Month: July 2016

Keynesian economics Chilean style

file_20160713143017_300x200.jpg copy

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

f700x390-114712_153730_79

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.