Money is just an IOU, and the banks are rolling in it

Back in the 1930s, Henry Ford is supposed to have remarked that it was a good thing that most Americans didn’t know how banking really works, because if they did, “there’d be a revolution before tomorrow morning”.

Last week, something remarkable happened. The Bank of England let the cat out of the bag. In a paper called “Money Creation in the Modern Economy”, co-authored by three economists from the Bank’s Monetary Analysis Directorate, they stated outright that most common assumptions of how banking works are simply wrong, and that the kind of populist, heterodox positions more ordinarily associated with groups such as Occupy Wall Street are correct. In doing so, they have effectively thrown the entire theoretical basis for austerity out of the window.

To get a sense of how radical the Bank’s new position is, consider the conventional view, which continues to be the basis of all respectable debate on public policy. People put their money in banks. Banks then lend that money out at interest – either to consumers, or to entrepreneurs willing to invest it in some profitable enterprise. True, the fractional reserve system does allow banks to lend out considerably more than they hold in reserve, and true, if savings don’t suffice, private banks can seek to borrow more from the central bank.

The central bank can print as much money as it wishes. But it is also careful not to print too much. In fact, we are often told this is why independent central banks exist in the first place. If governments could print money themselves, they would surely put out too much of it, and the resulting inflation would throw the economy into chaos. Institutions such as the Bank of England or US Federal Reserve were created to carefully regulate the money supply to prevent inflation. This is why they are forbidden to directly fund the government, say, by buying treasury bonds, but instead fund private economic activity that the government merely taxes.

It’s this understanding that allows us to continue to talk about money as if it were a limited resource like bauxite or petroleum, to say “there’s just not enough money” to fund social programmes, to speak of the immorality of government debt or of public spending “crowding out” the private sector. What the Bank of England admitted this week is that none of this is really true. To quote from its own initial summary: “Rather than banks receiving deposits when households save and then lending them out, bank lending creates deposits” … “In normal times, the central bank does not fix the amount of money in circulation, nor is central bank money ‘multiplied up’ into more loans and deposits.”

In other words, everything we know is not just wrong – it’s backwards. When banks make loans, they create money. This is because money is really just an IOU. The role of the central bank is to preside over a legal order that effectively grants banks the exclusive right to create IOUs of a certain kind, ones that the government will recognise as legal tender by its willingness to accept them in payment of taxes. There’s really no limit on how much banks could create, provided they can find someone willing to borrow it. They will never get caught short, for the simple reason that borrowers do not, generally speaking, take the cash and put it under their mattresses; ultimately, any money a bank loans out will just end up back in some bank again. So for the banking system as a whole, every loan just becomes another deposit. What’s more, insofar as banks do need to acquire funds from the central bank, they can borrow as much as they like; all the latter really does is set the rate of interest, the cost of money, not its quantity. Since the beginning of the recession, the US and British central banks have reduced that cost to almost nothing. In fact, with “quantitative easing” they’ve been effectively pumping as much money as they can into the banks, without producing any inflationary effects.

What this means is that the real limit on the amount of money in circulation is not how much the central bank is willing to lend, but how much government, firms, and ordinary citizens, are willing to borrow. Government spending is the main driver in all this (and the paper does admit, if you read it carefully, that the central bank does fund the government after all). So there’s no question of public spending “crowding out” private investment. It’s exactly the opposite.

Why did the Bank of England suddenly admit all this? Well, one reason is because it’s obviously true. The Bank’s job is to actually run the system, and of late, the system has not been running especially well. It’s possible that it decided that maintaining the fantasy-land version of economics that has proved so convenient to the rich is simply a luxury it can no longer afford.

But politically, this is taking an enormous risk. Just consider what might happen if mortgage holders realised the money the bank lent them is not, really, the life savings of some thrifty pensioner, but something the bank just whisked into existence through its possession of a magic wand which we, the public, handed over to it.

Historically, the Bank of England has tended to be a bellwether, staking out seeming radical positions that ultimately become new orthodoxies. If that’s what’s happening here, we might soon be in a position to learn if Henry Ford was right.

— source By David Graeber

The bait and switch of public-private partnerships

This being the age of public relations, the genteel term “public-private partnership” is used instead of corporate plunder. A “partnership” such deals may be, but it isn’t the public who gets the benefits.

We’ll be hearing more about so-called “public-private partnerships” in coming weeks because the new U.S. president, Donald Trump, is promoting these as the basis for a promised $1 trillion in new infrastructure investments. But the new administration has also promised cuts to public spending. How to square this circle? It’s not difficult to discern when we recall the main policy of the Trump administration is to hand out massive tax cuts to big business and the wealthy, and provide them with subsidies.

Public-private partnerships are one of the surest ways of shoveling money into the gaping maws of corporate wallets, used, with varying names, by neoliberal governments around the world, particularly in Europe and North America. The result has been disastrous — public services and infrastructure maintenance is consistently more expensive after privatization. Cuts to wages for workers who remain on the job and increased use of low-wage subcontractors are additional features of these privatizations.

The rationale for these partnerships is, similar to other neoliberal prescriptions, ideological — the private sector is supposedly always more efficient than government. A private company’s profit incentive will supposedly see to it that costs are kept under control, thereby saving money for taxpayers and transferring risk to the contractor. In the real world, however, this works much differently. A government signs a long-term contract with a private enterprise to build and/or maintain infrastructure, under which the costs are borne by the contractor but the revenue goes to the contractor as well.

The contractor, of course, expects a profit from the arrangement. The government doesn’t — and thus corporate expectation of profits requires that revenues be increased and expenses must be cut. Less services and fewer employees means more profit for the contractor, and because the contractor is a private enterprise there’s no longer public accountability.

Public-private partnerships are nothing more than a variation on straightforward schemes to sell off public assets below cost, with working people having to pay more for reduced quality of service. A survey of these partnerships across Europe and North America will demonstrate this clearly, but first a quick look at the Trump administration’s plans.

Corporate subsidies, not $1 trillion in new spending

The use of the word “plans” is rather loose here. No more than the barest outline of a plan has been articulated. The only direct mention of his intentions to jump-start investment in infrastructure is found in President Trump’s campaign web site. In full, it states the plan “Leverages public-private partnerships, and private investments through tax incentives, to spur $1 trillion in infrastructure investment over ten years. It is revenue neutral.” The administration’s official White House web site’s sole mention of infrastructure is an announcement approving the Keystone XL and Dakota Access pipelines without environmental reviews, and an intention to expedite environmental reviews for “high priority infrastructure projects.”

