What is Economic Freedom?

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The conversation at Mercer University for this new academic year will be centered on economic freedom. This is part of what the university calls the “grand challenge,” a central theme around which the university schedules seminars, conferences, movies, etc, to generate important conversation among students, faculty and staff.

The first thing, of course, is to define economic freedom. Here is where I come in:

Economic freedom is the fundamental right of every person to control his or her own actions and property so long as he or she does not infringe on the economic freedom of others.

It is, as you can see, a simple idea but it has powerful implications. Economic freedom essentially has to do with being able to exercise personal choice over what is yours (your own body/labor and property). In economically free societies, individuals are free to work, produce, consume and invest in any way they please. In economically free societies governments allow labor, capital and goods to move freely, and refrain from coercion or constraint of liberty beyond the extent necessary to protect and maintain liberty itself.

And why does economic freedom matter?

It matters first from a moral perspective. Freedom to control what is yours is essential to your pursuit of happiness. It also matters from a utilitarian perspective. It has been largely shown (there are hundreds of papers) that countries in which economic freedom is protected grow faster and reach higher levels of living standards and economic development. Just to mention some comparing cases: the US favored economic freedom, the Soviet Union didn’t; Colombia favored economic freedom, Venezuela didn’t; Chile favored economic freedom, Bolivia didn’t.

What are examples of policies that restrict economic freedom?

Communist and/or socialist regimes have, of course, provided multiple and obvious examples of restrictions to economic freedom. But one can see some of these cases also in democratic countries in the west. Here are some policies that can significantly restrict economic freedom: increasing tax rates, minimum wages, tariffs (which are taxes on foreign goods) and protectionism, buy local or national product campaigns, increasing the provision of public goods (which means increasing the tax burden), bureaucracy, red tape, etc. All of these policies will restrict economic freedom at different levels.

Why is it timely to talk about economic freedom?

Because it is an election year in the US and we have heard some very interesting (scary) proposals from both parties. For example: free college (which obviously means that more taxes are going to be collected to pay for college), a wall between the US and Mexico (which will restrict the free movement of goods and labor), increasing tariffs for Chinese goods and other imports (which will also restrict the free movement of goods and services), etc. By the way, the US used to be among the leading countries in indices of economic freedom. However, the US’ index has been falling over the last few years and now it is only in the top 20.

Can restricted economic freedom be justifiable in some cases?

The typical example is poverty alleviation. While some may recognize that increasing taxes affects economic freedom, they may still argue that if those taxes are used to alleviate poverty, then perhaps lower levels of economic freedom are not such a bad thing. Well, it turns out that they are (again, multiple papers have looked into this). First, is it moral to oblige people to alleviate poverty? After all, taxes are mandatory and, therefore, cannot be considered a “voluntary contribution” to alleviate poverty. But is it moral to forcefully collect money from somebody to give it to somebody else? Second, what are the unintended consequences of collecting taxes to alleviate poverty? Well, companies and individuals may decide that they don’t want to play by those rules and move to other countries where taxes are lower. This will mean that the capacity of the economy for creating goods and services as well as jobs will decrease, and consequently poverty will increase, in the future. The best policy to sustainably alleviate poverty is economic freedom.


Keynesian economics Chilean style

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President Bachelet spent a couple of hours yesterday supervising the construction of some of the 25,000 apartments that the Chilean government is building for low income families. The construction of these apartments is part of a program elegantly labeled the “Extraordinary Program of Economic Reactivation and Social Integration,” under which the Chilean government is spending more than US$ 1 billion.

The President emphasized yesterday that the program has two goals: to build housing for low income families and to reactivate the economy creating more than 100 thousand jobs. An that’s the way you do Keynesian economics in Chile.

I have already expressed my concerns about the direction that Chile has been taking in recent years. This program is just another example. Let’s point out the most obvious problems with this initiative.

  1. Where is the money coming from? How did the government get $1 billion to spend in apartments? It all comes from taxes, of course. Essentially, the government is taking forcefully the money from some Chileans to spend on housing for some other Chileans. The fact that the government does spend the money is the crucial Keynesian component. The President will argue that those resources are generating jobs, increasing sales and generating a multiplier effect that helps reactivate the economy. This idea is simply wrong. Remember the “broken window fallacy”? If all you need is spending then brake a window, the owner of the house will have to spend money to fix it and that will increase sales at the local Home Depot and generate a multiplier effect as the owners and employees of Home Depot buy supplies, groceries, etc. Brake enough windows and you will reactivate any economy. If Bachelet wouldn’t have taken $1 billion in taxes from the first group of Chileans, these would have spend it or invest it and that would have generated a similar or even a bigger multiplier effect.
  2. Ok, but ins’t it good to spend on social housing? It is if you are spending your own money. But not so much if your good deed is done with money that belongs to somebody else. Is it moral to steal money from a rich person only to give it to a poor person?

The myth of job security


The unions are on strike in Bolivia. The protest has to do this time with the announcement that the government is planning on closing a few public companies that have been unprofitable and bankrupt for quite some time now. Not a very surprising outcome. I have argued before that, apart for notable exceptions, public companies in Latin America are typically condemned to fail as soon as they are established.

In an interview with Pagina Siete, the president of the unions claims that the strike is legitimate because the actions of the government attempt against the sacred concept job stability: “our Constitution is being perforated with the new law [which mandates the termination of the public companies mentioned above] because there are no longer guarantees that workers won’t lose their jobs – this threat sets a bad precedent for the entire economy.”

