Tuesday, September 29, 2020
Home Opinions Facts, No Fiction: Socialists must realise, there are no free lunches

Facts, No Fiction: Socialists must realise, there are no free lunches

With the election season in full swing, I am reminded of the famous phrase “There ain’t no such thing as a free lunch”. As clear as this phrase is to Economists, politicians tend to disregard this important lesson while they formulate populist economic policies that tend to garner more support than sound economic policies. Socialists just want to spend, spend and spend as if it’s a free buffet, little do they realise that at the end of the day, there’s someone’s labour that is responsible for paying for the buffet. A good example of how such policies can be detrimental has been the recent inflation that has been experienced in Venezuela.

Venezuela’s economy has largely been driven by Oil Exports as it has the largest proven reserves of Oil. The domestic economy of Venezuela didn’t produce many goods except for petroleum products and it was dependent upon imports for most of their needs. Thus, when the prices of international crude oil reduced, the economy started to face the heat as the value of its exports started to fall while its imports continued. The government started to fuel economic growth by expansionary fiscal policy and as a consequence over a period of time, inflation rates accelerated. One of the reasons behind the high inflation rate is the fact that there is too much of demand for goods while the supply for them is limited and this has to do with the fact that most of the goods in Venezuela were imported from other nations. Thus, the twin deficits could be held majorly responsible for the current high levels of inflations.

Venezuela Inflation. Source: Banco Central De Venezuela

The case of hyperinflation (or exceedingly high inflation) is not just limited to Venezuela as it has been historically observed at different points in time in Germany, Zimbabwe and other nations. The reason why I am highlighting this issue today is to reiterate the point that in Economics, there are no free lunches. This is a case in point as India too witnessed a brief phase of high inflation between 2011-2014 and this coincided with a phase of high current account deficit and a high fiscal deficit.

Thus, it is important to be aware of the fact that India too maintains a current account deficit as we import more than we export. As a result of this, we need to be careful with the way we maintain our fiscal and monetary policy to ensure that strong fundamentals can subdue any downside risks to our growth in the short or medium run. The first instance of fiscal recklessness came in the budget of 2008, which was a pre-election budget. Over the course of the financial year 2008-09, populist measures led to a widening of the fiscal deficit and the North Atlantic Financial Crisis in September 2008 led to a global recession which slowed our growth. The period coincided with high inflation and the “taper tantrum” episode whereby external market interventions by the Reserve Bank of India didn’t have a significant impact on rupee stabilisation.

India- Food Inflation. Source: MOSPI

India- Consumer Price Inflation. Source: MOSPI

Given that there are no free lunches, it is amusing to see that socialist policies continue to resonate the discourse every now and then. The recent increase in international crude oil prices and the subsequent politicisation of the same by the UPA demonstrate that clearly, they haven’t learnt their lessons. The problem with such populist policies is that their economic costs are huge and have to be borne by subsequent governments while the benefits are immediate. A good example of this can be the fiscal expansion by the UPA government in 2008 which led to high growth for financial years 2009-10 and 2010-11 post which, growth started to collapse.

The current government has taken an entirely different approach towards economic policymaking as it has relied upon strong structural reforms to revive growth while ensuring fiscal prudence. The commitment by the government towards fiscal consolidation, especially in an election year is worth appreciation as it shows to some extent there is decoupling of economic policymaking from short-term political considerations. This, I believe is an important reason why our current account deficit and fiscal deficit has been lower than what it was between 2007-2013.

The fact that socialists continue to scream for federal spending illustrates that they don’t regard the fundamental principle of economics that merely increasing the liquidity will not automatically translate into real growth in the economy. This disregard towards the inflationary impact of such policies is the reason behind Venezuela’s current crisis and this disregard is also responsible for the double-digit inflation that India experienced during the period of 2011-14. It would be wise if socialists take out a page from the book of economics and remind themselves of the popular phrase that there are no free lunches. The Socialists, who speak of labour, must be reminded, that if a lunch is free, then they stole from the wage of the worker, who prepared the meal in the first place!

 

Karan Bhasin is an economist by academic training. His research interests are diverse in the field of economics. He tweets at @karanbhasin95.

  Support Us  

Whether NDTV or 'The Wire', they never have to worry about funds. In name of saving democracy, they get money from various sources. We need your support to fight them. Please contribute whatever you can afford

Karan Bhasin
Karan Bhasin is a political economist by training and has diversified research interests in the field of economics. He tweets @karanbhasin95.

Related Articles

Trending now

Delhi Riots Conspiracy Chargesheet Part 1: Yogendra Yadav, Umar Khalid, Sharjeel Imam, seeds of anarchy laid on 5th and the violence on 13th Dec

7 months after the gruesome riots, the Delhi police has filed the first chargesheet detailing the conspiracy that was hatched to unleash violence in the streets of Delhi.

