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?

One comment

  1. Hello… I have just discovered your blog and this is the first article I’ve read.
    So here some comments about this article:
    I conclude that by your comments you support capitalism over any other economic doctrine and I will not criticize that. I think the iniciative of Bachelet, by building 25.000 houses for low income people is a very smart initiative and I will explain why.
    It is not the first time a chilean government takes this type of initiatives. The chilean people has been opressed by decades under a dictatorship that was using extreme liberal policies increasing inequality in the country. As a result, in the 90s the government saw the need to start undertaking more social policies.
    I lack infrmation about this particular iniciative, I have only read your article. However, what I do know about is inequality and I know we are inequal since we are born or even before our births our lives/dedstinies are mostly designed by our starting resources, to this point I believe the intervention of the state as an entity that redistributes resources, in a way that maximizes the global utility, minimizing utility losts, is not only moral but fundamental. The taxes B. is spending in building houses for the poor would not have been spent otherwise (if B. didn’t take it as taxes), yes the money would have been spent/invested/else, but it would not have been use to diminish the inequality.
    Activating the economy might be important, howeever Chilean economy doesn’t need a keynessian policy by the moment and It is not only important to activate the economy but activate it for whom?? for the ones that are already spending millions or for the ones that are trapted in poverty?
    A poverty trap, when someone can not stop being poor because it lacks resources to make a change, it is a vicious circle,people is poor because they can not afford education and people with no education can not find good jobs so their destiny is to live in poverty, education is only an examplee, it could be people lacking resources to start a new business, or even people with illnesses that can’t be cured because of lack of resources to support medical expenses.
    A poverty trap needs government intervention to be alleviated, it is not only good for the poor but the entire sociaty might benefit from it. Having skilled workers, new business, or simply more workers is good for the whole society. This might not be obvious and it might look like a plain keyneesian policy but there is more than that.

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