John Maynard Keynes drafted a radical plan for the Chancellor of the British Exchequer on “How to Pay for the War” in which he provided a road-map for an inadequately armed country of 40 million people, with an economy which had been performing poorly in the inter war years, could at least start to function well enough to take on a much better performing country, at least economically, of twice its population.
We shouldn’t say that Keynes showed us how to pay for everything, not in the least for the CORONA-WAR. Clearly that is not possible, but if we understand what he was saying, we can also understand that we can afford to pay for much more than we do.
What explains the variation in how countries pay for the war or would be paying for their wars against Coronavirus? Just as Keynes suggested, nations must choose between four primary means of war finance: taxation, domestic debt, external extraction, and printing. Each alternative has different political and economic costs and benefits. Borrowing compounds the cost of war through high interest rates; printing can result in disastrous inflation; taxation combats high inflation and minimizes cost yet can be politically damaging; while garnering money from abroad invites outside influence and fosters dependency.
From my school, I am reminded of Mr Takhat Singh, supposedly a former prince, who was a hostel superintendent (let me recall the other 3 – Ms S Ghosh, Mr JK Agrawal and Mr SP Malhotra) responsible for proper grooming and turn-out of the cadets. My contemporaries from the school would recall our nick-name for him – ‘Ke naam saab’ – his ‘takia kalaam’ (catch phrase) which translates as ‘what is your name?’
Whenever he hauled us up for anything missing in our uniform or dress kit, our standard excuse used to be, “I have lost it sir,” and his unflinching suggestion used to be, “Beg, Borrow, Steal.”
Doesn’t these four choices – out of what one owns, what one could beg, what one could borrow or what one could steal as ways of fulfilments for the required item in dress-kit – larger set of alternatives than the Keynesians’ choices, for Keynes did not recommend the choice of ‘Beg.’
‘Beg’ has somewhat derogatory and selfish-personal connotations therefore better expressions like ‘solicit alms,’ ‘seek donation,’ ‘ask for charity,’ ‘petition for contribution,’ ‘plead for assistance’ and so on, can be used instead.
Conventional wisdom suggests that the type of the regime in the country dictates any strategy for financing a war. The fact of the matter however is that type of regime plays at best only a small role in a war finance story. Primary influences shaping any war-finance strategy are: public’s support for the war effort, fear of inflation, bureaucratic capacity, and the ability to cope with a balance of payments problem.
India is fighting a war against coronavirus. Prime Minister has actively pursued the Keynesian prescription of ‘borrow’ but has shot down his other prescription which came his way as an unsolicited suggestion of increased taxation. So far, we don’t know if he is going to exercise the option of printing currency (planned inflation of stealing from the future) to finance the corona-war. But surely, the Prime Minister has already used Takhat Singh’s alternative of ‘beg’ which Keynes did not envisage. PM has established a public charitable trust under the name of ‘Prime Minister’s Citizen Assistance and Relief in Emergency Situations Fund’ (PM CARES Fund).
The fund consists entirely of voluntary contributions from individuals/ organizations and does not get any budgetary support.
(First published 30 April 2020)
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