From “Khoon ki Dalali” to “where is proof”: How opposition parties questioned India’s 2016 Surgical Strikes in Pakistan Occupied Kashmir

The elite commandos of Parachute regiment on the intervening night of September 29-30 carried out an attack with clinical precision deep inside the Pakistan Occupied Kashmir, destroying 7 terror launch pads

Propaganda War: The undue influence of the Chinese govt over Indian media is a matter of deep concern and requires urgent intervention

Chinese Communist Party has sought to influence individual journalists and media organisations in its bid to alter global perception about China.

PM Modi tears into Congress and others for opposing farm bills, shows how they opposed everything from Ram Mandir to Rafale

PM Modi said that the people opposing the Farm Bill are doing so because the new reforms will finish the source of their black money.

AIIMS report does not rule out murder angle in Sushant Singh Rajput’s death, CBI to begin second leg of investigation soon: Reports

Since most of the evidence was destroyed, the findings has been based on 20% viscera samples of Sushant Singh Rajput

Recently Popular

Sanatana Dharma vs Bollywood on Republic Bharat: Arnab Goswami goes to war

Arnab Goswami has been at the forefront of the campaign against the drag racket in Bollywood and has not pulled any punches.

‘Maal is cigarette and hash are its different brands’, Deepika Padukone makes bizarre claims when confronted with ‘drug’ chats: Report

Deepika Padukone and others were apprised in advance as to what needed to be said during the interrogation, claimed NCB

“Your time of death has come”, radical Islamists attack actress-politician Nusrat Jahan on social media after she poses as Goddess Durga

An Instagram user, Sagar Hossain, questioned Nusrat Jahan, "Why do you support Hindus despite being a Muslim?"

Argentina: Legislator kisses bare breast of his girlfriend during online parliament session, resigns after the video goes viral

Juan Emilio Ameri claimed that he assumed that the camera was off and wanted to check out his girlfriend's new breast implants

Amnesty International, which had links to British govt and Islamist orgs shuts shop in India after it says the govt froze all its accounts:...

The government of India has stated that Amnesty has been receiving foreign funding and donations despite not registering under FCRA.

Madhya Pradesh: Special DG Purshottam Sharma brutally assaults his wife, video goes viral on social media

The accused's son has filed a complaint with the state DGP and has sent a copy of the assault video.

Delhi Riots Conspiracy Chargesheet Part 1: Yogendra Yadav, Umar Khalid, Sharjeel Imam, seeds of anarchy laid on 5th and the violence on 13th Dec

7 months after the gruesome riots, the Delhi police has filed the first chargesheet detailing the conspiracy that was hatched to unleash violence in the streets of Delhi.

Fact Check: Was Amnesty International forced to shut its operations in India due to its report on the Delhi Riots?

Amnesty International, one of the shadiest non-governmental organisations, was forced to shut down its operations in India on Tuesday

India-China standoff: MEA spokesperson rejects Chinese stand on Line of Actual Control. Read details

MEA spokesperson Anurag Srivastava has stated that the comments by the Chinese Foreign Ministry on the existence of 'only one LAC' ran counter to the bilateral agreements between the two sides.

Fact Check: Did a Muslim lawyer represent Bhagat Singh and a ‘Brahmin RSS’ man fought for the British against him?

Many social media posts and forwards are claiming that a 'Brahmin' RSS lawyer had fought for the British against Bhagat Singh.

From “Khoon ki Dalali” to “where is proof”: How opposition parties questioned India’s 2016 Surgical Strikes in Pakistan Occupied Kashmir

The elite commandos of Parachute regiment on the intervening night of September 29-30 carried out an attack with clinical precision deep inside the Pakistan Occupied Kashmir, destroying 7 terror launch pads

Actor Kangana Ranaut says BMC has served notices to her neighbours, threatened them against supporting her

The actress has stated that the BMC has asked her neighbours to socially boycott her and not to support her, failing which their houses will also face demolition.

Sexual assault case: Anurag Kashyap to be summoned for questioning by Mumbai police

Actress Payal Ghosh had accused Anurag Kashyap of forcing himself on her during a meeting at his house.

Propaganda War: The undue influence of the Chinese govt over Indian media is a matter of deep concern and requires urgent intervention

Chinese Communist Party has sought to influence individual journalists and media organisations in its bid to alter global perception about China.

He was chosen by ‘Allah’: Pakistanis celebrate terrorist who had stabbed 4 people near Charlie Hebdo office in Paris

He also revealed that Hassan was inspired by Sunni Muslim cleric Ilyas Qadri and would read Namaaz five times a day.

Connect with us

244,181FansLike
456,833FollowersFollow
17,400SubscribersSubscribe