislators, parliament hold-ups that cost 20k a minute, the 90 lakh free TVs that the DMK promised in Tamil Nadu to get elected there. Most of us are so used to government wastage that we shrug this off. “Pata hai yaar,” we say together in a gruff chorus of a billion nonchalant voices. “So what is new? Gorment is like this only.”

I feel outraged, though, angry and helpless. I never used to bother about such wastage earlier, largely because I had built a mental wall between the money that I pay as taxes and the money that the government spends. It was almost as if they were two separate things, and there was an endless supply of the latter. As a college kid, I am ashamed to admit, whenever I saw a worthy cause that needed support, I saw virtue in government money heading that way. It never struck me then that this money had a cost, and I never thought about who bore that cost.

Indulge me for a moment: take out a handkerchief and write down the taxes you have paid since you began working. List out all the things you would buy if 90% of that money was still with you. Consider, if everyone else did this, how much money would go into the economy, and the vast number of jobs created by this. All the people in those jobs, better off than they would be otherwise, would then be earning money and spending it. Think of the virtuous cycle that would then result. That is the cost of that money. Now put that handkerchief in the laundry and use a notepad next time.

That old saying about death and taxes being inevitable equate the two, which, as libertarians never tire of pointing out, is unfair for one reason: you are not dead one-third of every year. But if you are a typical Indian taxpayer, you pay more than a quarter of your income in taxes. For more than three months of the year, your salary goes to the government. (Sounds like part-time slavery, doesn’t it?) If you are reading this article on its date of publication, consider that you haven’t started working for yourself yet this year. That is still a few days away.

Indeed, it could be a lot more than just a few days away, because my calculation is based on your probable income tax. That is not where the matter ends. Every single thing you buy in the supermarket or the bookshop has taxes levied on it. You cannot spend your money anywhere without a chunk of it going to the government, indirectly or otherwise.

And this is not just the case with you, an educated, reasonably well-to-do reader of Mint [or India Uncut]: it is the case with every Indian. My maid, for example, may not pay income tax, but large chunks of every purchase she makes go to the government. Whenever she buys pulses or rice or soap and schoolbooks for her children, she is helping to fund the government’s activities, including moustache allowances. If she realised the extent to which she is being robbed, she would be rather upset at Sania Mirza asking the government to allot her land for a tennis academy, or Amitabh Bachchan getting tax relief on his KBC earnings of more than 50 crore. My maid bears their burden.

Now, I am not suggesting that we pay no taxes, despite the fact that they involve coercion. We need a government, and the government needs money to spend on maintaining law and order, providing public services and so on. But most of our taxes are simply wasted—I shall elaborate on the pointlessness of most government spending, even when well-intentioned and seemingly sensible, in my next column – and I wish we protested more at this waste. Not only is this money badly spent, but it would have been better spent elsewhere, and would have done more good for the economy as well as for us.

And remember, I am not just speaking of us decadent middle-class folk, but also my maidservant and her family, living a precarious existence in the slums of Mumbai, funding Unani with her backbreaking work. Isn’t that simply criminal?

The mistake some of us make when we talk about the budget…

… is in assuming that government spending can solve all our problems. The government may spend more on education, but that doesn’t mean that Indian kids will get anywhere near the education they should, or that the education system will become better. Our mai-baap sarkar may announce a safety net for workers, but that doesn’t mean that workers will benefit. It may extend the REGB, but that doesn’t mean that it is doing anything to enable the growth of employment in this country. In some cases, it might actually be harming the cause of those it claims to benefit, by spending money inefficiently that, had it never been taxed in the first place, would have done more good for the economy.

Beyond that broad point, I will offer no comments on the budget—there’s enough of it out there in the MSM already. I’m just glad there isn’t a cess on blogging.

Additional notice: My “Thinking it Through” column won’t appear today in Mint, because they needed the space for budget analysis, some of which is very good. Regular service resumes next week.

Enough carrot. Time for stick

Dick Cheney landed in Pakistan a couple of days ago to urge Pervez Musharraf to get serious about fighting al Qaeda. About time. This acknowledges that Pakistan wasn’t doing enough to wipe out al Qaeda to begin with, and no sensible man would expect otherwise. As I wrote here and here, it is not in Musharraf’s interest to end the battle with al Qaeda by winning it. Pakistan’s economy has flourished after 9/11 because it is the USA’s main ally in the War on Terror, and an end to the War on Terror means an end to aid and preferential treatment.

So the carrot was never likely to work. Will the stick fare better?

(Previous posts on Musharraf.)

Socialism and the Sirius Cybernetics Corporation

Kunal Sawardekar writes about how Douglas Adams’s description of the Sirius Cybernetics Corporation fits socialism as well:

Their fundamental design flaws are completely hidden by their superficial design flaws.

Kunal expands:

Whenever a Socialist policy fails, the blame falls on some minor (in the greater scheme of things) deviation from the Socialist Golden Path. For example, the National Rural Employment Scheme is a brilliant solution to rural poverty, it will only fail because the bureaucrats have weakened the Employment Guarantee Act. Forcing banks to give farmers in Vidharba low-interest loans in a good idea, the problem is that the interest is not low enough. Five-year-plans are a great idea, its just that our planners sucked. And so on.

Indeed. Always blame the execution—or order one, if it comes to that. That’s the way of socialism.

(Link via email from Ravikiran. And here’s an old Op-Ed by me on the REGB.)

Newspapers and regulation

I spend the whole day at the Kitab festival, hanging out with pals like Jai, Chandrahas and Manish, meeting the litty sorts and bitching about them like bloggy sorts should. I was also part of a session on journalism in India, and found some eminent people expressing the view that journalism needs to be regulated in India. The logic: The Times of India is indulging in monopolistic practices, and, in Delhi, forming a cartel with the Hindustan Times. To ensure competition, there should be government regulation.

I couldn’t think of a worse solution to the problem. (Leave aside the issue of whether there really is a monopoly emerging; Mumbai alone has HT, DNA and IE on the stands, among daily broadsheets.) The industry actually needs fewer controls, not more. If foreign capital was allowed to pour into that sector, and foreign ownership of media was enabled, there would be more competition, and monopolies and cartels would be less likely. Consumers would be empowered with more choices. Competition is the best regulation.

Government regulation, no matter how well-intentioned to begin with, always ends up favouring the entrenched players, and making it harder for newer players to enter. The protectionist lobbying that some of the top media houses in the country have done to keep foreign media out is a good example of this.

In my clumsy, inarticulate way, I did try and make this point, but I’m a better blogger than speaker. Anyway, the high point of the evening was the presence of Bhaskar Das, the executive president of the Times Group, who rightly got assailed about how the Times of India sells editorial space. “We don’t do it on all the pages,” he argued. “Only some of them.”

The best moment came when someone asked Das why the ToI didn’t have the basic decency to indicate which articles were paid for. His reply:

“The clients wouldn’t like that.”

Joy. It reminded me of Devi Lal, in that it was honest, and shamelessly so.