Free money is not free. Money has to come from somewhere and that is usually via source of revenue like taxes or inflation. Everything has a cost. If cash is the solution to poverty, why don’t governments just print money and solve the problem forever? That is because free cash will lead to an artificial inflation in the prices of goods including food items and would make life even worse.
Be that as it may, this article is not a learning module of economics 101.The point of this article is not to ridicule beneficiaries of free cash either. Instead, it is an attempt to objectively look around the world and learn from what unintended consequences have happened when governments decided to hand out ‘free’ money to simulate economy.
1) Small business and marginal farmers struggle to find labour
Who can compete with government’s ability to pay? Nobody. Not even entrepreneurs and farmers in the world’s largest economy, the USA. When President Trump spearheaded the CARES Act that brought in $600 weekly payment for people who lost jobs due to Covid-19, we are not sure if the experts thoroughly understood the consequences because are employers are now finding it challenging to bring people back to work. Thousands of employers and small-businesses impacted by coronavirus related shutdowns are struggling to reopen, as many people are staying home collecting government check instead of returning back to work. In some of the US states, more that 50% of the people are making more money getting unemployment payment than working full-time.
Does this sound familiar? It should. Today, across India, small farmers are struggling to find labour today, thanks to the MGNREGA. It has been rightly criticized for driving marginal farmers and businesspersons to despair. Many complain farmers are forced to sell their lands to bigger corporates as paying their labour more than what NREGA scheme pays has become unviable. Ofcourse, the corruption in the scheme goes without saying. Hence, it is important to think twice when our liberal politicians, economists and intellectuals advocate for a ‘universal basic income’.
2) Giving ‘Free Money’ is making everybody equally poor
When small business and farmers decide they might as well shut shops instead of competing with government to pay more, it leads to permanent job loss. Coronavirus together with coronavirus related payments have led to permanent restaurant closures in the USA. These restaurants are not opening back again, which has led to millions of farm products going waste, threatening farmer incomes. It turns out people in USA consume more veggies in restaurants than at homes. If India were to dole out cash mindlessly, thousands of farmers will face labour shortages as if their struggles against weather, pests, credit, water- shortages, corporate sharks, middlemen and traders with political connection are not enough. All this will affect ability of the economy to give permanent employment and wealth creation. Instead of moving poor into middle class with a sense of financial security, free cash will make everybody equally poor
3) Alcohol and illegal drug sales spike up and so does domestic violence
Unemployment leads to increase in alcohol addiction. Add in the welfare money and the combination is deadly. Well, not if you are a booze shop owner or drug peddler. USA, Mexico, Canada, UK, have all seen increase in alcohol sales and related-health issues along with increase in domestic violence. Alcohol sales have spiked in India since reopening, along with cases of domestic violence. While the correlation is not causation, it is very likely that Covid-19 related shutdown has caused a spike in domestic violence cases. The incentive for an addicted man to go out and work atleast to earn enough to buy liquor goes up in air once he gets ‘free’ money. Now ask the women and children in the household of an addict and they will tell us the impact of ‘free’ money on their lives.
4) Fear of surge in inflation due to money printing
Some right-wing economic hawks in India are calling for government to print money to dole out cash. Their argument is that will stimulate the economy as people will go out and spend this on products and services, thereby increasing demand and eventual economic recovery. Unfortunately, for India, we as a nation are net importer, that is we import more than we export. Our top 3 imports include fossil fuels, precious metals, electronics and industrial machinery. Printing money will lead to inflation and the rupee losing its value. Imports will become costly. This will affect spending power and capital costs of industries. Fuel import will become costly. Speaking of fuel costs, do not forget central and state governments over the decades are equally guilty of outrageously taxing fuel to fund their ‘free’ schemes. This is precisely why we say nothing is absolutely ‘free’. Central Banks in the West are cautious about any further stimulus for fear of inflation and stability of their currencies.
So if not for ‘free’ money, what can we do to kick-start consumption and economic recovery?
Finance Minister Nirmala Sitharaman has done a commendable job in addressing credit-supply side issues by introducing Emergency Credit Line Guarantee Scheme (ECLGS) for MSMEs hit hard by coronavirus. The next step should be a multi-pronged approach to fix the demand side. The Finance Minister still has room to increase government spending in infrastructure, health, transportation, income tax, and GST reduction to fix the demand side of the economy. State governments like Tamil Nadu can reduce their stamp duty and registration taxes from 11% to help real-estate sector recover. Since the coronavirus and its impact over the world economy is not fully understood, neither the Finance Minister nor the state governments are likely to play all their cards at once. Recovery plan has included selective direct benefit transfer (DBT) to migrants and labourers in unorganized sector, famers etc. Any DBT must focus on people who create jobs and senior citizen, who can no longer work.
Implementing a blanket ‘free’ money scheme to anyone and everyone like Rahul Gandhi’s NYAY and endorsed by the like of Rajan will lead to lot of unintended consequences and long-term economic damage.