Disclaimer 1: Econ Mom is an economist and hence has basic inherent rights to drool on and on about issues that may not be fun/ relevant/ interesting/ exciting/ amazing according to you.
Disclaimer 2: Unless you read all the serious boring stuff on public finance in the beginning of the blog, you anyways won’t understand what Econ Mom is thinking at the end of it.
Disclaimer 3: Yeah, sure! There’s wickedness coming your way, but you are going to have to plough through the basics for that. Lazy readers are advised not to read on.
Disclaimer 4: Econ Mom reserves rights to appear when she feels like in the blog. In the present one, she chooses to appear only in the end. What the hell, it’s MY blog! So here goes..
I have been reading up on fiscal federalism these days. It’s a part of my research interest.
Centre-State fiscal relations mainly span the collection of taxes and sharing of the same. While control over taxes is defined constitutionally under the “Union list” and the “State list”, the sharing of the same has been mostly formula-driven, again constitutionally. The Constitution has provisions for creation of the “Finance Commission”, which can then really decide how the Centre shares its taxes with states.
And then, there is also the Planning Commission, which willy-nilly, has played a part in Centre-State relationships. Well, even the Planning Commission has used some kind of a formula (the Gadgil-Mukherjee formula or some version of it) for tax sharing with states; however, not all tax shares are governed by formulae. Increasingly, in a reforms driven India, there is evidence that states received tax shares based not only on their economic fundamentals as encompassed in the “formulae”, but based on their political goodwill. Thus, states going to elections have received more tax shares, states that are politically more “aligned” with the Centre seem to have received higher tax shares.
Thus, a lot of modern empirical literature is into proving the existence of a political economy factor in determining Centre-State relationships. In my readings on the subject, I kind of went into the subject in a reverse timeline. I stumbled on a really interesting paper by Stuti Khemani (World Bank 2003) in which she spoke about how “political alignment” with the Centre has been a central idea in a 2001 paper on Swedish municipal councils. So I got reading that, which put me on an Avinash Dixit paper written in the 1980s on a game theoretic approach between two levels of Government. And well, since by now I already was neck deep into the subject, I decided to go backwards the whole way to the Big Bang, which happened in 1954.
The Big Bang of Public Finance, so to say, was created by Brahma, Vishnu and Mahesh. They just have different names in our field, and are called Paul Samuelson, Richard Musgrave and Charles Tiebout. And then there are plenty of other deities such as W. E. Oates and James Buchanan, who lent their mental Vajras and other weapons to sharpen the arguments.
The entire discussion started with Paul (Brahma) Samuelson defining public goods; his argument was that since the consumption of public goods (such as a street light) is necessarily, well, public, no one will be willing to pay for the same and hence, the market by itself will underprovide for the provision of public goods. In other words, capitalism may be wonderful. But free markets do not provide optimally for public goods.
Vishnu aka Richard Musgrave took the discussion further and classified public goods to be “non-excludable” as well as “non-rival”.
Hmmm. Nice. But it is Maheshji’s job to provide the necessary churning to the world created by Brahma and Vishnu, right? So here goes.
Enters Charles Tiebout, with a radically different viewpoint from the one provided by Musgrave. Says, are public goods always “non-rival”? Nnnnaah! Not really! Especially, if we are looking at “local” public goods such as a public park. Sure, you can’t exclude anyone. So it definitely is non-excludable. But it’s not always “non-rival”. If there is too much crowding into the park, then there exists rivalry in consumption of the good.
So, this is what Tiebout says. He firstly puts forth an idea that we need to look at public good provision from the perspective of a “local Government”. He likens local Governments (like Municipalities) to suppliers of different baskets of public goods at different prices (taxes). If a household does not like either the basket of goods that is being provided or the price at which it is being provided, then it can “vote with its feet” i.e. it may well choose to migrate away from that locality to another wherein the supply of public goods and its price matches its utility. This solves the problem of preference revelation effectively, as people’s preferences and their utilities get revealed through their decision to migrate. It is exit, rather than voice, that helps to reveal consumer preference.
Local Governments can closely observe the utility profiles of the public and hence, would be able to tax the people more accurately. They also are able to gauge the optimal quantity of public goods that need to be provided in an area. Thus, provision of public goods ought to be done by local Governments, who can then also tax the public for the provision.
Thus, according to Tiebout, there does exist a solution to the problem posed by Paul Samuelson. Provision of public goods need not be always sub-optimal; you just need local governments to take care of the thingy! Let local governments compete and voila! Optimal public goods is what the public will get.
What an interesting theory! He is suggesting that there is effectively, a political solution to this rather economic failure of the market mechanism. Politics to solve economic problems! What a wonderful thought! Though extremely impracticable, as Econ Mommy realized on her vacation to Goa. Yup, Goa it was, this year.
Goa. Blue skies, endless lines of coconut palms, backwaters, mangroves and the sea! Simply marvellous! We felt our spirits turn distinctly salty (just joking, guys!) as we drove down to the sea from Pune. The drive down the quaint little villages was just the balm I needed for my tired body and soul.
“We three are just like the three friends from Dil Chahta Hain,” suddenly announced Lil One with a grin at us. “We’re driving to Goa and we are really cool! At least….I am!” he said uncertainly, looking at the not-so-cool parents. Sigh!
