Wednesday, April 22, 2020

How can it be welfare unless it is for everyone?

The coronavirus pandemic has resulted in greater government support. "Blurring lines between the public and private, right-wing governments are even directly subsidizing private sector wages in rich countries," wrote Puja Mehra. "Countries are spending like never before -- not even during the wars had governments blown budgets to the skies as they are today." Following the subprime crisis in 2008 the Federal Reserve in the US expanded its balance sheet by $4.5 trillion by buying mortgage backed securities and Treasury bonds, named Quantitative Easing (QE). The European Central Bank (ECB) had its own QE program amounting to over $3 trillion over 4 years, swelling its balance sheet to about 4.65 trillion euros. This was done to infuse more money into banks and lower interest rates so that companies could borrow more cheaply to set up new investments as individuals spent more by taking loans. The ECB went even further by cutting interest rate to negative, which meant people in the eurozone had to pay to save money in banks. The coronavirus is many times more destructive because it has stopped all economic activity before economies fully recovered from the previous crisis. This time the US Congress passed a $2 trillion stimulus to protect workers and businesses, following which it passed another $484 billion package to protect workers' wages by supporting small businesses. However, these programs tend to leave out informal sectors and the self-employed, said Mehra. "A welfare state takes on twin roles: it provides (not necessarily produces) merit goods such as healthcare and education to everyone. It also redistributes incomes so as to alter the income distribution created by markets." The National Health Service (NHS) is available to every British citizen and is free at the point of contact. Even Prince Charles was issued a free bus pass on his sixtieth birthday even if its more of a joke. In India the taxpayer has no support. India has a multitude of welfare schemes aimed at the poor, to which Prime Minister Narendra Modi has added his own creations.  "Economic history of other countries with large welfare programs shows that growth slows down after the fiscal burden of the government is increased." "In Denmark, a third of the population was on the boat when welfare programs were started in the 1960s. By 2014, two-thirds of the population was riding on tax money." The danger, as in India, may be that subsidies were decided to win elections than on economic grounds. One reason for difficulties in paying for a welfare state is that giant online service providers, like Google and Facebook, are free and therefore drop out of GDP calculation, wrote Prof Ricardo Hausmann. Other reasons are that these giants avoid paying by (a) not paying for reusing media content and (b) paying almost no taxes by clever use of financial jugglery. Apple is challenging an order to pay $14 billion in back taxes to the Irish government. The rich countries will roll back subsidies once the virus has passed but in India, politicians will continue them for fear of losing elections. Danger to India is far higher.    

No comments: