Indira Rajaraman: November blues

Last Updated: Mon, Nov 26, 2012 19:40 hrs

November stormed in with Sandy in the United States and Neelam in South India and brought climate change straight to the forefront after it had been despatched to the back of public concern, chased there by the aftermath of the global crash of 2008. Very few people really have the scientific wherewithal to judge on whether these kinds of extreme weather events are a result of global warming. There have been storms of comparable severity in the past on the east coasts of both the United States and India, although the frequency of such events is said to have increased the world over. What is of greater concern is the melting of ice caps, and the steady desertification in Africa and South Asia, where the latter has been worsened by violation of traditional water management practices.

But climate change as an issue has surfaced strongly with the storms, and at a time when the world wants to get growth going immediately, whatever the long-term unsustainability of it. We in India, for instance, need additional thermal power generation for our own survival, regardless of climate change consequences. What complicates matters even more is that nowhere in the world does the political leadership appear sufficiently in command as to do what is necessary for either immediate growth or long-term sustainability.

So, then, what is it that needs doing? The single unifying factor across both the immediate growth requirement, and the longer environmental sustainability concern, is the call for fiscal resources. The US faces a fiscal cliff within a month — an automatic circuit breaker that comes into play when the currently legislated absolute public debt ceiling is breached. The tax rate increases and public expenditure cuts that will follow can only be staved off if an alternative fiscal programme is legislated with an acceptable public debt trajectory. There is actually a ready blueprint for raising tax resources by closing avoidance loopholes rather than by necessarily raising tax rates, prepared by a bipartisan Commission on Fiscal Responsibility and Reform (called Bowles-Simpson after its co-chairs). The Commission has been criticised for suggesting rate cuts while closing loopholes, but the details are not important. What matters is that implementation will be difficult in a fractured political establishment, one section of which wants public entitlement cuts, the other section of which is fiercely opposed to such cuts. And there is not much time left.

In Europe, the fiscal problem has on several occasions spilled out onto the streets. In mid-November, public sector employees facing salary cuts were on a co-ordinated strike across major member countries in addition to Greece. Actually, public sector salary cuts are a humane way of resolving the impossible euro-zone combination of high public debt, high unemployment, and rising expenditure on unemployment compensation. Salary cuts for those fortunate enough to have lifetime public sector jobs were a way by which to distribute the pain of expenditure cuts more equitably. But public sector employees were able to fight back in a way the unemployed could not. They simply closed down public systems. What the euro zone needs is a carefully calibrated medium-term increase in debt, allowed over an intervening period in which growth-enhancing investments are implemented, while at the same time phasing out abuses of the entitlement blanket. But tax resources will have to cover part of the net increase in expenditures over the medium term, no matter what.

Taxation is already at high levels in Europe, unlike the US. Even there, however, there is a great deal of room for taxing the rich more heavily than they are after the rate convergence that spread throughout the world in the 1980s. At that time, rate reductions on the rich were proposed by economists on the basis of illusory efficiency advantages, but were accepted by practitioners as a way by which to induce voluntary compliance. Since then, enforcement systems in the developed world have improved greatly, so that high rates by themselves should not pose a compliance problem. However, low taxation of the rich over a long period has bred a whole host of institutions dependent on voluntary contributions. These range from museums, broadcasting not paid for by advertisements and private universities all the way to charitable institutions serving the underprivileged. It will be difficult to change this network of dependence. The claim of the conservative rich who want to keep their taxes low is that they do a better job through charities of reaching the poor than the government would.

Climate change, too, can be fought only with fiscal resources for mitigation and adaptation. Renewable energy, for example, calls for massive public investment on transmission lines to evacuate the energy produced to consumption centres. These costs may eventually be recoverable from users, but discoms in India are unable to recover even routine charges, and needed a government restructuring plan. Adaptation calls for huge investment along coasts to prevent inundation with the rise in sea levels.

In the midst of this massive need, the neglect of the Tobin tax on international financial flows is impossible to understand. It is leviable at a minuscule rate on a base amounting to several trillion dollars per trading day, and its incidence falls on global capital flows, the major beneficiary of globalisation.

Within federal nations like India, governments at all levels must have a fiscal stake for effective progress towards fiscal and climate change correction. In the coal scam, the decision not to auction licences to private sector miners was defended on the grounds that when state governments were approached for their opinion, they did not want auctions. Of course they would not, when they have no automatic share of licence fees or of mining royalty revenues more generally under the present fiscal structure. With a fiscal stake for state and local government, their interests would be aligned with national interests, and with outcome monitoring of the use of these fiscal resources for reversal of environmental destruction, we might actually see some improvement on the ground.

The writer is a retired professor of economics

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