Tuesday, May 03, 2016

On the Question of State Debts and Intergenerational Transfers







By Rahul V Kumar*

  


When the question of intergenerational transfers is raised in the context of debt, especially unsustainable debt of the state, the natural response from supporters of debt is to argue that it all depends on what the debt is used for. They argue that if the debt is used to finance education, it could be rather beneficial to the state as well as to the future generation. There is nothing to separate these supporters of debt from Keynesian sympathisers of a debt fuelled economy. The argument fully underestimate, for instance, how a free market in education could lead to the growth and development of new and better modes, making current practices and standards in education totally obsolete. So what are the supporters of debt arguing? Do they want to invest in practices that would become obsolete in the short-run or do they want to reduce state control to allow the growth of a better system of education? Let me state at the onset that I don’t buy the argument that literacy is the end result of education.    

The idea of investing state debts in education assumes many things. It assumes that the money raised by the state as debts is directly used by individuals who have a choice to invest in specific types of educational systems that they value. This is however a lame excuse for accumulating debt when the state plays a major role in the society.
The key question is how do we define education in this context? Is there a freedom to choose between different educational systems and methods? The question is irrelevant only when it is a free society where you have a choice of different kinds of educational systems. In such a society each person could find a profitable occupation depending on his choice to study what he wishes to study. But this is different when the state has a major stake in the education sector. In a society where you have to follow conformity, where you have limited choices with respect to educational modes and where education is directed to specific end results like absorption into state services, the question is relevant. The issue becomes all the more relevant when the state itself fails to keep up with changes in technology and methods in education. Even if it does, the pace of acceptance of such change under state controls would be much slower than in a free market. So the mode and kind of education which is highly valued at present would be irrelevant in a short period compared to quickly changing practices world over.
Of course the natural response to this argument is that people can migrate to adopt best practices elsewhere. That is obviously how markets work. But better than that would be to allow for more freedom of choice in the home society. Now that would take us back to a full circle. If you need to allow for such freedom, you need the state to reduce its expense and that obviously means reducing the appetite for debt. 
On a different note “How does a state which plans for the people, assuming that people cannot make their individual plans, expect people to behave rationally when it comes to investing in education alone?” This is also a contradiction in the process of planning. There is a logical flaw in such actions of the state. It is always difficult to accumulate the scattered knowledge in the society in its complete sense and make plans. If that be true then it is raises bigger questions on raising debts to sponsor these plans.  
Investing in education is good for individuals, but only in a free market can such investments bear profitable results in the short or long run. A free market for education would adopt the best practices and innovate on them providing the best value for the money we invest. A debt raising state is characteristic of a market that is not free. The state raises funds primarily to invest or to finance its revenue expenditure. In both cases it contributes more to distorting market signals than making it clearer.      

* The Author is Research Consultant at Centre for Public Policy Research. Views are personal and does not present that of CPPR.
 

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