One of the woeful legacies of John Maynard Keynes is that many people defend virtually any government spending in his name, saying that spending will stimulate demand, thereby cause increased production and lead to an increase in GDP.
The trouble with this claim is that this is much beyond what Keynes said.
Keynes did not say that government spending money will invariably stimulate demand. He said that it would only when there is a recession or a depression. To understand why, we shall return to the NREGA example. Nitin and Atanu have explanations of why it will cause inflation. I urge you to read Atanu’s explanation at least, because I will be continuing his example.
In Atanu’s example, when 10 extra people are given “employment” those people now have extra money. These people will demand something for their money. Will this demand magically lead to an increase in production? No it won’t – not even according to Keynes.
An increase in demand will lead to an increased production only when there is unused spare capacity lying around. When you have unsold inventory, factories with machinery idle, etc. demand for goods will help to “prime” the economy’s pump. In this case – and only in this case will artificially inflating the demand lead to any good for the economy. This was arguably the case during the great depression. Much of the argument over Keynesian economics is over how rare or how common this case is, and over whether this is the best way out.
No serious economist will claim that India is in such a situation now. We do not have inventories piling up for lack of demand. Instead, we have industrialists unable to fulfill demand, because they are unable to set up factories because they cannot buy land, or unable to run factories at full steam because they do not have electricity. In this situation, adding more demand is not going to do jack for our GDP.
In fact, the NREGA was not even set up with that purpose. It was set up to provide employment. The theory is that the landless poor are underemployed, because they get work only part of the year, during the crop season. The rest of the time, lack of work options forces them to migrate to the cities, where they work as construction labour. By guaranteeing 100 days of work a year at minimum wages, the theory is that the expense on the scheme will be self-limiting. It will act as an option of the last resort. Those who have other options will not ask for work under the scheme because it pays less – only the minimum wage.
The fact, however, is that unemployment is rarely a problem among the very poor. This might be surprising, but should not be. It is a well-known fact that in India, as you leave the ranks of the poor and enter those of the lower middle-class, the probability of you suffering unemployment shoots up. This is because very poor people cannot afford to be unemployed.
So, if the NREGA actually succeeds in providing employment to the poor – a big if – it will pull them out of other occupations that they are engaged in. The other occupations presumably involve producing something. Government work rarely involves producing anything. Even if it involves building roads, and assuming that the roads built last out the next rains, the increase in production because of the road lies a few years into the future. So a cut in whatever they were producing, coupled with an increase in demand has to an increase in inflation. In fact, if you are a supporter of the NREGA, you should be worried if there is no inflation.
Ravi,
What are your views about government role in priming the economy, and to avoid a collapse. For the former I have expected US recession in mind, for the latter I have sub-prime crisis
Rarely works in practice. And if it works, it is entirely accidental rather than as part of a well-thought out strategy. Meanwhile government spending tends to stay.
But yes… a temporary and timely government stimulus during recession is useful in theory. Useful, not essential. Economies recover even without them.
And, btw… the sub-prime crisis did not bring the US economy anywhere close to a collapse.
Atanu’s example assumes that money is printed to pay for those 10 extra people. That obviously creates inflation. But in the case of NREGA, government is not printing money to finance the scheme. Tax revenues, which would have anyway been allocated for some project or the other and would have ended up being spent in some form or the other, is being directed to a specific section of the population. I don’t see how that creates inflation.
As for people being pulled out of other activities they were engaged in – fine, those activities will be done by people in lower middle-class where unemployment is supposed to be much higher. Unless your contention is that there is no unemployment in India, I don’t see how NREGA will create labour shortage.
Was my gut feeling too but was kind of confused by mixed signals (IMO) by TSWITW. By the way are you sure that Keynesian economics was limited to recession. I am not necessarily disagreeing with you, just that considering how whole premise of “commanding heights” tripe was founded upon Keynes, I am
Oh really? Which project is the government cutting to finance the NREGA? If the government really spends on the NREGA the way it plans (it has not, so far.) inflation is inevitable.
Second, did you understand why unemployment is higher among the lower middle class than among the poor? If you had, you would not have made that silly and glib assertion.
Oops comment got cut off to continue
I am not necessarily disagreeing with you, just that considering how whole premise of “commanding heights” tripe was founded upon Keynes, I am undecided.
Ummm. the previous comment was a response to Mohan, not to Gaurav.
