In 1972, the Indian state of Maharashtra was stricken with a drought that decimated crop yields and put 25 million Indians at risk of starvation. After years of plentiful rainfall and experimentation with food exporting, the Indian government had passed the “Deletion of the Term ‘Famine’ Act” under the impression that India had developed beyond the point of having to deal with food shortages.
What happened next in Maharashtra has been called a model for famine-prevention programs in the developing world. After pressure was put on both the state and local governments by struggling farmers, widespread employment programs were implemented to put Indians to work on public projects, offering them a living wage and enough money to supply food for themselves and their families.
Amartya Sen, the Indian economist who specializes in famines and economic development, describes the incident thusly:
5 million temporary jobs were created, which is really a very large number (when account is taken of the workers’ family members too). The results were extraordinary: no significant rise in mortality at all, and even no great deterioration of the number of undernourished people, despite a dramatic decline (in many areas 70 percent or more) in food production over a vast region.
After decades of starvation and destitution while under British colonial rule, the post-independent India had managed to stave off a potential famine with Roosevelt-esque employment programs that tapered off once food stability had been restored.
Sen writes favorably of this approach to famine prevention in more general terms:
The employment route also happens to encourage the processes of trade and commerce, and does not disrupt economic, social and family lives…Post-independence India has had, on different occasions, very large declines in food production and availability, and also quite gigantic destruction of the economic solvency of large groups of people, and still famines have been prevented through giving the potential famine victims ‘entitlement’ to food, through wage income in employment-oriented projects and other means.
While the Maharashtra program was not an institutionalized counter-cyclical fiscal program, it starkly resembles proposed policy solutions being discussed by a handful of American economists today. Rather than combatting famine, these programs would use public employment to stimulate the labor markets and boost incomes in times of economic shocks.
Andrew Haughwout of the New York Federal Reserve recently proposed the creation of “a program that would provide strong incentives for states to develop a catalog of construction projects that could immediately be put into production if the labor market weakens significantly.”
Economics professor Mark Thoma, while writing about proposed changes to American automatic stabilizers, suggests “a continuously updated list of infrastructure projects that can be started ahead of schedule or brought online anew if the economy goes into recession.”
Jay Shambaugh, in an interview with The Financial Times, speaks on a proposed change in the Department of Transportation’s BUILD program, whereby states would submit a list of infrastructure projects to the federal government, which would “look for the ones with the best cost-benefit ratios” and fund those programs in times of crisis. Heather Boushey says that the federal government “would take these slate of proposals that were supposed to be funded over the next four years and you front-load them and say, we’re going to do all of these proposals this year.”
State infrastructure programs would be put off until an economic downturn, at which point federal dollars would fund a flurry of infrastructure projects. Not only would this lift employment, but it would also give a boost to the productivity benefits that typically come when a government invests in a nation’s infrastructure (both Haughwout and work by the Congressional Research Service note that infrastructure investment can offer some of the highest returns available in the federal governments fiscal policy toolkit).
It should be noted that while these thinkers are introducing interesting ideas to the economic discourse, they aren’t necessarily new.
In 1939, Swedish economist Gunnar Myrdal published “Fiscal Policy in the Business Cycle,” a work of theoretical economics that proposed what Stellan Andersson called “a radical countercyclical fiscal policy.”
This “radical” policy was described by Myrdal as such:
Part of this fiscal preparation for crisis has been to take precautions in order to avoid delay in setting the spending program in motion. An intensive inventory of possible public works in the field of public buildings, road construction, and municipal investments has thus been prepared… The state production enterprises – railroads, power plants, post office system, mines, forest preserves, etc. – are urged to prepare yearly building programs for ten years in advance. They are asked to have available at all times technical and economic plans, ready for speedy action. The idea is that next crisis we shall not be caught unawares. The blueprints shall be at hand, the measures shall be decided upon in advance, and the government shall have only to press the button to set the machinery in motion.
Philip Whyman writes that Sweden’s infrastructure program, combined with “tax-based investment funds intended to influence the timing of investment decisions to reinforce counter-cyclical macroeconomic policy,” led to Sweden’s GDP rising by “over 40% between 1932 and 1940, whilst unemployment fell continually throughout the decade.”
Without citing Myrdal specifically, Boushey, Shambaugh and Haughwout seem to have proposed almost identical programs.
The fact that these proposals are being discussed now should come as no surprise, given how economic thinking has shifted in the western world. The 2008 global financial crisis, which Amartya Sen blames in part on “the belief that [the market economy] is sufficient on its own” at a time when “the role of the state in supervising needed to be emphasized,” led to what is now referred to as the “Keynesian resurgence.”
From this shift in academic thinking came a heightened awareness of the ability of the state to correct for market failures, i.e. the type of investment programs being spoken about by Boushey, Shambaugh and Haughwout.
One of the glaring flaws in counter-cyclical fiscal policy are the political hoops that policymakers must jump through in order to get timely legislation passed. By the time the deliberation process is over, the recession may have already concluded, longer and more painful than it otherwise would have been had stimulus come at the appropriate time.
If the “Deletion of the Term ‘Famine’ Act” tells us anything, it’s that the Indian government had a strong and enduring commitment to wipe away its identity as a country in need. Once the residents of Maharashtra spoke out, policy action followed, and millions of lives were saved.
The United States has no such strong and enduring commitment to prevent recessions given the extremely politicized nature of fiscal stimulus. However, given the universal appeal of blunting the sting of recessions, US policymakers would be wise to explore the types of proposals discussed by Boushey, Haughwout, and Myrdal.
While the American social safety net already exists as an automatic stabilizer, Sen and the Maharashtra incident make a strong case for putting individuals to work in order to combat resource scarcity. Infrastructure would be a broadly beneficial way to do just this. By placing infrastructure investment under the “automatic stabilizer” umbrella, we can ensure that the fruits of these investments are maximized, from the perspective of both fiscal policy and human well-being.
Image credit: Nattanan Kanchanaprat