The elections in Bihar has brought into sharp focus the single most acute economic issue that India faces; unemployment. With Tejashwi Yadav of the Rashtriya Janata Dal (RJD) first proposing 10 lakh government jobs and the subsequent promise in the Bhartiya Janata Party’s (BJP) manifesto of providing employment to 19 lakh people, there is no doubt that the ground reality is that people desperately want work. Listening to voices from the grassroots that are aired on local Internet/TV channels, it is clear that the man on the street considers it the responsibility of the government to provide jobs, and that it cannot relegate itself to being a mere enabler.
Elections in a well-functioning democracy are so important because this is when and how the masses communicate the most urgent and pressing issues they confront. Moreover, it is the politicians and political parties which are in a better position than professional economists to articulate the aspirations and desperation of people. Unfortunately, for a long time now, economists have dominated thinking on what the macroeconomic narrative and priorities of governments should be both in terms of objectives and the policies pursued to realize them.
Macroeconomics as a field of study originated from the work of John Maynard Keynes and evolved over the next several decades in the aftermath of the Great Depression of the 1930s. Its focus was concern over crises that led to a contraction of aggregate output and income and more importantly, involuntary unemployment, i.e. the inability of those who were actively looking for work to find work. Along with state interventions through fiscal and monetary policies to stabilize the business cycle, macroeconomics argued in favour of a greater role for governments in promoting the economic and social well-being of its citizens that led to the creation of the welfare state in the Western world. These policies ultimately resulted in the latter increasing share of labour vis-à-vis capital in the total output of a country.
The phenomenon of stagflation triggered off by the oil shocks of the 1970s marked the beginning of the end of Keynesianism. Debuting with Milton Friedman, a new wave of economists began their relentless attack on Keynesianism claiming that conventional demand management policies to tackle unemployment would result in accelerating inflation. Slowly but surely, academic literature shifted the focus of macroeconomics from unemployment to inflation as the bogey of stability and growth.
Inflation, it was argued, potentially distorts the functioning of the price mechanism in many ways. For instance, inflation would make it difficult for firms to distinguish between changes in relative prices and changes in the general price levels so that use of lower-priced inputs may not take place so that markets fail to allocate resources efficiently. Low and stable inflation is, therefore, a necessary condition for the market system to take an economy on to its optimal growth trajectory. Once inflation targets were set as the objective of macroeconomic policy, attention turned to the cause of inflation. The culprit was evident; the government. While fiscal austerity was one pillar of neoliberal macroeconomics, monetary policy – under the control of an independent central bank – was to be the other. State control over setting interest rates was transferred to the central banks, which were in turn mandated to ensure a ‘low and stable’ inflation rate.
The developing world was also brought into the ambit of the same paradigm. The 1991 Washington Consensus highlighted fiscal discipline as the key to achieving low and stable inflation. Its scope extended beyond stabilization policies to curtailing the role of the state in growth and development. Structural reforms – privatization, liberalization and globalization – was the new buzz word that became the basis for policy. Countries must rely on the private sector and the functioning of the market system to bring out an improvement in the standards of living of their people.
Somewhere over the last few decades, macroeconomics lost sight of what was the raison d’être of macroeconomic policy – full employment. Not only was this objective left to the private sector but more importantly, unemployment was transformed into a “buffer stock” (the non-accelerating inflation rate of unemployment or NAIRU) to meet the inflation target. The idea that a low and stable inflation rate, once achieved, with a little monetary policy intervention from Central Banks, is a necessary and sufficient condition for a self-correcting market system to take care of the business cycle and economic crisis, took a blow with the Global Financial Crisis of 2008. The need for proactive and massive state intervention had once again become apparent. Just as it seemed that this lesson was fading from memory, the Covid pandemic struck, bringing the necessity for state intervention during a crisis back into the limelight both, as lender of last resort and also, at least partially, as employer of last resort.
While the reasons for unemployment in countries like India are structural and not just cyclical, the impact of the pandemic may well have changed the macroeconomics narrative. Low and stable inflation may neither be a necessary nor sufficient condition to enable the market system achieving full employment. The state has a role to play and is responsible in alleviating unemployment. The Bihar elections are an indication that politicians are increasingly being (and will be) held accountable for their failure to address this issue.
Economists too must pay heed to this exigency and bring back unemployment as the core issue in macroeconomics if they are to stay socially relevant.
European Central Bank (2009), Price Stability: Why is it important for you? https://www.ecb.europa.eu/pub/pdf/other/whypricestability_en.pdf?462fe7a3f345b96e449afb48af2d742a
Scott Fullwiler, Rohan Grey and Nathan Tankus (2019), An MMT response on what causes inflation, Financial Times Alphaville, https://ftalphaville.ft.com/2019/03/01/1551434402000/An-MMT-response-on-what-causes-inflation/
L. Randall Wray (1998), Government as employer of last resort: full employment without inflation, Levy Economics Institute, Working Paper No.213, https://papers.ssrn.com/sol3/papers.cfm?abstract_id=74942
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Sashi Sivramkrishna (2017), Will the Rising Wave of Nationalist Leaders Sweep Away Central Bank Independence? The Wire, https://thewire.in/banking/rbi-central-bank-autonomy