Keynesianism in action ….in a housing society budget!

The influential English Conservative politician and three time Prime Minister Margaret Thatcher often used the example of a household budget to impress the virtues of fiscal conservatism.  She said (not in as many words so bear with me as I paraphrase) would you not want to live within your means if it was a question of your own household budget.  Would you not want to ensure that you do not spend in excess of what you earn for the sake of sustenance.  

Today I had the opportunity to test this comparison as I attended the annual general meeting of my housing society.  For the uninitiated, there’s a Societies Act governing residential apartment complexes in India so they have to go about managing the upkeep of the society within a certain statutory structure.  

Anyway, the meeting commenced and the Treasurer was asked to present the Annual Financials to the members.  He opened with the announcement that in the financial year gone by, the society had made a grand…deficit!  And it was not a modest deficit by any means.  It amounted to nearly 15% of income.  That’s big enough (in percentage terms) to dwarf some of the more profligate state govts in India.  Good start!

The discussion progressed, as most as such meetings do, in the direction of a plethora of grievances and suggestions voiced by the members present. Most, if not all, such suggestions would require money to implement.  The Secretary kept penning the Minutes away, eventually running up a pretty impressive list of targets to pursue in the year to come.  

When time came to consider the issue of the deficit and an increase in society membership charges to manage the deficit, there were a couple of reluctant voices and those in assent remained silent.  In fairness, this is one of the more disciplined societies and members were sympathetic and trusting of the Managing Committee’s intentions in trying to do their best.   And those members who grumbled about the proposed hike also sought compression of existing routine expenses and volunteered to help the Committee bring down expenses by way of payments to contractors for say lift maintenance or water tank cleaning.  

However, the end result was the question of whether to hike and by how much was left unanswered.  A provision for a hike, if necessary, was recorded.  In the meantime, the society was to do what they could to reduce expenses and see how far they succeeded in this effort.  But this meant the deficit situation would have to continue in the interim and society was losing money that could be invested in a fixed deposit to at least make up for inflation.  Two behavioural aspects that were most interesting to observe were (a) the scant discussion on the income side of the financials and (b) the reluctance to pay what is necessary to avail of a certain service and preference to postpone payment of the same.  For instance, it was suggested that in the interim, the society chase large sums outstanding from some members to implement some of the grand works that were proposed  in the meeting rather than approach all members to pay a pro rata charge.  Of course the members would pay, but later on; in the meantime the society would somehow juggle finances to manage the situation.  

In this unique situation, it probably worked in their favour.  A society is after all not run to make a profit but only to ensure maintenance of the housing complex so collecting only as much money from members as is required will suffice.  However, extrapolating such an approach to a macroeconomic level is a different ballgame altogether.  The stakes are lower in a housing society and if a deficit pushes the society to a cash crunch, it can quickly recover the situation by urging members to pay up some more money.  However, a government resolves a similar issue (like, say, a balance of payments crisis originating from a large fiscal deficit) by debasing its currency (either directly or by simply artificially expanding the supply of money).  And debasing the currency reduces the future value of payments you have provided today to make.  

Let me illustrate.  In the above example of the society, in an inflationary economy, the member saves money for himself by postponing the timing of the payment of the charge required.  A thousand rupees tomorrow is worth less than a thousand today.  Of course, this is not without its long run consequences.  The society receives the money later than it normally would have in which case it’s already worth less than today.  This means that other things remaining the same, the deficit next year would only be even higher than the current!!  And unfortunately for Keynes who said that in the long run we are all dead, this is not long run enough for the parties guilty of postponement to escape its consequences.  

Nevertheless, the above suggests that perhaps Keynesianism is in fact quite firmly embedded in the way households manage their affairs, contrary to what conservatives may believe.  And the key behavioural aspect driving this is, as I said, the reluctance to pay today for a service you have received.  

 

 

 

 

 

 

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