April 2, 2020public policyCovid-19economics

On the economics and morality of counter-epidemic policies

I have been thinking more about what the post-pandemic world will look like, and specifically, policy options for India. In many ways we have to go back to the US and European experience between and after the two world wars.

Over the past few days, I have been thinking more about what the post-pandemic world will look like, and specifically, policy options for India. In many ways we have to go back to the US and European experience between and after the two world wars. I was reminded of a 2009 essay by Richard Posner in The New Republic titled How I became a Keynesian” and recommend it to you.

How to help a few hundred million people

We’ll get to Keynes, but let me first talk about hundreds of millions of people who have been severely affected by the pandemic and the national lockdown. I think government-administered relief funds are inefficient, inadequate and blunt. Ajay Shah has estimated that it costs Indian society three rupees for every rupee the government spends. In my column in The Print I propose that the government enable large scale people-to-people cash transfers, by setting up a multi-contribution social security system. We already have all the ingredients — unique identification, financial inclusion and technology — that can make it happen. Using the Unified Payments Infrastructure (UPI), cash transfers are instantaneous. In my view, we do not have a choice but to enable such a system now, for there is no way the government can reach the vast number of people affected.

Back to Keynes

John Maynard Keynes was writing in circumstances similar to what the next few years are likely to be and his ideas and prescriptions will be increasingly relevant for us. Private firms and consumers lose confidence at such times and hold back on investment and spending, which traps the economy in a rut. Lower interest rates and massive government spending on public works are necessary to counter this behaviour. Don’t worry about fiscal deficits and inflation because those won’t be a problem until the economy reaches its potential. That’s the theory and a large part of the story of how the United States and Europe got out of the Great Depression.

India needs its own (Marshall) plan

In this week’s Mint column I call for the Modi government to announce a massive infrastructure development plan and build 100 new cities that were on his 2014 manifesto. India’s infrastructure deficit was painfully obvious even before the pandemic, so fixing it will be the foundation of India’s post-pandemic reconstruction. Public infrastructure is a multi-generational good. If fiscal deficits are about borrowing from future generations, building infrastructure is giving them forward benefits.”

My colleague Narayan Ramachandran estimates that the stimulus and reconstruction package will need around $300 billion (around 10% of GDP) which can be raised by tapping on sovereign wealth funds, pension funds, Japanese developmental funds and the Indian diaspora.

On the morality of pandemic control

From a moral philosophical perspective the lockdown is a huge trolley problem: do we do nothing and let the bug claim lots of lives, or do we lock down and incur economic and human costs? Strict utilitarians will make a case to lock down only if benefits exceed costs, but I don’t think democracies allow leaders such choices.

It was when the Globe and Mail’s Mark MacKinnon asked me about this trade-off that I was able to resolve the moral dilemma: the decision is not made on a utilitarian basis, not least when the epidemic is already here but the economic costs of controlling it are in the future. But a prolonged lockdown can change the calculus, after its human costs begin to be felt.

Either way, it’s not an easy decision to make. The dilemma would be less acute, and the costs much lower, had the WHO recommended stringent travel restrictions in late-January after China felt it necessary to lockdown Wuhan and other cities.

For now, the big question is what India should do after the 21 day national lockdown. At this time, based on modelling and simulations at Takshashila, we are inclined towards decentralising the decision and letting state governments decide on how strict restrictions should be, at the district level. Getting back to some business while being serious about masks and social distancing appears to be a reasonable be a way forward.



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