How to pay for the stimulus -Pulapre Balakrishnan
Money financing is a viable route to take us back to pre-COVID-19 levels of output
Former Prime Minister Dr. Manmohan Singh and his Congress party colleague Praveen Chakravarty have, in these pages, written on the appropriate policy response to the currently depressed state of the economy. Given Dr. Singh’s deep understanding of the subject, this is in the nature of invaluable counsel. Unlike the dispensation in power, he and his colleague are for government intervention to revive the economy. They present greater public spending as the sine qua non of such a revival, and they are absolutely correct in this diagnosis. They also present the options available and rank them, in the sense of recommending the order in which they ought to be considered for use.
Greater public spending will increase the fiscal deficit and this expansion has to be financed. Theoretically it can be financed by higher taxes. However, when the economy is in a recession, this is usually not in the reckoning even though the balanced-budget multiplier is one, i.e., output expands by exactly the same amount as the increase in government spending.
Please click here to read more.
The Hindu, 6 August, 2020, https://www.thehindu.com/opinion/op-ed/how-to-pay-for-the-stimulus/article32279610.ece