Wilbur Ross, an investment banker who buys companies and then takes away pensions and medical benefits so he can flip his companies for a big short-term profit, and who is President Trump’s pick for commerce secretary, along with a conservative economics professor, Peter Navarro, have recommended the Trump administration allocate $137 billion in tax credits for private investors who underwrite infrastructure projects. The two estimate that over 10 years the credits could spur $1 trillion in investment. So the new administration won’t actually spend $1 trillion to fix the country’s badly decaying infrastructure; it hopes to encourage private capital to do so through tax cuts.

There is a catch here — private capital is only going to invest if a steady profit can be extracted. Writing in the New Republic, David Dayen put this plainly:

“Private operators will only undertake projects if they promise a revenue stream. You may end up with another bridge in New York City or another road in Los Angeles, which can be monetized. But someplace that actually needs infrastructure investment is more dicey without user fees. So the only way to entice private-sector actors into rebuilding Flint, Michigan’s water system, for example, is to give them a cut of the profits in perpetuity. That’s what Chicago did when it sold off 36,000 parking meters to a Wall Street-led investor group. Users now pay exorbitant fees to park in Chicago, and city government is helpless to alter the rates.”

The Trump plan appears to go beyond even the ordinary terms of public-private partnerships because it would transfer money to developers with no guarantee at all that net new investments are made, according to an Economic Policy Institute analysis. The EPI report asks several questions:

“[I]t appears to be a plan to give tax credits to private financiers and developers, period. The lack of details here are daunting and incredibly important. For starters, we don’t know if the tax credit would be restricted to new investment, or if investors in already existing [public-private partnerships] are eligible for the credit. If private investors in already existing PPP arrangements are eligible, how do we ensure these tax credits actually induce net new investments rather than just transferring taxpayer largesse on operators of already-existing projects? Who decides which projects need to be built? How will the Trump administration provide needed infrastructure investments that are unlikely to be profitable for private providers (such as building lead-free water pipes in Flint, MI)? If we assume tax credits will be restricted (on paper, anyhow) to just new investment, how do we know the money is not just providing a windfall to already planned projects rather than inducing a net increase in how much infrastructure investment occurs?”

Critiques of this scheme can readily be found on the Right as well. For example, Douglas Holtz-Eakin, a former head of the Congressional Budget Office and economic adviser to John McCain’s 2008 presidential campaign, told The Associated Press, “I don’t think that is a model that is going be viewed as successful or that you can use it for all of the infrastructure needs that the U.S. has.”

Corporations plunder, people pay in Britain

Britain’s version of public-private partnerships are called “private finance initiatives.” A scheme concocted by the Conservative Party and enthusiastically adopted by the New Labour of Tony Blair and Gordon Brown, the results are disastrous. A 2015 report in The Independent reveals that the British government owes more than £222 billion to banks and businesses as a result of private finance initiatives. Jonathan Owen reports:

“The startling figure – described by experts as a ‘financial disaster’ – has been calculated as part of an Independent on Sunday analysis of Treasury data on more than 720 PFIs. The analysis has been verified by the National Audit Office. The headline debt is based on ‘unitary charges’ which start this month and will continue for 35 years. They include fees for services rendered, such as maintenance and cleaning, as well as the repayment of loans underwritten by banks and investment companies.

Responding to the findings, [British Trades Union Congress] General Secretary Frances O’Grady said: ‘Crippling PFI debts are exacerbating the funding crisis across our public services, most obviously in our National Health Service.’ ”

Under private finance initiatives, a consortium of private-sector banks and construction firms finance, own, operate and lease the formerly public property back to the U.K. taxpayer over a period of 30 to 35 years. By no means do taxpayers receive value for these deals — and the total cost will likely rise far above the initial £222 billion cost. According to The Independent:

“The system has yielded assets valued at £56.5bn. But Britain will pay more than five times that amount under the terms of the PFIs used to create them, and in some cases be left with nothing to show for it, because the PFI agreed to is effectively a leasing agreement. Some £88bn has already been spent, and even if the projected cost between now and 2049/50 does not change, the total PFI bill will be in excess of £310bn. This is more than four times the budget deficit used to justify austerity cuts to government budgets and local services.”

The private firms can even flip their contracts for a faster payday. Four companies given 25-year contracts to build and maintain schools doubled their money by selling their shares in the schemes less than five years into the deals for a composite profit of £300 million. Clearly, these contracts were given at well below reasonable cost.

One of the most prominent privatization disasters was a £30 billion deal for Metronet to upgrade and maintain London’s subway system. The company failed, leaving taxpayers with a £2 billion bill because Transport for London, the government entity responsible for overseeing the subway, guaranteed 95 percent of the debt the private companies had taken out. Then there is the example of England’s water systems, directly sold off. The largest, Thames Water, was acquired by a consortium led by the Australian bank Macquarie Group. This has been disastrous for rate payers but most profitable to the bank. An Open University study found that, in four of the five years studied, the consortium took out more money from the company than it made in post-tax profits, while fees increased and service declined.

As for the original sale itself, the water companies were sold on the cheap. Although details of the business can be discussed by “stakeholders,” the authors conclude, the privatization itself remains outside political debate, placing a “ring-fence” around the issues surrounding the privatization, such as the “politics of packaging and selling households as a captive revenue stream.” The public has no choice when the water provider is a monopoly and thus no say in rates.

Incredibly, Prime Minister Theresa May and the Tories intend to sell off more public services to Macquarie-led consortiums.

Corporations plunder, people pay across Europe

Privatization of water systems has not gone better in continental Europe. Cities in Germany and France, including Paris, have taken back their water after selling systems to corporations. The city of Paris’ contracts with Veolia Environment and Suez Environment, expired in 2010; during the preceding 25 years water prices there had doubled, after accounting for inflation, according to a paper prepared by David Hall, a University of Greenwich researcher. Despite the costs of taking back the water system, the city saved €35 million in the first year and was able to reduce water charges by eight percent. Higher prices and reduced services have been the norm for privatized systems across France, according to Professor Hall’s study.

German cities have also “re-municipalized” basic utilities. One example is the German city of Bergkamen (population about 50,000), which reversed its privatization of energy, water and other services. As a result of returning those to the public sector, the city now earns €3 million a year from the municipal companies set up to provide services, while reducing costs by as much as 30 percent.