The real bad precedent here is the pervasive concept of “job stability” (estabilidad laboral), which remains highly prevalent in Latin America. Under this philosophy, jobs come to be viewed as “rights” and not as what they really are: temporary opportunities. Let me explain. Jobs are created when countries grow and companies (including public ones) see profitable investment opportunities. But when those opportunities disappear due to the natural progression of business cycles, some of those same companies exit the market and, inevitably, some jobs are destroyed. At the same time, however, as the cycle and technology  change, other investment opportunities arise for other companies and some other jobs are created. That is the natural progression of economic growth. Schumpeter called it “creative destruction.” Notice that the underlying principle of the process is the exact opposite to job stability. A healthy economy grows when companies are free to destroy and create jobs as they search for profitable opportunities.

Insisting on job stability will only stiff the economy and undermine the process of economic growth. For once I hope that the government of Evo Morales carries with the new law. I have strong doubts though. Populist and lefty regimes like Evo’s are typically the prisoners of unions.

Retirees: A guaranteed market


I read in La Razon that the government of Evo Morales is thinking about expanding the subsidies for senior citizens in Bolivia (“Renta Dignidad”) by Bs. 50 (approximately $7). However, this increment will not be offered in cash but in kind (consumption goods). In fact, the policy will be designed in such a way that the consumption goods offered in the subsidy are exclusively national or “made in Bolivia.”

Evo Morales claims that such policy kills two birds with one stone. First, it strengthens the internal demand and, second, it provides a guaranteed market for national products.

Let’s point out the obvious problems with this policy:

  1. The government of Evo Morales has been loudly arguing that the apparent success of the Bolivian economy in recent years and its apparent strength against adverse international conditions resides on the strength of its internal demand. But that is only a political slogan. The truth is completely different. The supposedly strong internal demand has been always fueled by policies identical to this one for senior citizens. The government collects important revenues from natural gas exports, which it then redistributes to different groups of the population (subject, of course, to massive amounts of inefficiencies and corruption), who then turn to local markets demanding product and services. In other words, the internal demand has absolutely no intrinsic or “internal” strength. The minute the government stops collecting large revenues from natural gas exports, the minute the internal demand will stop on its tracks. The Bolivian economy does not have a strong internal demand because it does not have a strong internal supply. It all comes from the redistribution of natural gas exports (and, of course, drug trafficking money laundry).
  2. Imposing local groups to buy national products is a tremendous mistake. Of course it guarantees a “market” for national products but that is precisely what you don’t want to offer to any industry, national or foreign. With guaranteed markets there is no competition and, therefore, there is absolutely no incentives to improve products, reduce prices, etc.
  3. Economists have long shown that cash transfers produce always better results because individual consumers have the ability to maximize their idiosyncratic preferences.


The imprudent Evo Morales


Evo Morales gave another unfortunate speech yesterday. According to this report from Los Tiempos, the Bolivian president called anybody using the telephone services provided by foreign companies in Bolivia, Tigo and Viva, “antipatriotas” (unpatriotic). He recommended that Bolivians use the services of Entel, the Bolivian public telecommunications company. Although this kind of ideas are too obviously absurd, let me just make three important points:

  1. The chauvinistic principle under which Evo’s argument rest is patriotism: the local or national always comes first. This principle is tremendously perverse and world’s history has shown how destructive it can be. There is absolutely no reason to favor local companies as a moral principle. Instead, the moral principle should be freedom: freedom to choose which company serves me better and freedom for foreign companies to compete on a level playing field (something that Bolivian companies also demand when they compete in foreign markets).
  2. Competition makes better companies. Entel benefits from the healthy competition with foreign companies and vice versa. The competitive pressure generates incentives for innovation, better customer service, etc. Blocking foreign companies with silly arguments like patriotism only generates inefficiency.
  3. As Los Tiempos also report, other public companies use the services of Tigo and Viva. Will Evo ask those public companies (like Papelbol) to cancel those service agreements. Why can’t the president exercise some prudence when he opens his mouth?

CBN sanctioned for anticompetitive behavior


This is interesting. I just read in La Razon that Bolivia’s most important beer manufacturer, CBN, has been sanctioned by AEMP (the industry regulator in the country) for allegedly behaving in an “anticompetitive” manner. What was the sin committed? Apparently CBN priced their products below its competition (and supposedly below their own average cost) and used price discrimination for different geographical regions in Bolivia.

Why should CBN be sanctioned for charging less for their products? This is really weird. The idea, I suppose, is that by setting low prices, CBN can outcompete other beer manufacturers and potentially command a monopoly. If the prices set are below their own costs, regulators call it “dumping.” And this is seen as a terrible practice that distorts the competition in the market. I completely disagree. First, setting prices lower than the competition is what free market competition is all about. How you afford to set lower prices is completely up to your company and strategy. Second, if you set prices so low that you make a loss, how long can you sustain such strategy? Even if your bet pays off and your low prices outcompete everybody from the market only to be increased again once you are monopoly, how long can you sustain that monopoly? Wouldn’t the competitors you outcompeted (and new ones) be willing to re-enter the market once your prices are higher? In general, over time, dumping never pays off.

Regulators will never know better than the market what prices should be charged for a product.