Prabhat Patnaik used to teach Econ at JNU. Can he write a single sentence in the Indian Express which is not utterly false or foolish? Let us see.
The government has adduced no reasons for the proposed privatisation of several public sector assets other than to generate resources for its spending.
Nonsense! Modi has said these assets are underutilized or unutilized because public sector managers are afraid of 'legal tangles' and controversies. These assets will be modernized in private hands. Resource allocation will improve. Tax revenue will increase. This means the poor can receive more support.
Let us see what such a fiscal strategy involves.
We have already seen what the opposite of this fiscal strategy involved- it was waste and loss of revenue for the Exchequer.
Nobody buys public sector assets by skimping on consumption.
Ordinary people, if they are smart, skimp on consumption to put their money into a mutual fund which generates a return by buying shares in the privatized entities.
Nor does one buy such assets by skimping on investment:
Savings are redirected to assets with a higher return. Ceteris paribus, aggregate Savings grows because the reward for thrift has increased.
At the margin, no doubt, some Investment which would otherwise have been made, need not be made because a pre-existing asset is being transferred to a more productive use. However, overall Investment is likely to rise.
Current investment expenditure depends on decisions taken in the past and is more or less pre-determined.
Not at the margin. Expectations re. the future, not hysteresis, determines such Investment in accordance with the theory of the marginal efficiency of Capital.
It is only investment decisions that are taken today for fructification tomorrow that may be scaled down by such a purchase;
All investment decisions have this characteristic. If you get utility today for what you spend, then you are consuming, not investing.
and if investment decisions taken today are scaled-down, then it is an authentic case of “crowding out” and such a strategy should be avoided anyway.
Nonsense! 'Crowding out' is a real, not monetary, phenomena. It occurs where the State takes command of more real resources. Suppose a company which buys a psu no longer needs to build its own plant because it can use that of its acquisition. That isn't 'crowding out' because the private sector has increased, not decreased, its share of real capital. Output goes up because the marginal efficiency of Capital has increased for the reason Modi mentioned- viz. entrepreneurs are not afraid of criticism or 'legal tangles' by doing smart things which increase efficiency.
Selling public sector assets therefore does not “release” any resources from private use for government spending.
Yes it does. It releases financial resources which shore up the Government's credit thus reducing borrowing costs.
The resources the government obtains by spending the sale proceeds of public assets are none other than the resources lying idle in the economy.
No. The funds the government obtains arise out of the expectation that previously idle resources will now be properly utilized. This expectation means, ceteris paribus, an inflow of resources. India is not a closed economy- as Patnaik seems to think.
Output that could have been produced by utilising idle capacity and unemployed labour, but is not produced because of lack of demand,
No. what Patnaik should have written is 'not produced because bureaucrats mis-manage things or fail to manage things properly because of fear of political criticism or a 'legal tangle'.
PSUs don't languish because of 'lack of demand'. They languish because their product does not represent good value for money- the root cause of which is poor Management.
Patnaik, cretin that he is, thinks a poor country like India has reached 'the final crisis of capitalism'- i.e. 'under-consumption' or a 'general glut'. He doesn't get that effective demand for PSU products is lacking because
1) the thing is shite
2) it is too expensive
Both of these things can be corrected by better management. Demand becomes effective as prices fall and quality improves.
now gets produced as demand gets generated by government spending financed by the sale of public assets.
Patnaik is assuming that price and quality remain fixed. He doesn't get that Management improves when entrepreneurs take over from bureaucrats. This because a business man wants to make money by making customers happy. The bureaucrat wants to keep his political masters happy and to avoid controversy.
One can visualise the entire process as follows. The government borrows say Rs 100 from banks, uses it for spending, and then sells public assets worth Rs 100 to raise this money and return it to the banks, so that its net indebtedness does not go up.
Why bother? Just visualise it as the Government selling stuff and spending he money.
It follows that financing government spending by selling public sector assets is basically no different from a fiscal deficit.
Fuck off! If you sell your car and use the money to throw a big party, you have not increased your debt. By contrast, if you borrowed money for this purpose, you face a day of reckoning. You will have to pay back the interest and then the principal. Your future looks a little bleaker than it otherwise would be.
In the latter case, the government puts its bonds — directly, or indirectly via banks — in private hands; in the former case, the government puts its equity (held in public sector assets) in private hands.
Nonsense! The government is selling a real asset. It is not a Joint Stock Company selling shares. However, if profits in the privatized company go up, then the Government gets more tax revenue.
Harold McMillan criticized Thatcher for 'selling the family silver'. But the Government gets to tax the profits generated by privatized companies so it isn't really selling 'family silver' at all. On the contrary, its fiscal position improves not just now but in every future time period- provided privatization really improves allocative and dynamic efficiency through better management and what Modi calls 'modernization'.
Patnaik is repeating a fallacy which was exposed more than three decades ago! He has truly learned nothing and forgotten nothing. Why is the Indian Express holding up this senile coot to ridicule?