Gaurav, TSWITW is less libertarian than I am. I am not doubting that the sub-prime crisis is difficult for the US economy. I just don’t think that the crisis will bring it to anywhere close to a collapse. It will mean a difficult year, markets will correct and we will go on with life. She thinks that government intervention is justified even to fix this kind of crisis. I don’t.
Oh, about Keynes, I am dead sure. The commanding heights tripe was not justified by Keynes except in popular imagination.
Mohan,
Actually Atanu talks about stuff not printed money so your objection is mute
Ravi,
I think there may be a suggestion of point in what Mohan is driving at. Essentially government has got some revenue which it is going to spend, now I think spending on NREGA is unproductive (and therefore inflationary), but to put it in perspective most of the schemes, that government of our socialist republic spend monies on, are uproductive anyway, we wish it weren’t like that, but as things stand the wastage is a matter of degree.
No Gaurav, in that Mohan is right. If money was directed from elsewhere, it wouldn’t be inflationary.
If money was raised by imposing a new tax, it won’t be inflationary, but it will have exactly the same effect.
And all this is without considering the deadweight loss of tax. When the government accepted the 9th pay commission report, the economy suffered a 5% growth rate for two years. This scheme will end up having the same effect, because that is where the money will end up anyway.
Oh, and I agree with your statement about subprime mess. From what I understand it is more of a political crisis than a with no politicians who has balls enough to ask people to suck it up. Well Ron Paul has usage after all.
Since we are on subprime whether subprime will cause a real estate meltdown in US, AFAIK it has not happened yet. And, whether real estate meltdown will shake up the global economy.
About “Commanding heights”, I heard it had something to do with import substitution (or something like that), whose evil invention was that ?
BTW you more libertarian than TSWITW, hmmm….
See, the world does not end that regularly. I don’t know whether the real estate meltdown will happen. Even if it does, the US will recover next year. I don’t know how much the world will be affected as a result. But quite clearly, it will be less than the effect on the US.
The commanding heights argument is different from the import substitution argument. I am not sure which economists actually came up with those arguments. But it wasn’t Keynes.
Oh I was not really worrying about Judgment day, what I meant to ask was whether and at what stage there is economic rational behind government to intervene. And I am not sure that the effect on global economy will be less than effect on American economy. Depending on how much of economic activity is based on speculation as opposed to fundamentals I will say there may be a magnifying effect. But yes, certainly no rapture.
Just to give the context, I am reading up a bit (or trying to read up) about New Deal.
1) The great depression was caused by government actions… this is now uncontroversial
2) Notwithstanding the above, Keynes might have been right. The way out might have involved government spending. This is controversial – libertarians will kill me for making this statement. There is much controversy over whether the new deal actually improved matters. Anything less than depression level crisis, there is no clear evidence that the government can improve matters.
3) Judgement day for the US will come because of social security and because of its ageing population, not because of the subprime mess.
4) The rest of the world would have been much less affected if we hadn’t exported so much to the US and hoarded dollars – that is true. But we will survive even the collapse of the US.
Ravi,
How is your point 1 uncontroversial? The closest to it that I’ve read is Ben Bernanke apologising to Milton Friedman about the Fed Reserve being in the wrong with its contractionary policies DURING the depression. Any links supporting point 1?
I mean any links supporting the ‘uncontroversial’ nature of the assertion – there are, of course, umpteen resources that argue for the assertion itself.
Gaurav: Oh, and I agree with your statement about subprime mess. From what I understand it is more of a political crisis than a with no politicians who has balls enough to ask people to suck it up. Well Ron Paul has usage after all.
Could you please clarify how sub-prime mortgage mess is a political crisis?
And while on the topic of balls, why haven’t libertarians (since you mentioned Ron Paul) with balls who keep shouting about how they defend capitalism and not capitalists not spoken about reforming the banking system from within. Why is an industry, which, in Martin Wolf’s words , has a penchant for privatising gains and socialising losses, not being asked to suck it up instead? Why isn’t an industry whose definition of AAA ratings is bundles of sub-prime mortgages and whose definition of holding a person accountable for the sub-prime mess involves giving him $161 million severance package, not being hauled up by the likes of Ron Paul and Co.? Instead who does balls the size of footballs Ron Paul ask to suck it up, the general public (not even in the sub-prime segment) whose Adjustable Rate Mortgage is skyrocketing through no fault of their own because of these douchebags Investment Managers who are being paid million dollar severance packages.