Water is big business. Suez and Veolia both reported profits of more than €400 million for 2015. Not unrelated to this is the increasing prominence of bottled water. Bottled water is dominated by three of the world’s biggest companies: Coca-Cola (Dasani), PepsiCo (Aquafina) and Nestlé (Poland Springs, Deer Park, Arrowhead and others). So it’s perhaps not surprising that Nestlé Chairman Peter Brabeck-Letmathe infamously issued a video in which he declared the idea that water is a human right “extreme” and that water should instead have a “market value.”

One privatization that has not been reversed, however, is Goldman Sachs’ takeover of Denmark’s state-owned energy company Dong Energy. Despite strong popular opposition, the Danish government sold an 18 percent share in Dong Energy to Goldman Sachs in 2014 while giving the investment bank a veto over strategic decisions, essentially handing it control. The bank was also given the right to sell back its shares for a guaranteed profit. Goldman Sachs has turned a huge profit already — two years after buying its share, Dong began selling shares on the stock market, and initial trading established a value for the company twice as high as it was valued for purposes of selling the shares to Goldman. In other words, Goldman’s shares doubled in value in just two years — a $1.7 billion gain.

Danes have paid for this partial privatization in other ways as well. Taking advantage of the control granted it, Goldman demanded lower payments to Danish subcontractors and replaced some subcontractors who refused to use lower-paid workers.

Corporations plunder, people pay in Canada

Canada’s version of public-private partnerships has followed the same script. A report by the Canadian Centre for Policy Alternatives flatly declared that

“In every single project approved so far as a P3 in Ontario, the costs would have been lower through traditional procurement if they had not inflated by these calculations of the value of ‘risk.’ The calculations of risk could just as well have been pulled out of thin air — and they are not small amounts.”

Not that Ontario is alone here. Among the examples the Centre provides are a hospital, Brampton Civic, that cost the public $200 million more than if it had been publicly financed and built directly by Ontario; the Sea-to-Sky Highway in British Columbia that will cost taxpayers $220 million more than if it had been financed and operated publicly; bailouts of the companies operating the city of Ottawa’s recreational arenas; and a Université de Québec à Montréal project that doubled the cost to $400 million.

A separate study by University of Toronto researchers of 28 Ontario public-private partnerships found they cost an average of 16 percent more than conventional contracts.

Corporations plunder, people pay in the United States

In the United States, a long-time goal of the Republican Party has been to privatize the Postal Service. To facilitate this, a congressional bill signed into law in 2006 required the Postal Service to pre-fund its pension costs for the next 75 years in only 10 years. This is unheard of; certainly no private business would or could do such a thing. This preposterous requirement saddled the Postal Service with a $16 billion deficit. The goal here is to weaken the post office in order to manufacture a case that the government is incapable of running it.

The city of Chicago has found that there are many bad consequences of public-private partnerships beyond the monetary. In 2008, Chicago gave a 75-year lease on its parking meters to Morgan Stanley for $1 billion. Shortly afterward, the city’s inspector general concluded the value of the meter lease was $2 billion. Parking rates skyrocketed, and the terms of the lease protecting Morgan Stanley’s investment created new annual costs for the city, according to a Next City report.

That report noted that plans for express bus lanes, protected bike lanes and street changes to enhance pedestrian safety are complicated by the fact that each of these projects requires removing metered parking spaces. Removing meters requires the city to make penalty payments to Morgan Stanley. Even removals for street repairs requires compensation; the Next City report notes that the city lost a $61 million lawsuit filed by the investment bank because of street closures.

Nor have water systems been exempt from privatization schemes. A study by Food & Water Watch found that:

Investor-owned utilities typically charge 33 percent more for water and 63 percent more for sewer service than local government utilities.
After privatization, water rates increase at about three times the rate of inflation, with an average increase of 18 percent every other year.
Corporate profits, dividends and income taxes can add 20 to 30 percent to operation and maintenance costs.

Pure ideology drives these privatization schemes. The Federal Reserve poured $4.1 trillion into buying bonds, which did little more than inflate a stock-market bubble, while the investment needs to rebuild U.S. water systems, schools and dams, plus cleaning up Superfund sites and eliminating student debt, are less at a combined $3.4 trillion. What if that Federal Reserve money had gone to those instead?

“Public investment to create private profit”

Given its billionaire leadership, the Trump administration’s plans for public-private partnerships will not lead to better results, and may well be even worse. Michael Hudson recently summarized what is likely coming in this way:

“Mr. Trump wants to turn the U.S. economy into the kind of real estate development that has made him so rich in New York. It will make his fellow developers rich, and it will make the banks that finance this infrastructure rich, but the people are going to have to pay for it in a much higher cost for transportation, much higher cost for all the infrastructure that he’s proposing. So I think you could call Trump’s plan ‘public investment to create private profit.’ That’s really his plan in a summary, it looks to me.”

This makes no sense as public policy. But it is consistent with the desire of capitalists to continually extract higher profits from any and all human activity. Similar to governments handing over their sovereignty to multi-national corporations in so-called “free trade” deals that facilitate the movement of production to locales with ever lower wages and weaker laws, public-private partnerships represent a plundering of the public sector for private profit, and government surrender of public goods. All this is a reflection of the imbalance of power in capitalist countries.

This is “the market” in action — and the market is nothing more than the aggregate interests of the most powerful industrialists and financiers. It also reflects that as capitalist markets mature and capital runs out of places into which to expand, ongoing competitive pressures will drive corporate leaderships to reduce expenses (particularly wages) and move into new lines of business. Taking over what had been the public sector is one way of achieving this, especially if public goods can be bought below fair market value and guarantees of profits extracted.

The ruthless logic of capitalism is that a commodity goes to those who can pay the most, regardless of whether it is something essential to human life.

— source

“Ryancare” Dead on Arrival

The new American Health Care Act has been unveiled, and critics are calling it more flawed even than the Obamacare it was meant to replace. Dubbed “Ryancare” or “Trumpcare” (over the objection of White House staff), the Republican health care bill is under attack from left and right, with even conservative leaders calling it “Obamacare Lite”, “bad policy”, a “warmed-over substitute,” and “dead on arrival.”

The problem for both administrations is that they have been trying to fund a bloated, inefficient, and overpriced medical system with scarce taxpayer funds, without capping its costs. US healthcare costs in 2016 averaged $10,345 per person, for a total of $3.35 trillion dollars, a full 18 percent of the entire economy, twice as much as in other industrialized countries.

Ross Perot, who ran for president in 1992, had the right idea: he said all we have to do is to look at other countries that have better health care at lower cost and copy them.

So which industrialized countries do it better than the US? The answer is, all of them. They all not only provide healthcare for the entire population at about half the cost, but they get better health outcomes than in the US. Their citizens have longer lifespans, fewer infant mortalities and less chronic disease.