The only difference between a fiscal deficit and selling public assets lies in the nature of the government paper that is handed to the private sector,
Nonsense! Privatization means that real assets can be used more productively.
but the macroeconomic consequences of a fiscal deficit on the economy are no different from those of selling public assets.
They are completely different because the effect on Expectations is different. People expect efficiency gains and, provided the new owners are competent, these expectations are fulfilled. But this means tax revenue goes up. There is a virtuous circle here such that the Government's fiscal position not just as a one off but continually through time.
Finance capital, and institutions like the IMF, do not recognise this fact, and treat the sale of public assets on a different footing from a fiscal deficit, for ideological — not economic — reasons, because they ideologically favour a dismantling of the public sector.
No. It is because it is a fact that PSUs face an incentive incompatibility problem. The bureaucrat has different incentives from an entrepreneur. So mis-management results.
Patnaik is 'ideological' because he ignores facts. The IMF, in this instance, is not ideological because it is guided by the historical record. Of course, much depends of the quality of entrepreneurship. In the Fifties and Sixties, Indian entrepreneurship wasn't very good. A British Managing Agency taken over by Marwaris frequently crashed and burned. But those days are long gone. Indian entrepreneurs are tech savvy and, more often than not, have MBAs from top institutions- not jhollawallah shitholes like JNU.
What, it may be asked, is wrong with a fiscal deficit?
The same thing which is wrong with borrowing money to throw a wild party
Not what is commonly suggested. In a situation of demand-constraints,
which don't exist in a poor country like India. Effective demand for a value for money product exists in plenty. The trick is to get ex PSUs to start producing good quality stuff at an attractive price.
where unutilised capacity and unemployed workers exist aplenty, if an appropriate monetary policy is pursued, it can have no adverse effects whatsoever, except one: It gratuitously increases wealth inequality in society.
Clearly, this cretin has never heard of 'stagflation'. Yet, the cunt was teaching in Cambridge as late as 1974 when stagflation paralyzed the British economy. That is why Ted Heath had to declare a State of Emergency. Unlike Indira, Heath failed. His head Civil Servant took off all his clothes and rolled around on the carpet of Number 10 screaming hysterically about a Communist Conspiracy! He had to be carted off to the psychiatric ward!
Abstracting from foreign transactions for simplicity,
this man is simple-minded
a fiscal deficit generates an excess of private savings over private investment exactly equal to itself.
No it doesn't. Expectations are adversely affected. Ceteris paribus, the pie shrinks. A vicious circle is created. Britain discovered this in the Seventies. That's why Thatcher kept winning elections by, firstly getting rid of Exchange Controls and Prices and Incomes and Policy, then crushing the Unions and the 'loony Left', and then Privatizing the fuck out of everything.
Patnaik was educated in stupid shit in England in the Sixties. It was this shit English education which got him his Professorship in the mid Seventies. England repudiated the stupid shit Patnaik had been taught. But the fucker was well ensconced in India and so didn't bother to read the memo. Forty years later he is writing imbecilic shite which the Indian Express, rather cruelly, has chosen to publish.
The government expenditure financed by the fiscal deficit creates additional aggregate demand that increases output and incomes until the additional savings generated out of such incomes exactly match the fiscal deficit (with private investment given).
This cunt is describing a deterministic model with perfect information. It doesn't incorporate Expectations. It isn't even 'bastard Keynesian'. It is simply nonsense.
What actually happens, ceteris paribus, when the deficit goes up is that Income in succeeding periods falls causing Government Revenue to fall till the Government can't finance its debt payments. There is either a 'hair cut' for savers or hyperinflation. Voters revolt. A right wing Government determined to throttle the PSBR comes to power. Cunts like Patnaik are derided and chased back to their ivory tower.
These additional savings accrue to the savers without their having to reduce their consumption, compared to the initial situation (that is, prior to government expenditure increase). Since savings represent additions to wealth, this amounts to putting extra wealth gratuitously into the hands of the rich (who are primarily the savers).
No. Rich people are smart. They know about 'Ricardian Equivalence'- i.e. they foresee that either there will be a 'haircut' or there will be hyperinflation. They offshore their assets and Corporate H.Q's (because, in any case, Taxes are bound to rise) and thus get richer while ordinary savers get a haircut. Pensioners, in particular, are badly hit- as the recent Greek experience has clearly shown. The young have to emigrate. Look at Venezuela and you can see the consequences of Patnaik's stupid economic policies.
If the same government expenditure was financed by taxation, no matter who was taxed, then there would be no addition to private wealth, and hence no increase in wealth inequality.
No. Rich people have higher elasticity of supply because they can go offshore. Tax avoidance is a real thing. Furthermore, as the Indian Government realized long ago, tax rates have to come down for Tax revenue to rise. There is no point listening to potty Patnaiks.
Avoiding a fiscal deficit is important for this reason, which is why tax-financed government expenditure should always be preferred to fiscal-deficit-financed government expenditure, even when such taxation does not reduce either private consumption or private investment compared to the initial situation.
But if taxes rise, then tax revenue falls. Patnaik is describing a fantasy world.
