Tuesday, April 12, 2011

Old Story: NREGA Causes Inflation

Old Story: NREGA Causes Inflation: "

Just thought that an old post from over three years ago in Jan 2008 is worth revisiting since it appears that some idiots people in India are waking up finally to the truth of how NREGA causes inflation. “Does the NREGS Cause Inflation?

Inflation happens when the total amount of money increases relative to the total amount of goods that are produced in the economy. If a scheme merely adds more money to the pot without increasing production, it will cause inflation. If you increase production and at the same time increase the total amount of money appropriately, there is no inflation.

If you do a pure income transfer, without raising the total amount of money, you do not have inflation.

So what is the NREGS doing? If it is merely printing money and handing it to unemployed people (who are not producing anything), then it leads to inflation. This inflation reduces the real incomes of people who are producing something. So in this case, it is a pure income redistribution scheme. Drèze knows this as he knows basic economics. But he cannot admit the truth because his job depends on being economical with the truth.