In newspapers and TV, we often hear of reports that the chief minister of a state is distributing free TV to poor people. Some other times, we hear of a state government giving free laptops to students. Sometimes the reports are about rice given away almost free, at Rs 2 per kg. People are happy when governments promise to reduce electricity prices, or to give water for free. But should we really be happy when governments give things away for free?
Nobel-prize winning economist Milton Friedman famously said, ‘There is no such thing as a free lunch.’ And there is no such thing as a free laptop, or a free TV or free water. We pay for everything. But the price may be cleverly hidden from our eyes. How?
When the government gives us a free TV, the chief minister is not spending out of her own pocket to give us the TV. The TV is purchased out of the money government collected from us, the common people, through taxes. So it is really a case of giving with the left hand, and taking away with the right.
However, it may not be the same person from whom the tax is taken who receives the TV. There is usually a component of redistribution. Tax (at least the income tax) is usually collected from middle to upper income group. And the free TV schemes are typically for lower-income group. So on the face of it, the project is laudable, as it transfers wealth from the rich to the poor.
However, we can question the wisdom of distributing TV sets to poorer households. Why TV, and why not an almirah? Why not clothes, or a gas oven, or a mobile phone? How does the government know what is the most pressing need of a particular household at this point?
The answer is, the government does not know. The best thing obviously would have been to give the poor household an equivalent amount of cash instead of a TV, and let them choose what they want to do with it. (even that may not be sometimes wise — as people often do not know what’s best for them, and may waste that cash on a drinking binge as soon as it arrives).
Each time we give away things to poorer sections of the society as a direct hand-out, we may even be harming them in a subtle way. Imagine you are a poor person, living in a welfare state. The state takes care of the unemployed. If you are unemployed at any point of time, you get Rs 5,000 a month from the state, to tide you over for the duration that you are unemployed.
All well and good. The state that takes benevolent care of its poorest section is doing them a favour, right? But it may not be so. If the unemployment benefit is too generous, or it is greater compared to the salary that poor person can currently get from the market — he loses the incentive to work. It may be harmful for him in the longer run.
Let’s say he can currently get a job as a construction labourer — but it will pay him only Rs 3000 a month. So the unemployment benefit looks more attractive. He chooses to stay at home. The construction job, on the other hand, would have given him some valuable skills — and five years down the line, he may have been a supervisor in the same construction company, earning Rs 15,000 a month — far greater than the unemployment allowance. But he loses that long-term opportunity, because in the short-term the incentive to get the unemployment benefit is much stronger than working for a lower pay.
Whenever we spend money on something, we give up the opportunity for spending money on something else. Same goes for other resources like time. Let’s say, it’s two days before your board exams. You have to study history, economics, math and languages. If you study history for the entire two-day duration, you may do well in history, but you give up the opportunity to a last-minute revision of economics, math and languages. The cost that you incur by choosing one thing over the others is called opportunity cost.
There is opportunity costs in all aspects of life. When a woman chooses to have a baby and raise her children by staying at home — her opportunity cost is her career, and a few years of foregone income. When somebody wants to set up a business by giving up his job (which was paying 20 lakhs per year, for example), his opportunity cost is that salary that he chooses to forego. Each choice that we make in life, including whether to watch TV in the evening or read or talk to our friends, whether to invest money in our own business, or in the stock market or keep in a bank fixed deposit — involves opportunity cost. Each time we choose one of the options, we forego the second-best option (according to our judgment). The second best option is the opportunity cost.
Just like we have opportunity costs, governments also have opportunity cost for all of their decisions. Each time they decide to spend money to distribute TV sets to poor people, they are deciding NOT to spend that money on building roads, schools or hospitals. And in the long run, poor people would benefit more if they have access to better schools, roads and hospitals. Because better medical facilities make them healthier and better schools make them ready for the future world — and together they improve his future earning potential. Instead of waiting for the governments to give him a small black-and-white TV, he can choose to buy a 1080p HDTV then, and may be one for each room of his house.
So if giving free TV is such an obvious nonsense, why do governments do it? And why do poor people get excited about it? It’s because long-term benefits are too far away. A chief minister who works for the long-term betterment of the people may not remain in office after five years to see her efforts fructifying. Common people are also swayed much more by a present act of generosity than a benefit that will accrue to them 15 years hence. Just like most students like a teacher who give them a lot of play-time, and do not discipline them much, common people also love chief ministers who give them tangible things NOW, rather than some intangible benefit later.
India as a country has also seen a lot of corruption and a significant siphoning off of public money. People see politicians getting richer by diverting and pocketing public funds. That also plays on their psychology. Let’s say there are three ways in which a politician can use her public funds:
1) To enrich herself
2) To give free gifts to people
3) To build roads and hospitals
Though the last choice is the best, the second choice is at least better than the first one. So people feel happy that at least public money is not being wasted to enrich the political class — it is being wasted to give them free TV!
However, that satisfaction is only illusory — as we know only too well. Because these schemes result in even more corruption and even more enrichment of the political class. In fact, politicians cannot gobble up the tax money directly. They can divert it only when the money is ostensibly being spent, on some purpose. So while buying the TV sets for the poor — the politician calls over various TV companies. TV companies are of course excited to get a contract where they can sell a lakh TV sets directly to one customer — the government. It is far more profitable than selling TV sets in their shops — one set by one set, slowly, over time. To get such a profitable contract, they bribe the minister concerned. The minister is happy. The TV company is happy. The people are happy. And if in a situation so many stakeholders are happy — obviously it is a recipe for success. So such schemes go on and on.