THE GIST of Editorial for UPSC Exams : 11 December 2019 (Macroeconomics may not have the answers we are looking for (Mint))

Macroeconomics may not have the answers we are looking for (Mint)

Mains Paper 2 : Economy
Prelims level : Not much
Mains level : Populism of macroeconomics

Context:

• Given the huge failures of macroeconomic policymaking over the last 25 years, with growth not delivering enough jobs and inflation refusing to rise no matter how much interest rates were cut or public spending raised in Europe, the US and Japan, we need to question our touching faith in macroeconomics.

Promise of high growth:

• if the fiscal deficit is magically brought to 3%,
• if GST is implemented “correctly",
• if trade tariffs are cut to the bone,
• if taxes are cut, or
• if inflation is kept low by keeping interest rates high. Now, we are being told the opposite—that we need more fiscal latitude and lower rates to get growth up and boost consumption.
• The macro forecasts in 2016 on the impact of demonetization ranged from 0.5% of gross domestic product (GDP) to 3.5%, suggesting that these predictions were no better guided than apes throwing darts at a dartboard. Someone was sure to get close to the bull’s eye.

Populism of macroeconomics:

• Macroeconomics gained popular appeal in the 20th century because of two factors:
• One was the emergence of US from the Great Depression by following broadly Keynesian policies, and
• The other was the invention of mathematical modelling in the heyday of the US’s post-war industrial boom.
• When economists such as Wassily Leontief used input-output analysis to make macroeconomics seem like the physics of social sciences, capable of predicting precise changes in economic direction.
• Another kind of disruption is creeping up on the global economy, one led by huge leaps of productivity, thanks to technology that is drastically driving prices down.
• These changes could even be reducing GDP, as gains in quality are often left uncaptured by the financial economy.

Has this qualitative change pushed GDP up or down?

• Post-demonetization and digitization, the financial services industry derives more bang for the buck from the same infrastructure.
• Business expansion needs very little additional investment in overheads.
• In many technology markets, there are free versions available of high-priced software.
• The Internet of Things (IoT), where sensors are being embedded in more and more products, will at some point make the entire service sector support jobs redundant.
• There is a huge collaborative economy for free products, from free publications on the web to electronic marketplaces that let borrowers and lenders, buyers and sellers, do business at zero or low cost.
• Bigger changes could occur once people change their mind about owning products. This is happening with cars, as app-based taxi services proliferate.
• It could happen in hospitality and home ownership, too, as millions of underused properties are put up for rental, both for long-term use and holiday homestays.

Way ahead:

• Cheap net connectivity will enable people to produce and exchange goods and services for free or barter.
• Even those items still being purchased in the exchange economy are becoming fewer in number as more people redistribute and recycle previously purchased goods in the sharable economy, extending their usable lifecycle, with a concomitant loss of GDP.

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Prelims Questions:

Q.1) With reference to the ‘FrogPhone’, consider the following statements:
1. It will allow scientists to monitor frogs in the wild.
2. It is described as the world’s first solar-powered remote survey device that can be installed at any frog pond and which receives a 3G or 4G cellular network.

Which of the statements given above is/are correct?
(a) 1 only
(b) 2 only
(c) Both 1 and 2
(d) Neither 1 nor 2

Answer: C
Mains Questions:
Q.1) If macroeconomics has not delivered even in a highly monetized economy, why will it deliver once large parts of the global economy shift away from production for exchange to production for shared usage?