Is the Government Actually Saving Jobs with merger of psu bank?

he government recently decided to merge three public sector banks, Bank of Baroda, Dena Bank and Vijaya Bank.

Of the three banks, Dena Bank with a bad loans rate of over 22% was clearly in a mess. A loan which isn't repaid for 90 days or more is categorised as a bad loan. Left on its own, the bank would have to clearly wind down business and jobs would have been lost.

Along similar lines, many public-sector enterprises, which keep losing money year on year, continue to operate by borrowing more and more money from banks. Banks lend money to these companies because they are government owned. In this way, the total liabilities of the government are built up.

Then there are many other companies which have very low rates of capital employed. Even such companies continue to operate.

Of course, with the government bailing out or continuing to operate companies and banks it shouldn't, lots of people continue to be employed in jobs they would have otherwise lost by now. But is the government actually saving jobs on the whole?

The answer to this question is slightly complicated. Before I answer this, let's try and understand the concept of the fallacy of composition. As Thomas Sowell writes in Basic Economics-A Common Sense Guide to the Economy: "When thinking about the national economy, a special challenge will be to avoid what philosophers call "the fallacy of composition"-the mistaken assumption that what applies to a part applies automatically to the whole."

Let's first understand the fallacy of composition in simple English. As Sowell writes: "The fallacy of composition is not peculiar to economics. In a sports stadium, any given individual can see the game better by standing up but, if everybody stands up, everybody will not see better."

Anyone who has watched cricket in a stadium would have faced this problem. When crowds are excited they tend to get up from their seats, forcing those who are seated behind them to get up as well. On the whole, watching something seated is a more enjoyable experience than watching it standing up.

Sowell further writes: "In a burning building, any given individual can get out faster by running than by walking. But, if everybody runs, the stampede is likely to create bottlenecks at doors, preventing escapes by people struggling against one another to get out, causing some of these people to lose their lives needlessly in the fire."

This is why fire drills are so important, so that people know exactly how to leave a building during an emergency, in an orderly way.

Now how does it apply to the issue at hand. When the government rescues unviable firms or banks, or simply lets them operate, even the return on capital employed is very low, it thinks it is saving jobs. Yes, it is saving those jobs, but is it saving jobs on the whole is a question worth asking?

It is worth remembering that the government isn't simply responsible for only those companies, it is responsible for the economy as a whole.

As Sowell writes: "Any given firm or industry can always be rescued by a sufficiently large government intervention, whether in the form of subsidies, purchases of the firm's or industry's products by government agencies, or by other such means. The interaction that is ignored by those advocating such policies is that everything the government spends is taken from somebody else. The 10,000 jobs saved in the widget industry may be at the expense of 15,000 jobs lost elsewhere in the economy by the government's taxing away the resources needed to keep those other people employed. The fallacy is not in believing that jobs can be saved in given industries or given sectors of the economy. The fallacy is in believing that these are net savings of jobs for the economy has a whole."

What does this mean? It means that a government does not have unlimited amount of money. When it spends money on something, it is not spending a money on something else.

When the government spends money on rescuing a company or keeping it going, it does not spend that money on anything else. Further, even when the government does not spend money on many companies which barely have any return on capital employed, its capital remains locked up. This capital could easily have been used in other areas.

Every rupee that goes towards saving Air India could have gone towards education, health, agriculture etc. It could have meant creation of jobs in those sectors, even though jobs in Air India would have been lost. Every rupee that goes towards rescuing Dena Bank (Rs 5,219 crore in total, for a very small bank) is being paid for by you and I, in the form of higher petrol and diesel prices.

We could have easily spent this money somewhere else helping businesses do better than they currently are, and this would have created more jobs in the process. Or we could have saved this money and that would have brought down interest rates.

The capital that the government has locked up in public sector enterprises which barely make any money, could have been unlocked and used to create better roads, railways etc., and in the process more jobs could have been created.

Of course, these are jobs which could have been created. And politicians are not bothered about jobs that could have been created. They are more bothered about jobs that are currently there and the nuisance value of the people who are employed in those jobs.

The larger point here being that there is no free lunch in economics. Every time more money is spent on a public-sector enterprise to keep it going, thousands of youth across the country, lose jobs, that they could perhaps have got. Of course, the tragedy is they don't even know about it, simply because no one thinks about jobs in this way.