President Trump, who is all about getting the most bang for the buck, should love that.

Hard to Argue with Success

The secret to the success of these more efficient systems is that they control medical costs. According to T. R. Reid in The Healing of America, they follow one of three models: the “Bismarck model” established in Germany, in which health providers and insurers are private but insurers are not allowed to make a profit; the “Beveridge model” adopted in Britain, where most healthcare providers work as government employees and the government acts as the single payer for all health services; and the Canadian model, a single-payer system in which the healthcare providers are mostly private.

A single government payer can negotiate much lower drug prices – about half what we pay in the US – and lower hospital prices. Single-payer is also much easier to administer. Cutting out the paperwork can save 30 percent on the cost of insurance. According to a May 2016 post by Physicians for a National Health Program:

Per capita, the U.S. spends three times as much for health care as the U.K., whose taxpayer-funded National Health Service provides health care to citizens without additional charges or co-pays. In 2013, U.S. taxpayers footed the bill for 64.3 percent of U.S. health care — about $1.9 trillion. Yet in the U.S. nearly 30 million of our citizens still lack any form of insurance coverage.

The for-profit U.S. health care system is corrupt, dysfunctional and deadly. In Canada, only 1.5 percent of health care costs are devoted to administration of its single-payer system. In the U.S., 31 percent of health care expenditures flow to the private insurance industry. Americans pay far more for prescription drugs. Last year, CNN reported, Americans paid nearly 10 times as much for prescription Nexium as it cost in the Netherlands.

Single payer, or Medicare for All, is the system proposed in 2016 by Democratic candidate Bernie Sanders. It is also the system endorsed by Donald Trump in his book The America We Deserve. Mr. Trump confirmed his admiration for that approach in January 2015, when he said on David Letterman:

A friend of mine was in Scotland recently. He got very, very sick. They took him by ambulance and he was there for four days. He was really in trouble, and they released him and he said, ‘Where do I pay?’ And they said, ‘There’s no charge.’ Not only that, he said it was like great doctors, great care. I mean we could have a great system in this country.

Contrary to the claims of its opponents, the single-payer plan of Bernie Sanders would not have been unaffordable. Rather, according to research by University of Massachusetts Amherst Professor Gerald Friedman, it would have generated substantial savings for the government:

Under the single-payer system envisioned by “The Expanded & Improved Medicare For All Act” (H.R. 676), the U.S. could save $592 billion – $476 billion by eliminating administrative waste associated with the private insurance industry and $116 billion by reducing drug prices . . . .

According to OECD health data, in 2013 the British were getting their healthcare for $3,364 per capita annually; the Germans for $4,920; the French for $4,361; and the Japanese for $3,713. The tab for Americans was $9,086, at least double the others. With single-payer at the OECD average of $3,661 and a population of 322 million, we should be able to cover all our healthcare for under $1.2 trillion annually – well under half what we are paying now.

The Problem Is Not Just the High Cost of Insurance

That is true in theory; but governments at all levels in the US already spend $1.6 trillion for healthcare, which goes mainly to Medicare and Medicaid and covers only 17 percent of the population. Where is the discrepancy?

For one thing, Medicare and Medicaid are more expensive than they need to be, because the US government has been prevented from negotiating drug and hospital costs. In January, a bill put forth by Sen. Sanders to allow the importation of cheaper prescription drugs from Canada was voted down. Sanders is now planning to introduce a bill to allow Medicare to negotiate drug prices, for which he is hoping for the support of the president. Trump indicated throughout his presidential campaign that he would support negotiating drug prices; and in January, he said that the pharmaceutical industry is “getting away with murder” because of what it charges the government. As observed by Ronnie Cummins, International Director of the Organic Consumers Association, in February 2017:

. . . [B]ig pharmaceutical companies, for-profit hospitals and health insurers are allowed to jack up their profit margins at will. . . . Simply giving everyone access to Big Pharma’s overpriced drugs, and corporate hospitals’ profit-at-any-cost tests and treatment, will result in little more than soaring healthcare costs, with uninsured and insured alike remaining sick or becoming even sicker.

Besides the unnecessarily high cost of drugs, the US medical system is prone to over-diagnosing and over-treating. The Congressional Budget Office says that up to 30 percent of the health care in the US is unnecessary. We use more medical technology then in other countries, including more expensive diagnostic equipment. The equipment must be used in order to recoup its costs. Unnecessary testing and treatment can create new health problems, requiring yet more treatment, further driving up medical bills.

Drug companies are driven by profit, and their market is sickness – a market they have little incentive to shrink. There is not much profit to be extracted from quick, effective cures. The money is in the drugs that have to be taken for 30 years, killing us slowly. And they are killing us. Pharmaceutical drugs taken as prescribed are the fourth leading cause of US deaths, after heart disease, cancer and stroke.

The US is the only industrialized country besides New Zealand that allows drug companies to advertise pharmaceuticals. Big Pharma spends more on lobbying than any other US industry, and it spends more than $5 billion a year on advertising. Lured by drug advertising, Americans are popping pills they don’t need, with side effects that are creating problems where none existed before. Americans compose only 5 percent of the world’s population, yet we consume fully 50 percent of Big Pharma’s drugs and 80 percent of the world’s pain pills. We not only take more drugs (measured in grams of active ingredient) than people in most other countries, but we have the highest use of new prescription drugs, which have a 1 in 5 chance of causing serious adverse reactions after they have been approved.

The US death toll from prescription drugs taken as prescribed is now 128,000 per year. As Jon Rappaport observes, with those results Big Pharma should be under criminal investigation. But the legal drug industry has grown too powerful for that. According to Dr. Marcia Angell, former editor in chief of the New England Journal of Medicine, writing in 2002:

The combined profits for the ten drug companies in the Fortune 500 ($35.9 billion) were more than the profits for all the other 490 businesses put together ($33.7 billion). Over the past two decades the pharmaceutical industry has [become] a marketing machine to sell drugs of dubious benefit, [using] its wealth and power to co-opt every institution that might stand in its way, including the US Congress, the FDA, academic medical centers, and the medical profession itself.

It’s Just Good Business

US healthcare costs are projected to grow at 6 percent a year over the next decade. The result could be to bankrupt not only millions of consumers but the entire federal government.

Obamacare has not worked, and Ryancare is not likely to work. As demonstrated in many other industrialized countries, single-payer delivers better health care at half the cost that Americans are paying now.