Why should the general public suck up what the Bankers have thrown up after a drunken orgy knowing fully well the consequences of foolish risk taking beforehand? The sub-prime mess is an indictment of ‘we need no regulation and the market will regulate itself’ kind of theorising that allowed market regulatory mechanism to award AAA ratings and announce million dollar bonuses based on year end performance. But the guys with balls are busy kicking guys with smaller balls when they should be seriously examining their own and then kicking the guys with the biggest balls who are holding the Fed hostage to lower the interest rates continually.
Ravikiran: If you agree, and I am not suggesting you will, with what Raguram Rajan says in this article about pay in the Financial industry, how do you propose to rectify this situation and save capitalism from the capitalists without regulation surrounding their pay? Individual firms regulating this from within is not an option since they will lose a lot of their good people to the competition.
Ritwik: This is a link to an article written by Paul Krugman about Milton Friedman. Although Krugman has his own agenda mixed up in the article, he provides a good critique of the libertarian orthodoxy regarding government causing the depression.
OK, I take back my claim that this position is uncontroversial. Anyone who disputes the position is, by definition, making it controversial.
Chetan, this has been one of your silliest outbursts ever. First, you might be interested in knowing that the Gaurav in the comments is not the notorious libertarian Sabnis, but noted libertarian baiter Gaurav.
Second, you might be interested in knowing that Martin Wolf, whose article you have tried to link (but haven’t) is a noted libertarian himself, and if my memory serves me, was a finalist for the Bastiat prize in a previous year.
Third, if you are talking of regulation you might want to consider the list of regulations that Tyler Cowen compiled some time back. Pay particular attention to numbers 12 and 13, which encourage banks to make subprime loans. I am quite surprised to note that banks are being blamed for handing out loans at low interest to poor people. A few years back, failure to do this would be held up as examples of the flaws in capitalism.
Fourth, you are writing on the eve of a crisis that will probably cost the jobs of thousands of bankers, cause huge losses to banks, and will lead to general misery to their shareholders and CEOs. Saying that banks are not being asked to suck it up is just silly.
Fifth, one of the working principles for us libertarians is that laws should stay constant. If I make a contract under one law, and I cannot count on the law being enforced, then there will be no way to do business. If you want the banks to “suck it up”, you are asking for not just a recession, but a depression. If even one bank collapses because the government decided that it will not enforce contracts, then it will have to pump in incredible amounts of money to save the financial system, and then you will be whining about nationalising losses.
Sixth, the borrowers cannot escape responsibility for their actions. Many of them actually lied on their loan applications and overstated their income. In general, punishing people who take on more debt than they know they can take on is a good idea.
That said, the US has one of the friendliest bankruptcy laws in the world – friendly to the borrowers, that is. If they declare bankruptcy, life will be a bit difficult for them, but they will not lose their homes. The US does the best job of ensuring that failure is hard, but not so hard that you will never take a risk.
Seventh, you can’t complain about high ARMs in one paragraph and complain about banks forcing the fed to lower interest rates in the next.
Eighth, if you want to talk about nationalising losses, you might want to talk about deposit insurance and the fed itself, which Ron Paul opposes. I myself think that the Fed is probably needed, but if you are opposed to those, you are into the most extreme libertarian territory. Take your pick please.
Libertarian baiter, whoa !
By the way good analysis. Anyway Banks are actually sucking it up, it was their money which went down the drain after all.
“No Gaurav, in that Mohan is right. If money was directed from elsewhere, it wouldn’t be inflationary.”
Then why assume that that is not the case? It need not even be directed from any existing project. Economy is growing, tax revenues are growing, so government starts new programs with those additional revenues. As long as budget deficit is under control, I don’t see how it can lead to inflation.
“Second, did you understand why unemployment is higher among the lower middle class than among the poor?”
I considered two possibilities. a) Poor are somehow more qualified than LMC’s for doing those jobs that the poor do or b) LMC’s are not interested in doing those jobs. If it is a) then there is no problem. As poor get sucked up by nrega, those jobs will go to next best qualified among the LMC’s. I presume you meant (b). So my comment was a way of asking for proof of this supposed preference among the LMC’s to remain unemployed rather than take up the jobs that the poor do. Because frankly, I find it hard to believe.
>Economy is growing, tax revenues are growing, so government starts new programs with those additional revenues. As long as budget deficit is under control, I don’t see how it can lead to inflation.
Yeah that was the justification offered for adopting the ninth pay commission. We can put brakes on the economy so that some money can be diverted to government servants. This does not mean that we should do it.
