Saturday, September 16, 2006

A government that gifts television sets to households?

What should the State do? The ideal State is one that obtains revenue from an efficient consumption tax (e.g. VAT or an income tax with correct treatment of income on capital) and then spends it to produce public goods. Public goods are areas like police, judiciary, defence and financial regulation: non-rival and non-excludable (link, link). The preferences of the population should determine how much taxes are collected and to determine what public goods are produced. Efficient production technologies should be used to produce public goods.

Okay, we don't live in that world. We have a State that obtains a certain tax/GDP ratio, and the bulk of this isn't spent on public goods, it goes into subsidy programs. In that case, what would you hope for? The inefficient thing for the State to do is to try to run programs like PDS or NREG where a little money reaches the population and the bulk of it gets captured by the political system. A clever thing to do would be to have a negative income tax program.

Making a negative income tax work is very hard. If one had to be simple & stupid, an efficient thing to do would be to have a helicopter drop of money where each citizen gets a fixed payment. I am thinking of a very simple, administratively feasible scheme: a direct transfer from the Department of Expenditure into a bank account for every citizen of the country. That would achieve efficient redistribution with minimum frictions. Many middle income countries have built `conditional cash transfer' (CCT) programs accompanied by `electronic benefit delivery' (EBT) with considerable success. They work much better than PDS or NREG. But at present in India, the administrative capacity for doing either CCT or EBT does not exist (though it can be built in a few years if there is an interest in doing this).

Let's spin some numbers. Suppose you wanted to blindly deliver Rs.1000 per person per year. For a family of five, this is a transfer of Rs.5,000 per year or Rs.400 per month. (As an aside, the "poverty line" in year 2000 was a monthly consumption of Rs.211 per person (rural) or Rs.454 per person (urban), so a transfer of Rs.400/person today is quite a lot.). For a billion people, this is an expense of Rs.1 trillion or 3% of 2006 GDP. If the State would restrict itself to this one redistributive program - and do nothing else by way of distorting the economy - I would warmly applaud. This one program would achieve the task of redistribution, and the rest of economic policy can simply focus on growth.

Now suppose you didn't have the infrastructure for delivering Rs.5,000 per year into the household. How else would you do it?

You could gift a television set to every household. If a TV costs Rs.20,000, a gift of a TV set to a household is roughly the same as four year's worth of payments per household. The administrative challenge is that of ensuring that every household gets exactly one TV.

A TV set is something that is visible and monitorable. Every household can verify that it gets one TV set and that everyone around them gets exactly one TV set. Once the TV set has been obtained, everyone would turn around and sell off the TV set into the secondary market and turn it into cash. So it's fair to think of a TV-set-gifting program as being a way of implementing a helicopter drop of cash in a way that supports transparency, monitoring and enforcement.

Viewed in this perspective, what Karunanidhi is doing with TV sets is not that off the mark, even though it has been widely ridiculed and surely links up to their business interests in television states. But if you are cynical enough to believe the State can just not be persuaded to produce public goods, then this is a decent way of returning taxes back to the populace in a broad-based redistributive way. It is easier for voters to verify that television sets are given to all households -- as opposed to complicated welfare programs where goodies are delivered to favoured subsets of the population in non-transparent ways. Gifting TVs to all is better than most welfare programs that we know today, where the bulk of money gets captured by a few households in the political system.

If this issue interests you, T. Ninan had also done an editorial in Business Standard a while ago.

4 comments:

  1. Really? If the system is so good, why don't we extend it a little further. Using that tax money, how about a house for each family in the state? How about monthly vegetables and rice? How about medical benefits (or insurance)? Pretty soon we would have perfect state that would tax its people and pay for all that people need. I think it is called some "ism".

    If Karunanidhi really wants to give each family a TV, a better way for him is to send a check or draft of Rs 20,000 to each family in the state. People who don't have one can buy one; others can go straight to bank with stopping at the secondary market. That will at least reduce the transaction cost and the CM can claim his election pledge stupidity complete.

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  2. As I say in the post, I think delivering money to each household is a good idea. But it requires a considerable administrative capacity to do right. The most important issue, in my opinion, is that the delivery of money from government to household is relatively non-transparent. My neighbours don't see it. Hiding behind that non-transparency there can be all kinds of problems. Some households can get more / less. Some households can get more often / less often.

    The beauty of a TV is that it is near-cash -- it's easy to go to the market with a new TV and convert it into cash. But at the same time, the sheer bulk of a TV imposes greater transparency. Everyone gets the same TV - there are no shades of gray on who gets what. My neighbours see me getting a TV. So it's harder for the State to give some people more and some people less.

    I'm trying to say that giving out TVs might not be as silly as it seems. The process incurs the frictions of a government buying TVs and the household selling them. But in return, we are gaining a more fair process thanks to transparency. The government has fewer fudge factors on who gets what.

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  3. Ofcourse the real reason TV Sets, Bicycles, Cash is being distributed - Bribe the Voters.

    And it works in India. Reservation is another form of Bribe too.

    Bribe The Voters

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  4. I realised an unedifying goal that would help motivate the DMK to give away television sets: Their ownership of Sun TV. In particular, here is the ownership pattern. This really does not look nice to me.

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