Recently, 60 economists, including Abhijit Banerjee, Debraj Ray and Jean Dreze, wrote to Arun Jaitley, asking him to increase government spending on old age pensions and maternity entitlements.
These economists have fallen prey to the fallacy of “good intentions”. The great economist Milton Friedman rightly said that it is a mistake to judge policies and programmes by their intentions rather than their results. The move advocated by these economists is intended to help pregnant women, newborn children and elderly people. It will end up hurting all three groups, and more.
This is very counter-intuitive. After all, giving senior citizens or pregnant women more money should make them better off. But there is a concept in economics, called the Law of Unintended Consequences. Government meddles in the economy with the intention of solving a problem, but ends up making the problem worse or creating another problem.
The US and European countries have large amounts of government spending on the kind of welfare schemes that our economists are requesting from Arun Jaitley. Let us see whether these schemes helped people in America and Europe or hurt them.
In the US, people are forced to pay into a government programme called Social Security. They pay a part of their salaries during their working years and receive pension from the government when they retire. Similar schemes are found throughout Europe. This sounds very appealing, until one realises that these are just giant Ponzi schemes.
Governments tax the current working population, to pay pensions for the current ageing population. As long as there are fewer old people claiming pensions and lots of young people paying taxes, the scheme works wonderfully. When there are more old people claiming pensions and fewer and fewer young people paying taxes to fund those, the Ponzi scheme collapses. By 2090, the US government will be facing a $32 trillion shortfall in Social Security funding, which is almost twice the size of the US economy and little less than 10 times the tax revenue collected today.
India might have a large (and growing) youth population now, but these youths will grow old. The birth rate will keep falling, as it has been for a long time. If government starts paying pensions for everyone in India, we would face a similar economic disaster in the future, where too many old people will be claiming pensions, with too few young people paying taxes to fund them. Just look at what is happening in Europe.
The Ponzi welfare state is the reason Greece, Spain, Italy and other European governments are in such debt crises, because they have predominantly ageing populations and cannot extort sufficient taxes to fund their populist measures. To sustain their Ponzi schemes, European governments have had to provide financial incentives for people to have more children. Which brings me to the next point.
In the introduction to the letter, economist Jean Dreze wrote that the government should provide maternity benefits to all pregnant women, so they can have nutritious food and focus on raising children. As Dreze wrote:
“A fair amount of recent research in economics brings out the lifelong value of adequate care in early childhood. That, in turn, depends a great deal on mothers’ access to health, nutrition, rest, resources and power. This is the main reason why the National Food Security Act 2013 provides for maternity entitlements of Rs.6,000 per child for all pregnant women, except those already covered in the formal sector.”
Such assistance is also provided in the US. What were its effects? It broke up the family structure. In 1960, 73% of children in the US lived in two parent families, and only 5% were born out of wedlock. In 1964, the government launched a slew of welfare schemes, including assistance in obtaining food. Today, less than half of all children in the US live in intact families. Blacks, who are mostly poor, have it worse. Nearly three quarters of black children are raised by a single parent.
The economics behind this is very simple. Because government subsidises child rearing in America, women don’t wait to get jobs, or marry someone who does, before having children. They have more children, and earlier, than they would have without government assistance.
The real problem here is that women who can’t even take care of themselves are given incentives to have children, whom they are not equipped to raise. Children raised in such troubled environments are more likely to turn to crime as they grow up.
The Pradhan Mantri Matru Vandana Yojna (PMMVY), Narendra Modi’s new maternity benefit scheme, is just another dirty populist measure. But it has a saving grace. It will give benefits only for the first child. Jean Dreze sees this as a bad thing. He believes that taxpayers should pay the expenses of any number of children a woman might chose to have, but can’t afford to raise on her own. That would be even worse, since more children would be raised by parents who can’t raise them properly.
Experiences from the western world have clearly shown that while governments provided social security and maternity benefits with the best of intentions, they created far bigger problems in the process. The economists who have written to Arun Jaitley advocating similar policies would have been wise to look at the results of these policies, rather than their intentions.