And dude, in the first place, unemployment in India among all classes is fairly low. It is very low among the very poor, low among the lower middle class and somewhat higher, but still manageable among the middle class and the rich. The proof that LMCs will not do the job the very poor will do lies in the structure of the unemployment rate. What more proof do you want? In any case, there is no slack among any class that will take up the labour shortage that will be caused by diversion of labour to the NREGA – unemployment will happen.
“brakes on economy” is a different argument from “it will lead to inflation”. My comment was only on the inflation argument.
“In any case, there is no slack among any class that will take up the labour shortage that will be caused by diversion of labour to the NREGA”
I said as much in my first comment. If that is your argument, I have no problems with that. I would like to see some data though.
Sheesh… what’s happening to me. First, I am talking of the 9th pay commission when I meant the 5th.
Second, I am arguing about the wrong things. The thing is, even if the lower middle class does the work that the very poor used to do, they will do it at a higher wage – and that means higher costs and higher inflation. Once again – I am not arguing that this is a bad thing. If the NREGA is successfully implemented, it will amount to a transfer to the poor at the cost of some inflation. But it is silly to argue that there will be no inflation. My argument against the NREGA concerns leakage and the deadweight loss of taxation.
>I said as much in my first comment. If that is your argument, I have no problems with that. I would like to see some data though.
Check out our unemployment statistics. They are available from the NSS.
Ravi,
In my defense, I wasn’t drunk this time round.
I knew that this Gaurav is ‘not Sabnis’ (sorry Gaurav, I know you do not like being referred to by a use of a negation following you name). I am a big fan of this blog and by corollary also know almost all the commenters here and their views. I know that Gaurav is not a libertarian. Had he been a libertarian I wouldn’t have bothered. I would have just sighed and carried on. The reason for arguing with him is that there is still a chance to save him from going to the dark side. ;
The comment was directed at him because he called the crisis political (I still have no clue why he called it that). Secondly there have been a flurry of op-eds from the conservative/libertarian machine in the US about how the general population should suck it up and how it is important for the people who borrowed beyond their means to learn a lesson so that the crisis doesn’t repeat itself. Similar thoughts are voiced by Paul. If there is any kind of a bail-out, these voices assert, then there is a possibility of the crisis being repeated again. I assumed that Gaurav was referring to such arguments when he meant that the crisis is about sucking it up. Although, what these op-eds argue is correct, they never refer to the predatory lending practices that the market followed at that time. When the most basic norms such as some percentage of required down payment, providing knowledge about the risks involved in ARMs etc were thrown to the winds while looking at short term profits, there is no word from these guys about such egregious practices and the need to ensure that those mistakes aren’t repeated. And given how the incentives are aligned right now in the financial industry with short term profits being rewarded with enormous bonuses, there is no guarantee a similar crises may not recur inspite of borrowers borrowing beyond their means being ‘taught a lesson.’
About the fact that people were cribbing about poor not being lent money, they were cribbing about the usurious interest rates being charged. Their contention still remains the same. The enormous increase in ARMs amounts to usury. Besides your tone suggests that somehow the banks succumbed to the exhortation of these ‘socialists’ and came up with a plan to increase lending for the poor. The reality is that they did it for self-interest, which is fine by me, except, that you don’t get to take a moral high ground defending them for providing the loan. That’s because, the lending occurred not on account of any genius financial innovation, but because of hiding the risks which they were aware of before hand and the knowledge that they would be rewarded for the performance on the balance sheet on a yearly basis in contrast to the securitised 30 year mortgages they were selling. There is also the fact, conveniently neglected to mention by the ideologues, that the rating agencies, who were supposed to be the market regulatory mechanism, were in cahoots when they gave AAA ratings to bundles involving numerous sub-prime mortgages being traded in the secondary markets. So spare me the hectoring tone.
Banks are the most important component of a functioning economy. They know it. They leverage their position to get a lot of assistance for boosting the economic machine by the Feds in terms of keeping the interest rate low even during periods of boom/’moderation’. They use this window period to maximise profits but will clamor for lesser interest rates in order to minimise their losses rather than using the depression to set their own houses in order. When they are involved in risk taking, they know that they will be immune to a severe backlash since the government is bound to rescue them for the benefit of the economy, which in turn will induce them to take even more risks. This is something I feel needs to be addressed long term; through regulation, if need be.