Winston Churchill is said to have quipped, “You can always count on the Americans to do the right thing after they have tried everything else.” We need to try a thrifty version of Medicare for all, with negotiated prices for drugs, hospitals and diagnostic equipment.

— source

Healthcare or Wealthcare?

A startling new report from the Congressional Budget Office is projecting 24 million people will lose health insurance coverage by 2026 under the Republican plan to replace the Affordable Care Act. Fourteen million people would lose health insurance in the next year alone. While the White House rejected the CBO findings, Politico is reporting the White House’s own analysis predicts 26 million people will lose coverage under the bill over the next decade. According to the CBO, the bill would reduce the deficit by $337 billion, but one of the biggest beneficiaries of the Republican bill will be millionaires. A new study by the Tax Policy Center shows people in the top 0.1 percent would get a tax cut of about $207,000 under the plan. House Minority Leader Nancy Pelosi accused Republicans of attempting to push through the biggest transfer of wealth in the nation’s history.

Elisabeth Benjamin talking:

it’s simply devastating for low-income people and for working people, that what they’re going to do is rob $880 billion from the Medicaid program. They’re going to rob $673 million in tax care—tax credits and subsidies from middle- and working-income people, and pay for tax cuts to the very wealthy in the order of around $600 billion. So, it’s just—these are extraordinary numbers. I don’t think people understand that 41 percent of the people on Medicaid are children. The remainder are elderly, people with disabilities and very low-income wage earners.

I was helping a woman recently who used to work in a very high-end department store. And now she got a bad knee from standing up so much in her department store work and then now works in a coffee shop, and she makes around $16,000 a year. She’s on Medicaid. Medicaid has saved her life. She’s been able to get the treatment for her knee, and she’s been able to keep working. She’s in her fifties. If she were to—she is going from having free healthcare on Medicaid, that’s helping low-wage workers, to a $16,000 health insurance plan. It’s insane. And you can’t afford, basically, to pay what you earn.

However, wealthy people will be getting an incredible tax cut. So, the Peterson Institute for International Economics just released a statement saying people who make $1 million will be getting a $12,900 tax cut, while the people who are earning $26,000, who are older, will be getting a $12,000 insurance rate hike. This is not fair. It’s not right. And it’s unethical.

what they are doing is robbing money from the Medicaid program, robbing money from the states. They’re incentivizing states to cut people off of Medicaid. Instead of being looked at the eligibility once a year, they’re changing it to every six months. Instead of letting people have retroactive Medicaid if they get into an accident and go into a coma, that goes backwards for a month while you were in a coma, they’re getting rid of that. They’re basically incentivizing the states to cut off Medicaid for low-income and working people. And we will have no more Medicaid program for them. So the fact that Dr. Tom Price doesn’t understand how the numbers were derived by the Congressional Budget Office—by the way, which were rosier than the White House’s own numbers. He’s in the White House. Can’t he read the reports? I find that just a shocking display of ignorance.

unless they’re just simply pretending, I mean, to obscure facts, which seems to be the plan here. But the bottom line is, is real people will get hurt, like my waitress, like children, like seniors, people in nursing homes. It’s really an unconscionable bill.

A 20-year-old—so, now we’re moving from Medicaid for a second to what’s happening in the marketplaces. So we’re talking about people with a little more income, say around $16,000 a year and above. What will happen to a 20-year-old who is earning around $18,000 is they will get a $2,000 tax credit. Now, they’re able to buy a plan that costs $150, so they’re going to be a net winner. So that will incentivize—and this is what they’re trying to do, is incentivize more young people to get into the health insurance market. Not a bad idea on its face to incentivize young people to get into the marketplace. But their means are pernicious and evil.

The 60-year-old will have to pay, right now, who’s making the same amount of money, around $20,000—will be asked to pay five times more, because they’re going to allow age rating, which means they’re going to say, if you’re older, you have to pay five times more than a younger person. They’re not going to base it on income anymore. Before it was like you pay as much as you can, up to set amounts, up to 400 percent of poverty. Now they’re saying, “Forget about your income and how much you can afford. Everybody has to pay the same amount. And, P.S., if you’re older, you have to pay five times more.”

it’s not about choice, because they’re basically going to guarantee that health insurance premiums will be unaffordable for older people. You know, when people were asked what they didn’t like about the of Affordable Care Act, it was they had copays and deductibles. This bill is a guarantee that—it’s a race to the bottom. Deductibles will be even higher. Copays will be larger. And they’re going to allow it. The Affordable Care Act set standards for what health—what good health insurance would be. Now, you could buy lower-quality insurance; you could buy higher-quality insurance. You had choice, but—and you, arguably, you know, had lots of subsidies for people who really needed it. What’s happening here is they’re giving a transfer of wealth to very well-income—very well-off people who don’t need it, and they’re basically robbing it from low-income people, people on Medicaid, seniors, people with disabilities and the working poor and middle-income people. And it’s just not right, and we have to say no.

I think we are at a point as a country where we have to decide who we really are. And if we’re really about enabling the super-rich to be richer at the expense of vulnerable populations, like children, old people, people with disabilities and the working poor—who, by the way, aren’t getting things necessarily for free. They’re having to pay what they can. It’s just—that’s the Affordable Care Act. That is a fair and just system of healthcare. It’s not perfect. We can make it better. But this is making it—it’s throwing it away and offering and substituting it with something much worse that’s going to really hurt real people.

Elisabeth Benjamin
vice president of Health Initiatives at the Community Service Society of New York and co-founder of the Health Care for All New York campaign.

— source

Bad Bank Proposal for India

What Is Jubilee?

Jubilee comes from Judaic Law (Leviticus 25). It is a clean slate to be proclaimed every 49 years (seven Sabbath years—Sabbath means to cease, to end or to rest) annulling personal and agrarian debts, liberating bond-servants to rejoin their families, and returning lands that had been alienated under economic duress (Hudson 2013).

Jubilee is not a religious fiction or ideal as some think it is. It has been traced back to royal proclamations issued in Sumer and Babylonia in the third and second millennia BC. It used to happen quite often, and debt write-offs happen quite regularly even these days (Öncü 2016).

Zero Coupon Perpetual Bonds?

The oldest known perpetual bond in the world that still pays coupon (at an interest rate of 2.5%) was issued in 1624. It was originally floated to raise funds for the repair of a dike by the Hoogheemraadschap Lekdijk Bovendams, a Dutch water authority responsible for maintaining levees (Andrews 2016). As the name suggests, a perpetual bond never pays principal. It pays coupons with some stated frequency on the stated principal (the face value or the price it was issued) only.