“So who is Aamir Khan?” I asked no one in particular and grinned to see all three hands raised in the car.
Lil One felt he was the truly wicked one and hence qualified to be Aamir Khan. I was Saif Ali Khan, since I was always getting teased by the other two and Dad, he said loyally, was the thinker. Akshay Khanna. Hmmm…
Hubby, on the other, said that it was far too much fun pulling Lil One’s leg and hence Lil One was Saif and he himself, the leg puller, was Aamir. “Mommy’s Akshay Khanna,” he said with a grin, “because she is the sentimental types. Cries on seeing that foul movie. Whatisit called..”
“Kabhi Khushi Kabhi Gam,” supplied Lil One helpfully and suddenly extremely high energy. “And Hum Saath Saath Hain..And Dad, do you know, she was crying watching Kuch Kuch Hota Hain yesterday!”
“Oh, shut up,” I said. It’s their favourite topic these days. Tell me, is it so bad to cry on seeing a movie? Yeah, I mean, even I agree that those movies are complete nonsense, but God alone knows why, Karan Johar makes me want to wail real real loudly, the bugger. I have given this a lot of thought as to how this happens to me and this is my analysis. I think my defences are already lowered by the complete lack of any brain usage for around 50 minutes and then, when I see all these idiotic melodramatic situations, it causes me to cry.
Sorry! I come back to Goa. “Who runs a humor column? I do! That means I qualify to be Aamir Khan!” I said bossily causing Lil One and Hubby to make rude faces at me. “And in any case, only I can sing Tanhai…it’s way beyond your skillsets, got it, boys?” The boys looked sulky about it. Hubby looked positively alarmed at him being chosen to be Saif Ali Khan because he can do the “flap flap” dance, and Lil One happily hummed “Kaisi hain hain, ruta kii jisme”.
We stopped in a picturesque village lane for a small picnic. And sauntered out of the car after our meal, just looking at the pretty little houses with slanting rooftops. Every house has a small yard in the front, mostly hosting coconut palms, with the familiar pepper creepers running up them. How pretty! Hubby said with a real longing in his voice, “Manasi, I wish we could settle here. I could stay here forever!” He had said the same in Kerala. “Goa or Cochin?” I asked with a grin. “Well, both!”
It is such a tempting thought. If you think of what a life you can have in Goa versus the one you have in Pune, Goa takes the cake and eats it too, royally. Look at the basic infrastructure. The roads are so beautiful. I mean, if you can have those smooth kind of roads when you are simply swamped with monsoons, I wonder why Pune has to have road-shadow, even when we lie in the rain-shadow zone. That brings me to the second point.
Rains. Water. OMG. To see all that water and greenery in Goa, just across the border from Maharashtra, was such a slap in the face. I have recently been on the roads in drought prone zones in Maharashtra and we all know about the monsoon issues that Marathwada and Vidarbha are facing. And in Goa, there is simply no water problem at all.
Plus, its cheap. Oh no, not the hotel stay. But petrol at Rs. 59. Aaaargh! And the basic fruits and vegetables. Its so cheap! There were hawkers on both sides of the roads into Goa, hawking mangoes, coconuts, jackfruits, karmals, karvandas, bimlis, bananas. It was really too much for my poor vegetarian soul to see all these fruits being hawked so cheap. I took it personally and gorged so much on the fruits in Goa in the last one week that I think I have single-handedly caused the fruit prices to go up. That last wrinkle on Dr. Rajan’s already lined forehead (no, not that big one, that one was created by Subramaniam Swamy), yeah, that little one there, that’s the one I created with the inflation index going up one tiny little notch, all thanks to my gluttony.
There aren’t too many things I agree with Hubby on, but this one was really really tempting. Wah, to settle down here! But what about our careers. And Lil One’s schooling. And our friends. And family.
Households are not really that mobile, after all. Even if Municipal Corporations are service providers offering baskets of services, households don’t really move around freely. Their personal choices come first and hence, even with the most tardy of service offerings, people stick around with the Pune Municipal Corporation (PMC).
Thus, even with decentralization and creation of municipal corporations and gram panchayats competing with each other, we may not really find optimum provision of public goods taking place. And what that means is that people will keep flocking to the Tier 1 and Tier 2 cities, causing their municipal corporations to really crash under that huge migratory burden. Consequently, public goods provision will be bad.
But the so long as the losses on the public life are more than made up by gains on the personal front, people will be okay grumbling about it and life will go on, in a most un-Tieboutish manner. The Tiebout model goes wrong, because it makes the most impractical of assumptions, such as assuming perfectly mobile households.
Oh, why is it that the most interesting ideas are the ones that are mostly impractical?
I came out from the waters and walked to Hubby, who was lounging in the sand, enjoying himself. He was singing. How romantic! I thought. May be he’s singing, “Sagar jaisi aakhon waali…”
Hmmm. He looked into my (sagar jaisi) eyes and sang, “Ye kahaan aa gaye hum, yoo hi saath saath chalte!”
Aaaargh! Why is it that the most interesting ideas are the ones that are mostly impractical?