Reference to high ARMs was in contrast to the severance packages of the executives who brought on the sub-prime mess. This is in context of general public being asked to suck it up while definition of holding someone accountable in the financial industry is multi-million dollar bonuses. The reference to Fed being held hostage to interest rate reduction was in context of how risks are taken by the financial industry knowing that they would be rescued from any backlash. I am not complaining, just giving you pointers about saving capitalism from capitalists. So talking about both in different paragraph are not iincompatible as you assert.
Here is the link to the Martin Wolf op-ed I refer to where he makes this argument.
If Martin Wolf is/was a libertarian, it is you guys who ought to worry, not me, since in the last three op-eds in financial times he has being arguing for regulating the financial industry, especially its pay for the managers.
Also, I am waiting for your answer to my question about tackling what Raghuram Raman has presented as a problem.
To that last point. I haven’t read it fully, but even if it is valid, what do you propose to do about it via regulation? His objection is not to the high salaries, but to the way the pay is structured. I can understand someone proposing that the government impose a pay cap. But a pay cap will dissuade people from doing the right things as well as the wrong ones. But do you really want the government to take over the job of your HR department?
Ravi,
First of all, I guess we agree that there is no demand side impetus to inflation – because the money that goes into the hands of nrega beneficiaries is money that would have been spent in some other form anyway.
As for labour shortage – even if one were to assume there is no slack, nrega only increases the total wage bill to the extent of (min wage – average wage of the poorest) * number of beneficiaries. And even that for only 100 days a year. I think its impact on the economy as a whole will be negligible.
>First of all, I guess we agree that there is no demand side impetus to inflation – because the money that goes into the hands of nrega beneficiaries is money that would have been spent in some other form anyway.
No we don’t agree. If the NREGA actually acquires full steam, it will have a huge impact on the budget deficit. Unless you can show that the government is going to cut spending elsewhere, this has to stand.
“If the NREGA actually acquires full steam, it will have a huge impact on the budget deficit. Unless you can show that the government is going to cut spending elsewhere, this has to stand.”
ok, here are some numbers:
Total receipts for 2007-08: Rs. 548,000 crores
Total receipts for 2006-07: Rs. 468,000 crores
Increase in receipts between FY ’07 and ’08: Rs. 80,000 crores
Total allocation in 2007-08 budget for NREGA: Rs. 12,000 crores (for 330 districts)
So even if they double that allocation next year to cover all 607 districts, it will only cost the exchequer Rs. 24,000 crores. Just the increased receipts next year will be enough to cover *three* more schemes like NREGA for the entire country. No, they don’t have to cut spending elsewhere to finance this scheme.
Since we are talking deficits, lets get the right figures.
Budget Estimates for 2006-07:
“Revenue deficit estimated at Rs.84,727 crore, 2.1 per cent of the GDP; fiscal deficit estimated at Rs.148,686 crore, 3.8 per cent of the GDP.”
Budget Estimates for 2007-08:
“Revenue deficit estimated at Rs.71,478 crore (1.5% of GDP) and fiscal deficit at Rs.150,948 crore (3.3% of GDP).”
source: http://indiabudget.nic.in/
On a tangent, I think the term “budget deficit” has a specific meaning (exactly what, escapes me right now) in the Indian context. IIRC, it was rejected a while ago and is no longer used as a tool of budget analysis.
For the purpose of this discussion, I think Fiscal Deficit is probably the right figure to use.
Plese continue
Umm.. Mohan, you do know, don’t you, that the Finance Minister has been underfunding the NREGA? The estimate for how much will actually be spent, assuming that NREGA works as expected, is Rs. 150,000 crore – that will double our fiscal deficit. Those numbers you are giving are pulled out of Mr. Palaniappan’s arse. In the first year, when the NREGA was supposed to be implemented across 200 poorest districts, in the country, he allocated Rs. 11,300 crores. The next year, when it was supposed to be extended across 330 districts, he increased the allocation by 700 crores. Because the NREGA is a demand driven scheme, the actual money spent can be anything – it need not be constrained by the actual allocations. But of course, our bureaucrats have helped the finance minister by not actually implementing the scheme with any seriousness.
Jean Dreze was so frustrated by the Finance Minister’s attitude that he described his behaviour as “war” on the NREGA. Incidentally, his estimate for what 200 districts require was 20,000 crores. In reality, no one knows how much will be spent if it is actually implemented seriously. But it is true that the 12000 crore is meaningless, and too low.
Ravi, the government is legally bound to reduce fiscal deficit to 3% of gdp or something. I don’t think any FM will be reckless enough to double the deficit. So fears of inflation on that count are misplaced.
