Rahul Gandhi’s Congress announced a manifesto ahead of the upcoming elections in India. The manifesto in its entirety can be read here. As an Indian I am deeply troubled by some aspects of this manifesto and wanted to write a short note to outline my concerns.
A wise man once said “If you want to make a show about changing a system you change the rules of the system, if you want to actually change the system you change the incentives in the system”. In my lived experiences I have found the insights of this quote to be very deep. Humans as a species are hardwired to deduce the incentive structure of any given situation and then maximize their rewards from the incentive structure. One can think of this as a deduce/optimize cycle, where we are always trying to understand how incentive structure changed and once we understand the change we adapt our behavior to optimize our chances of doing well in the new incentive structure.
It is an odd trait for a species to have, but it does make us an interesting species because this deduce/optimize feedback loop in our minds causes us to be creative and competitive. As incentives adapt we take great pleasure in anticipating and recognizing the change in incentive before others, and then getting a juicy reward under the changed incentives gives us the dopamine high that pushes us to the next deduce/optimize cycle.
The single largest reason that the Congress manifesto bothers me, is that it changes the incentive structure of our country in a very significant way. The Assured Income Scheme announced in the manifesto guarantees a minimum income of Rs 12000 to every Indian, irrespective of their ability, background or current standing in life. And therein lies the rub – this changes the deduce/optimize framework of every single Indian. If implemented, this scheme would mean that going forward in all perpetuity, productive Indians in the middle class will part with sizable portions of their income to fund the minimum income scheme.
For every day where they work hard they will have in their mind a few recurring questions – are there other lower tax countries where they could save more, is their hard earned money being used by the recipients wisely, is the government wasting large portions of it as an overhead? Basic questions of fairness will haunt their minds – should they not be saving for their retirement, or for their health expenses, or children’s education or for any of the other reasons that are close to their heart. What do people do when faced with such questions? How do they react?
In trying to answer questions on how middle class will react, we are lucky that Rahul Gandhi is not the first politician to have thought of such a scheme. We can look at other places where such schemes have been tried and see if we can learn something. In all the places such schemes have been tried, they have ended with utter failure. There is a common narrative that unfolds in the following way
There is initial euphoria about the scheme and for first couple of years poor sections of the population are able to enjoy goods and services they were unable to in the past. All the freshly flowing money increases a demand for goods, causing markets to do well since there are a lot of new consumers in the economy. At the same time not everyone is happy, productive members of society in the Middle class notice that they are left with much lesser money at the end of the month, since the Government is taking a large part of their paycheck as a tax to fund the Income scheme for the poor. These middle class citizens see that the Rich are not paying their fair share in taxes as usual and feel victimized as the only section of society who is being asked to sacrifice to fund the minimum income program.
As the middle class is unable to fund their children’s education or health expenses due to shortage of money, they start looking for other options. They realize that not all countries have such wealth redistribution schemes and their friends who live abroad pay half the taxes (~30%) vs the 70% that they do. In a couple of years this middle class starts leaving for other countries to ensure a good life for their family. Middle class professions with transferable skills like Engineers, Teachers, Accountants are the first to leave. The country starts losing key skills from its talent pool.
In few years the euphoria starts settling down, effect of waning entrepreneurial activity and flight of productive middle class professionals starts to make a dent, but money is still flowing and hence inflation picks up. Goods and services both become more expensive. Everyone nervously knows good times are over but no one says anything. As inflation rises the same people who cheered for the initial socialist impulse, pressure the government to do more and ask for ever larger handouts. Governments can’t stand up to the public because they trained the same public that “Government will take care of you and make sure you can afford the necessities in life”. Governments cave in and give ever larger handouts. In the end we have a failed state which cannot fund its obligations.
On some level I do not particularly care whether @narendramodi wins or not, but I am very concerned that a great nation is possibly going to make a very dark choice. I hope we look at Rahul Gandhi’s scheme for what it is – a cynical ploy to revive the fortunes of the Indian National Congress by reinventing it as a Communist party. In our rush to dispense with the current government, I hope we do not destroy our country irreversibly. A good litmus test for middle class voters to think about is – “Can I live all my life with 70% of my income taken away by the government?”. If the answer to that is no, please vote against Rahul Gandhi’s Minimum Income Scheme.
“When the people find that they can vote themselves money that will herald the end of the republic.” – Benjamin Franklin