Context

We could take a leaf out of a booklet by Keynes in our effort to tackle some of the challenges posed by the covid-19 pandemic.

The Crisis-Keynesian Mode response mode to pandemic

• What is the war economy? One of the defining features of a war economy is that economic thinking is focused on quantities rather than prices.

• Much of the ongoing global response to the covid-19 pandemic is still in crisis-Keynesian mode.

• What is a crisis-Keynesian response: The nation-state has become the income supporter, financier and consumer of last resort.

• However, there are also clear signs of war economics as well.

• Signs of war economics: The decision by US President Donald Trump to use America’s Defense Production Act to force General Motors to make ventilators is one resonant example.

• Just consider some of the key questions that are being asked right now.

• How many ventilators are available? Are there ample food stocks? Can more hospital beds be made available? How many masks be produced in the next few weeks? Can the production of testing kits be ramped up? It’s all about quantities, quantities, quantities.

Historical background and impact of a shift in economic strategies

• Impact persists in subsequent decades: Such big shifts in economic strategies are usually not reversed overnight. Decisions taken in response to a particular emergency tend to remain with us in subsequent decades.

• World War II example: What happened in India during World War II is instructive. Many of the controls that were introduced during that global conflagration formed the basis of the later interventionist state that sought to control who produces how much. Here are a few examples.

1. Quantitative import controls

• One of the first moves by the colonial state was to impose quantitative import controls in May 1940.

• There were two reasons why this was done—to conserve foreign exchange as well as ensure that shipping capacity was used to bring in only what was essential to the war economy.

2. Food rationing

• Food rationing was also introduced during the war years.

• Over 700 towns were covered by some rationing scheme or the other by the end of the War.

• The government also brought in measures to buy surplus grain from farmers at administered prices.

• Various forms of rent control were also instituted. Most of these controls continued after India gained independence.

3. Balance of payment crisis in 1957

• India was hit by a balance of payments crisis in 1957.

• The massive investment thrust in the Second Five Year Plan had severely strained the country’s foreign exchange reserves.

• The Indian government, once again as a temporary measure, imposed stringent controls on imports.

• Many of these were quantitative in nature. They survived well into the 1980s.

• In fact, the entire trade policy approach since the 1957 crisis was to minimize imports in a bid to preserve foreign exchange.

Will the government opt for automatic monetisation of the deficit?

• Money creation by the RBI to fund deficit: There is now a growing consensus that the Indian government will have to fund part of its growing fiscal burden through money creation by the Reserve Bank of India.

• What about inflationary consequences? The inflationary consequences will be muted—for now—because the velocity of narrow money is most likely set to fall on account of weak demand conditions under a lockdown.

• Precedence: The automatic monetization of Indian government deficits was part of the policy playbook after the 1950s till it was thankfully discontinued in 1997.

• The main instrument for that was ad hoc treasury bills.

• These were introduced in 1954 as a temporary measure to replenish the cash balances the government maintains with the central bank.

• What was ad hoc treasury bills? Ad hoc treasury bills were not introduced through any formal law but as an arrangement between mid-level bureaucrats in New Delhi and Mumbai (i.e. RBI).

• What began as a temporary measure to smoothen government cash holdings had become a near-permanent feature of Indian macroeconomic policy by the 1970s.

The uncertain future

• Longer the war more profound will be the changes: The longer the global battle against the pandemic lasts, the more profound will be the changes across the economic landscape.

• In an insightful article in Bloomberg, Andy Mukherjee uses the lessons of history to look into the uncertain future.

• Among the possibilities he mentions are the contrasting ones of an economy run by robots and algorithms but with little labour, or an economy in which labour has clawed back the power it lost in the second age of globalization.

Managing the resources in the time of war

• Managing the resources: In 1940, John Maynard Keynes wrote a little booklet How To Pay For The War, Keynes essentially argued that the main challenge was not how to finance the war effort, but how to manage real resources to produce the arms that the UK needed to defend herself.

• Suppression of consumption: He then argued that war production would necessarily involve suppression of consumption, either through higher taxes or some scheme of deferment.

Conclusion

The war against the covid-19 pandemic is very different from the military war that Keynes was thinking about. Yet, his booklet offers useful lessons on how to think about some of our current challenges—and also about what we can expect once the situation returns to normal.