But, what if a perpetual bond does not pay any coupon either? At what price would such a bond sell other than zero? How much would it cost to issue the bond to its issuer other than almost nothing?

As crazy as the zero coupon perpetual bond idea may sound, the banknotes we carry in our wallets are essentially zero coupon perpetual bonds. They pay neither coupon nor principal. Yet, they have face values written on them such as ₹100 or ₹500. And, they buy things at their face value.

The most recent zero coupon perpetual bond proposal belongs to the former chairperson of the Federal Reserve Bank of the United States (US), Benjamin Bernanke, and earned him the nickname “Helicopter Ben.” In July 2016, Bernanke proposed to “Japan that helicopter money—in which the government issues non-marketable perpetual bonds with no maturity date and the Bank of Japan directly buys them—could work as the strongest tool to overcome deflation” (Fujiko and Ujikane 2016).

I will propose zero coupon perpetual bonds to India also. But, not in the way Bernanke proposed it to Japan.

Non-performing Assets in India

The non-performing assets (NPAs) of the Indian banking sector have been on the rise since September 2008, with faster deterioration after September 2009. Interestingly, while the private sector banks were suffering from most of the NPAs in September 2008, from September 2009 the public sector banks started to take the lead, and now, the public sector banks are suffering from most of the NPAs (Unnikrishnan and Kadam 2016).

The deterioration that started in September 2008 continued until the last quarter ending 31 December 2016, and NPAs reached 9.3% of the total credit extended by the entire (public and private) banking system, while NPAs of public sector banks were 11% of the total credit they extended. What is worse is that five of the public sector banks had NPAs of above 15%. The size of the NPAs of the entire banking system at the end of this quarter was ₹6.7 trillion and 88.2% of this amount was on the books of the public sector banks (Mathew 2017).

As noted by Chandrasekhar (2017), the Indian Ministry of Finance’s Economic Survey 2016–17 recognised that under normal circumstances this would have threatened the banks concerned with insolvency, perhaps triggered a run on the banks, forced bank closure, and even precipitated a systemic crisis. Chandrasekhar (2017) also noted that according to the Survey, since there is a belief that these banks have the backing of the government, which will keep them afloat, the bad loan problem has not, as yet, become a systemic crisis. Whether the bad loan problem in India has become a systemic crisis or not can be debated. However, that India needs to decisively resolve her banks’ stressed (non-performing, restructured or written-off) assets with a sense of urgency in the way the newly appointed Reserve Bank of India (RBI) Deputy Governor Viral Acharya mentioned in his 22 February 2017 speech cannot be.

Proposals on the Table

A “bad bank” is a corporation established to isolate stressed assets held by a bank or financial institution, or a group of banks or financial institutions. It might be established privately by the bank or financial institution, or the group of banks or financial institutions, or by the government or some other official institution.

There have been two main proposals to tackle the stressed asset problem of the Indian banks since the beginning of this year. The first one was the “bad bank” proposal made in the Survey:

NPAs keep growing, while credit and investment keep falling. Perhaps it is time to consider a different approach—a centralised Public Sector Asset Rehabilitation Agency [PARA] that could take charge of the largest, most difficult cases, and make politically tough decisions to reduce debt.

The PARA to resolve the stressed assets of the public sector banks is the “bad bank” the Finance Ministry proposed. The Survey gives a detailed description of how the PARA would work and mentions that the funding for PARA would come from three sources: (i) government issued securities; (ii) capital market; and (iii) RBI. The first two of these sources are not unusual. However, the third source is rather unusual (although not novel as the Survey documents):

The RBI would (in effect) transfer some of the government securities it is currently holding to public sector banks and PARA. As a result, the RBI’s capital would decrease, while that of the banks and PARA would increase. There would be no implications for monetary policy, since no new money would be created.

The second proposal came from Acharya on 22 February 2017. Although rumour has it that he was hired for his advocacy of “bad banks,” Acharya clarified that his suggestion is not akin to creating a “bad bank,” but is more to create a resolution agency. He suggested two models. A Private Asset Management Company (PAMC) and a National Asset Management Company (NAMC).

Under the PAMC, banks would come together to approve a resolution plan based on proposals from a variety of different restructuring agencies and this would also be vetted by rating agencies. As he explained, there

are ways to arrange and concentrate the management of these assets into a single or few private asset management companies (PAMCs), at the outset or right after restructuring plans are approved. These companies would resemble a large private-equity fund run by a team of professional asset managers. Besides bringing in their own capital, they could raise financing from investors against equity stakes in individual assets or in the fund as a whole, i e, in the portfolio of assets. (Mathew and Dugal 2017)

As Acharya argued, the PAMC would be more suitable for sectors such as steel and textiles where some sectoral recovery is in sight whereas the NAMC—in which the government would play a larger role—would be more appropriate for infrastructure investments such as power where the assets may appear to be unviable in the short to medium term. However, even the NAMC would bring in asset managers such as asset reconstruction companies (ARCs) and private equity to manage and turn around the assets, individually or as a portfolio, although the government may retain a minority stake in the assets.

To sum up, while the finance ministry proposed a mainly public solution, Acharya proposed mainly private or market solutions to the problems.

My Criticism of the Proposals

Although given the urgency of the situation both proposals have many merits, many have attacked both the proposals for a multitude of theoretical and ideological reasons. This is normal of course because economics is not even the “dismal” science as some call it. What is wrongly called economics these days used to be correctly called political economy as the following title from the 27 February 2017, Times of India demonstrates (Sidhartha 2017): “Few Supporters in Govt for ‘Bad Bank’ Proposal.”

Here is a quotation from this article.

Sources in the finance ministry, however, said that the issue is best left to banks as the government did not have the required resources to meet the capitalisation needs. In addition, it does not want to be seen bailing out companies and banks when the same resources can be deployed elsewhere.

This is what I mean when I say there is no economics but political economy. Under these conditions, it would be unfair to criticise either of the proposals, but I have to criticise both on one account.

It is that both of the proposals operate under the implicit assumption that “banks are financial intermediaries.”

The problem is that banks are not financial intermediaries. They are money creators. Banks create money either by extending credit or by buying government securities while in the process creating corresponding deposits. In other words, banks do not collect or mobilise deposits to lend them out. Although banks can collect deposits from each other, when we look at the entire banking system as a single bank, there is no other place from which this bank can collect deposits except the holders of currency in circulation. That is, the banking system does not collect or mobilise deposits first and then extend credit or buy government securities. It is the other way around.