Taking Dreze’s estimate, it works out to 60k crores for covering all 600 districts. If tax revenues continue to grow at current rate, that figure can easily be met in a couple of years time without having to either cut spending elsewhere or increasing the deficit.
Mohan, thus far you were on the border, but now you’ve firmly moved to fantasy land. What law are you talking of? Are you sure that you are talking of the right country?
Also, one fallacy I missed out pointing out in your last comment is that you assumed that revenues will increase, but not the expenses. The right number to look at is the fiscal deficit, which takes into account both revenues and expenses. The fiscal deficit is 150,000 crores. Do you think that increasing it by 60,000 crores will not cause inflation? I am not talking of a fantasy world where tax revenues are infinitely elastic, India never experiences a slow down and revenues stay static. I am talking of the real world.
> What law are you talking of?
Fiscal Responsibility and Budget Managet Act. http://indiabudget.nic.in/es2003-04/chapt2004/chap27.pdf
> Also, one fallacy I missed out pointing out in your last comment is that you assumed that revenues will increase, but not the expenses.
No. Expenses only need to grow to account for inflation (say 5%). As long as you keep the outlays for other projects at current levels (after accounting for inflation), you still have an additional 50-60k crores every year. Part of that can easily finance the additional expenditure for nrega.
But expenditure did not grow at 5% from 2006 to 2007. It grew from 580,000 crores to 680,000 crores, an increase of almost 17%. Check out the India budget website linked to above. What makes you think that Chidambaram will be able to increase outlay to the NREGA, but manage to hold the expenditure on everything else?
Ravi,
Your point was that to finance nrega, either he will have to *cut* spending elsewhere or increase deficit. I have shown with figures that neither is necessary. If you just hold the spending on other projects at current levels (plus inflation), then the annual increase in revenues will be more than enough to finance nrega completely.
But ofcourse, FM hasn’t held the expenditure elsewhere at current levels. He has chosen to *increase* expenditure elsewhere. But when you do that, when you spend all the additional revenues on other projects, then obviously you won’t have money left to fund nrega. So he has chosen to underfund nrega. When he thinks nrega needs more funding, then all he needs to do is not increase spending elsewhere. He doesn’t have to cut spending elsewhere, merely hold it at current levels.
Look, this is pure sophistry. You have chosen to assume that revenues will increase the same way they have been increasing, but when I assume that expenditures will also increase the same way they have been increasing, you think I am wrong to make that assumption.
Because the two are unrelated. Revenues are a function of growth and by most estimates India is poised for continuing at 8-9% growth rate in the medium term. But expenditure is not a function of growth. Our growth is thankfully not dependent on govt expenditure (mostly). So it is not necessary that if revenues go up, expenditure also has to. Beyond the bare necessities to run the country (defense, law&order, govt salaries etc.) govt expenditure is a matter of discretion. Sure, as revenues grow, govt also increases its expenditure – but that increase mostly happens because govt finds new ways of spending the additional money they have got – starts new programs or increases allocations to things like health, education etc. But that increase is not inevitable. So if govt thinks that the additional revenue is better spent on nrega rather than increasing spending elsewhere, it is certainly an option.
Think of a household. Let’s say you are employed in a growing industry, doing well, so by most reasonable estimates your salary is expected to grow at 10-15% per year in real terms over next 10 years. But that doesn’t mean your expenditure also has to. If you are running the family at Rs. X per year, you can certainly continue to run at the same amount (+ inflation) for next 10 years also. Just because your salary went up, it doesn’t mean your expenditure has to. So with that additional income you can either choose to increase your current expenditures (upgrade to a better car/tv/home theater, go to epxensive restaurants, etc. – equivalent of govt increasing its expenditure on current projects) or you can start allocating that additional revenue on new projects (start saving for kids college education, do some charity, whatever – equivalent of govt allocating increased revenue to nrega).
[...] It turns out that the UPA government, which presided over the boom phase of the business cycle has ended its term with an incredibly high fiscal deficit. It got away with its legal responsibility to keep the budget within limits by keeping them within limits on paper and simply spending more than it was allowed. Chidambaram’s response to those who pointed out that he had not actually provided funding for the NREGA was, in effect “Trust me. Do you think I am so stupid as to not provide funds for such an important scheme?” Now, we will enter the bust phase of the cycle burdened with a huge deficit. For some reason, I am reminded of the discussion I got into here. [...]