Selling public assets, which is analogous to a fiscal deficit, also increases wealth inequality quite gratuitously; and it does so by putting into private hands not just wealth in the form of claims on the government (as a fiscal deficit does), but in the form of public assets, and that too at prices well below the capitalised value of earnings (for otherwise private buyers would not accept them).
As the Chinese have discovered, increasing wealth inequality is a good thing. Either we all starve together- though actually we don't because smart people emigrate- or we let some get very rich creating jobs which enable us to eat well and to buy cool shiny stuff.
Instead of taxing away the additional wealth that a fiscal deficit puts into private hands, this strategy actually puts public assets into private hands. This increases wealth inequality for two reasons: First, it does so exactly as a fiscal deficit does; and second, the public asset it puts in private hands is under-priced.
It does not do what a fiscal deficit does. Rich people will dump gilts because they have rational expectations re. the yield curve. Middle class savers and pensioners etc get shafted.
By contrast, privatization can lead to efficiency gains which in turn yield economies of scope and scale and a virtuous circle of endogenous growth. In this scenario, the Government provides a Social safety net with the tax revenue generated by a booming economy.
Let us leave aside questions about the strategic role of the public sector that should deter privatisation:
Modi isn't privatizing 'strategic' public assets.
As a bulwark against multinational corporations’ propensity to arm-twist a third world country;
This stupid fucker thinks we are still a shithole of a turd world country. He hasn't noticed that Manmohan and Modi were very well received. The Left in India keeps whining that Modi is twisting the arm of Facebook and Twitter and so forth. Patnaik has not noticed this trend.
in making loans available (via public sector banks) to a much wider spectrum of the population than would have occurred otherwise (which had made the Green Revolution possible); and so on.
The Green Revolution forsooth! The guy hasn't noticed the spate of farmer's suicides and its link to indebtedness! He failed to register the fate of the for profit micro-lender! How fucking stupid and out of touch is he?
But, even purely as a fiscal strategy, the privatisation of public assets for financing government expenditure, is utterly inexcusable. It betrays either poor economics or a determination to increase wealth inequality.
No. It shows adherence to best practice and attention to empirical, not ideological, economic research.
But what alternative does the government have? The obvious one is wealth taxation.
But the wealthy have already defended themselves from it. Their assets are off shore. Their debts are in India. A Leftist Government is welcome to take over their debts.
Taxing away the private wealth additionally and gratuitously created by a fiscal deficit leaves private wealth inequality unchanged at its initial level; it does not exacerbate it.
In other words, tax away the interest payable on Government bonds. But, in that case, who in their right mind will buy the thing? The answer of course is the Provident Funds or Pensions or LIC type public sector Insurance companies. So, the public sector worker finds that his savings are being plundered to pay his salary! This is a Ponzi scheme. It will collapse. You will have a situation where Public Sector workers show up for an hour or two at work but spend the rest of the day driving a cab or doing other such casual labour so as to make ends meet.
Nobody, therefore, should object to it, or even to what comes close to it, namely a larger taxation of profits.
There may be some wealthy but stupid people who stay put though they are being bled white by taxation. But such people would have fallen for some other such scam sooner or later. Everybody else would have offshored their assets.
Interestingly, when Elizabeth Warren had suggested wealth taxation during her bid for nomination for American Presidency, 18 top billionaires of that country had backed her and suggested higher taxes on themselves.
Fox News reports-
Warren's proposal, which is nearly identical to the wealth tax that she introduced during her failed 2020 presidential campaign, would impose a 2% annual tax on the net worth of U.S. households above $50 million and would add an additional 1% levy on households worth more than $1 billion.
The Massachusetts Democrat estimates the Ultra-Millionaire Tax Act would affect about 100,000 households in the U.S., or roughly 0.05% of the population, and would generate about $3 trillion in revenue over the next decade based on estimates from Emmanuel Saez and Gabriel Zucman, economists at the University of California, Berkeley.
If the government is unwilling to impose higher wealth or profit taxes, it can raise GST rates on several luxury goods, after consultation with the states.
Cool! That will keep the smugglers in business!
Assuming that working people consume what they earn
why do so? Poor people have to have precautionary balances which are a multiple of monthly income whereas the wealthy can always borrow cheaply on the basis of a diversified portfolio which is less fungible but earns a higher real rate of return.
Moreover, informal sector workers need to be building up a pension fund. If China is any example we should expect India's saving rate to soar as and when we have our own Manufacturing Revolution.
— and abstracting from foreign transactions — such an increase in indirect taxation matched by an equivalent increase in government expenditure, will still leave post-tax profits in real terms unchanged, while increasing employment and output in the economy.
Nonsense! Economic activity will shift from the organized sector to the informal or even criminal sector. They have no compliance costs though transactional corruption cost obtain. However, by teaming up with the Mafia this is avoided and instead extortion becomes a profit center. The State as 'stationary bandit' is disintermediated. The Mafia is the Government.
Selling public assets to finance government spending is thus both undesirable and unnecessary.
If you live in a world where the future is completely predictable and where everybody complies with the law with perfect fidelity. But, in such a world, why not simply instruct the rich to give their money to the poor and also to wipe their backsides on demand?
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