Lost Century in Economics

In an article titled “A Lost Century in Economics: Three Theories of Banking and the Conclusive Evidence,” Werner (2016) argues the following:

During the past century, three different theories of banking were dominant at different times: (1) The currently prevalent financial intermediation theory of banking says that banks collect deposits and then lend these out, just like other non-bank financial intermediaries. (2) The older fractional reserve theory of banking says that each individual bank is a financial intermediary without the power to create money, but the banking system collectively is able to create money through the process of ‘multiple deposit expansion’ (the ‘money multiplier’). (3) The credit creation theory of banking, predominant a century ago, does not consider banks as financial intermediaries that gather deposits to lend out, but instead argues that each individual bank creates credit and money newly when granting a bank loan. The theories differ in their accounting treatment of bank lending as well as in their policy implications. Since according to the dominant financial intermediation theory banks are virtually identical with other non-bank financial intermediaries, they are not usually included in the economic models used in economics or by central bankers. Moreover, the theory of banks as intermediaries provides the rationale for capital adequacy-based bank regulation. Should this theory not be correct, currently prevailing economics modelling and policy-making would be without empirical foundation. (emphasis added)

In a working paper by the Bank of England titled “Banks Are Not Intermediaries of Loanable Funds—And Why This Matters,” Jakab and Kumhof (2015) describe the money creation process as follows.

In the intermediation of loanable funds model of banking, banks accept deposits of pre-existing real resources from savers and then lend them to borrowers. In the real world, banks provide financing through money creation. That is, they create deposits of new money through lending, and in doing so are mainly constrained by profitability and solvency considerations.

In this paper, Jakab and Kumhof quoted Alan Holmes (1969), a former vice president of the New York Federal Reserve, who wrote the following: “In the real world, banks extend credit, creating deposits in the process, and look for the reserves later.”

How Is Money Created in India?

In 1969, Holmes was talking about the US. The situation is somewhat more complicated in India because there have been two liquidity requirements imposed on the banks by the RBI after independence. These two requirements are called the cash reserve ratio (CRR) and the statutory liquidity ratio (SLR).

Prior to further progress, let me clarify what the RBI means by “cash.”

In the language of the RBI, “cash” does not mean just rupee banknotes, and the rupee and smaller coins. Beyond these three are the “bank deposits” with the RBI which are just some numbers on some computers these days. So, rather than “cash” and consistent with the rest of the world, I will use the word “reserves” for these “bank deposits” with the RBI and save the word “cash” to mean what we ordinary people think “cash” is in our daily lives. The economists call the sum of cash and reserves, base money, whereas the sum of cash and deposits is broad money. It should be mentioned that while cash and deposits can buy things in the real world, reserves cannot. Reserves are common currency only among the banks and the RBI, and cannot go out of the banking system.

To sum up, the CRR is what the most of the rest of the world calls the “required reserve ratio.” As Holmes (1969) described for the US, in India also, banks first create deposits by extending credit or by buying government securities, and then look for reserves to meet the CRR requirements. The most recent banking data available on the RBI website—as of 17 February at the time of writing—shows that the reserve to deposit ratio was about 4%, which is consistent with the current CRR requirement.

And, had the CRR been the only liquidity requirement, the money creation process in India would have been no different than the money creation process in the US, for example. What sets India apart from most other countries is the SLR requirement. Because, the SLR requirement can be met not only by holding “reserves,” but also by holding gold and “government approved securities.”

When we look at the SLR historically, we see that the commercial banks in India have met their SLR requirement by holding “government-approved securities” mostly. In addition, if we look at the earlier mentioned RBI data we see also that above 99% of the “government approved securities” were “government securities.” This comes as no surprise because these securities are very safe and pay high interest rates.

Further, as of the same date, the credit-to-deposit ratio was roughly about 70%, while the government-approved securities-to-deposit ratio was roughly about 30%, and these two ratios nearly added up to 100% despite the expected measurement errors. Given that the current SLR requirement is 20.5%, this also indicates that the banks are holding way more government securities than they require. This is understandable, because the banks need non-SLR government securities to repo (or repurchase option) with the RBI to obtain reserves to meet their CRR requirement.

To sum up, while the CRR is a tool of the RBI to manage the liquidity in the banking system, the SLR is a tool to manage the liquidity in the economy, although nowadays the RBI uses the CRR to manage the liquidity in the economy also. To clarify these further, let me summarise the 17 February RBI data in Table 1.

And, let me add to this that the total of all outstanding government securities is ₹47.2 trillion.

These data show that the commercial banks in India hold about 70% of all outstanding government securities, and hence the SLR is not only a monetary policy tool, but also ensures that banks in India lend to the government. Furthermore, the availability of government securities puts an upper bound on the deposits the Indian banks can create.

If the banks buy all of the government securities and use them to meet the 20.5% SLR requirement only, then the banks in India can increase the aggregate deposits to ₹230.4 trillion by extending additional credit. In this case, the credit extended to the rest of the economy other than the government would be ₹183.2 trillion. This is the maximum amount of credit that can be extended to the rest of the economy, if the government does not issue new securities and the SLR remains 20.5%. Further, in this scenario, the RBI has to increase the reserves to ₹9.2 trillion so that the banks can meet their 4% CRR requirement.

Of course, the above is just a hypothetical scenario I constructed to give the readers some idea about how these two ratios, reserves, and government securities affect the availability of money and credit to the economy.

My Bad Bank Proposal

In light of the discussion so far, I now make my “bad bank” proposal for India and, for want of a better name, call it the Bad Bank.

(i) The Bad Bank would be promoted by the Government of India and capitalised with zero coupon perpetual bonds the government would issue;

(ii) The Bad Bank would swap the zero coupon perpetual bonds with reserves the RBI would create. These reserves would be excess, because they would not back any of the deposits of the banking system;

(iii) The Bad Bank would swap the excess reserves with the banks (public and private) for the bad loans.

Two things will happen to the banks (not just public, but also private):

(i) They are relieved of the bad loans;

(ii) Since the excess reserves have zero risk weights, their capital ratios go up so that there is no need to recapitalise any of the banks.

Furthermore, although the base money was increased by the amount of the issued zero coupon perpetual bonds, since the existing deposits remained intact, the broad money neither increased (no immediate inflation) nor decreased (no immediate deflation). In addition, this operation would cost nothing either to the Government of India or to the Indian taxpayers, because the Government of India will pay neither coupon nor principal on the issued zero coupon perpetual bonds.

At this point, a decision has to be made regarding what to do the with the bad loans. One possible decision is to erase all of the bad loans against the Bad Bank’s equity and dissolve the Bad Bank. This is what I call a partial Jubilee. It is partial because in a full Jubilee, all of the debts in the country would be annulled and the country would start from a clean slate.

Of course, this is not the only possible decision. As in the case of the NAMC proposed by Acharya, the Bad Bank might bring in asset managers such as ARCs and private equity to manage and turn around the assets, individually or as a portfolio, and the like. Other possibilities can also be considered.

Let me conclude by noting that although what I proposed above solves the immediate stressed asset problem of the Indian banking system cheaply, it does not solve any other problems, be those economic, financial, political, social and the like. It only gives the country some breathing time so that she can attack and tackle all of her other problems.

Last Words

One last issue I would like to discuss is the excess reserves the RBI created. As readers familiar with the quantitative easing (QE) programmes implemented in the US would recall, many have expressed concern that the large quantity of excess reserves created through the QE programmes will lead to an increase in the inflation rate unless the Federal Reserve acts to remove them quickly once the economy begins to recover.

In an article titled “Why Are Banks Holding So Many Excess Reserves?” Keister and McAndrews (2009) addressed this issue and argued that if interest is paid on the reserves, this allows a central bank to maintain its influence over market interest rates independent of the quantity of reserves created by its liquidity facilities. This can also be considered in India. Furthermore, despite all these concerns in the beginning, no significant inflation took place in the US and, indeed, in 2015, the US was flirting with deflation.

And, of course, there is the luxury of the SLR that the RBI can use to manage the liquidity in the economy.

— source by T Sabri Öncü

Assessing the GDP Estimates in the Light of Demonetisation

The Second Advance Estimates of National Income, 2016-17 produced by the Central Statistical Office (CSO) show that demonetisation has had no impact on the country’s economic growth. According to the CSO, Indian economy grew by a healthy 7% in the third quarter of the current financial year, quite contrary to even the expectations of even the Finance Ministry. The Economic Survey had observed, “demonetisation has had short-term costs”, which “real and significant”, and added that the costs would be high especially for those who are dependent on the “informal and the cash intensive sectors”. Given that the informal sector contributes almost 50% to GDP and supports over 90% of the workforce, the Economic Survey alluded to the serious adverse impact of demonetisation.

The GDP growth estimates unveiled by the CSO raise three pertinent issues. The first is whether the GDP growth estimates can be adequately explained. The second is whether the estimates are in sync with the government’s overarching objective of maintaining the growth momentum. The third and perhaps the most important issue is whether GDP growth rate is an appropriate indicator of the economic well-being of the common woman in the country.

According to the CSO, Indian economy grew a tad slower in the third quarter as compared to the immediately preceding quarter. However, this slow-down, from 7.4% to 7.1%, was much less than predicted by the critics of demonetisation. Further, during April-December 2016, GDP growth was 7.2%, which, once again, exceeded all expectations. Here lies a conundrum: the main components of GDP do not quite explain these growth numbers.

The main source of GDP growth in the third quarter was private final consumption expenditure (PFCE), which had witnessed remarkable increase. As a share of GDP, PFCE increased from 53.7% during second quarter to 58.7% in the third. What makes the PFCE in the latter quarter particularly noteworthy is that it recorded its highest share since the third quarter of 2013-14. In other words, the spurt in PFCE reported by the CSO is of a magnitude that has not been seen in the past 12 quarters.

The question that therefore arises is the following: how did PFCE register this magnitude of increase when the government had severely dented consumer demand by sucking-out 86% of currency notes in circulation from an economy, in which, according to some estimates, well over 90% of consumer spending is cash driven?

In the period since 8 November 2016, consumer spending should have been drastically hit also because Reserve Bank of India (RBI) was unable to remonetise the economy at a pace that the exceptional circumstances demanded. RBI had reported that on October 28 2016, i.e., 10 days before demonetisation, Rs. 17 lakh crore worth of currency notes were in circulation. Demonetization seems to have “shocked” RBI as well, for three weeks following the withdrawal of high denomination currency notes, the institution reported that “Currency with the Public” was Rs. 15.3 lakh crore, when the actual figure should have been well below Rs. 2.5 lakh crore (equivalent to 14% of the pre-November 8 currency in circulation). By end-December 2016, currency in circulation was Rs. 7.8 lakh crore, which was about 46% of the level prior to demonetisation. The latest figure provided by RBI (for 17 February 2017) shows that currency in circulation was nearly 60% of the pre-demonetisation level. We can now understand why Economic Survey 2016-17 had argued that “remonetizing the economy expeditiously by supplying as much cash as necessary” is an essential step to put the economy on track.

A disquieting dimension thrown up by the GDP numbers is the steep fall in the rate of domestic investment. Gross domestic fixed capital formation fell below 27%, the lowest level in more than a decade. The GDP estimates have, therefore, put before the government two daunting challenges, namely, reviving consumer sentiments, and also to get domestic investors to increase their stakes in the economy.

As the debate on the GDP growth rate rages, it is necessary to ask whether this economic indicator should receive the kind of importance it has been receiving in public discourse. Mainstream economics have, for a long time, questioned the relevance of economic growth as an indicator of economic well-being of a nation. The “trickle-down theory”, once bandied about as the primary benefit of high economic growth has long been rejected on the sheer weight of evidence against it.

Two decades back, the UN Human Development Report (HDR) had advised the policy makers to avoid getting “mesmerized by the quantity of growth” and to instead “be more concerned with its structure and quality”. The report had stated that “unless governments take timely corrective action, economic growth can become lopsided and flawed”. Under such circumstances, only determined efforts can help in preventing growth from becoming “jobless, ruthless, voiceless, rootless and futureless”. HDR’s observations could not have been more pertinent – during past decades, large swathes of the developing world have witnessed these undesirable forms of “growth” that have perpetuated human miseries.

However, despite these warnings, governments, including those in India, have remained obsessed with growth numbers and have, as a result, glossed over the factors responsible for the unacceptably high levels of deprivation suffered by large sections of their citizens. The citizens of this country would have greatly benefitted if the obsession of those responsible for shaping public policy was on ways to address the scourge of poverty, malnutrition, the growing burden of diseases and to find ways in which those in the working age can get decent work. But, this is unlikely to happen if the dominant discourse on the state of the economy remains a prisoner of a set of numbers that are bereft of the human face.

Biswajit Dhar is a Professor of Economics at the Centre for Economic Studies and Planning, School of Social Sciences, Jawaharlal Nehru University, New Delhi. K.S. Chalapati Rao is a Distinguished Fellow at the Institute for Studies in Industrial Development, New Delhi.

— source