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?
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The myth of job security

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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

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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

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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

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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.

The dictatorship that runs Bolivia – Part II

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A few days ago, Bolivia’s public prosecutor ordered the arrest of a journalist (photo) accusing him of interfering with the judicial process in a case of child abuse. The specific reasons behind the arrest were never very clear but it seems that the prosecutor considered that the journalist’s research on the case, and his interviews with the people involved, were somehow interfering with the official investigation. As expected, the press and other media outlets initiated a strong protest campaign against the arrest and the public opinion was that the apprehension of the journalist was a flagrant abuse against free speech.

Aware of the political costs that this arrest could provoke only two weeks before regional elections, yesterday, the party in power, the MAS, acted quickly and “coordinated” with the prosecutor the release of the journalist. Today, the journalist was, indeed, released.

Apart from any consideration as to whether the arrest was appropriate or not, what is truly amazing in the story is the political power of the executive branch. In just two days, the government “coordinated” with the judicial system (i.e. ordered) the release of somebody previously arrested with the order of a judge. How is this possible? Does the judicial system not have rules and procedures that are independent of any “coordination” or order from the executive branch? Where is the separation of branch powers? Is this the way justice works in Bolivia? If the government doesn’t like an arrest, can they just pick put the phone and “coordinate” the immediate release with the judges and prosecutors? This is truly pervasive and yet another example of the continuous abuse that characterizes the dictatorship that runs Bolivia.

The dictatorship that runs Bolivia

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President Evo Morales and his party, MAS, have been elected three times with important margins over opposing parties. While these results give the current administration formal political legitimacy, it is clear for anybody watching the political situation in Bolivia that the power that MAS has accumulated over time has led to a consistent abuse and violation of basic human and civil rights. Evo Morales and the MAS have violated basic democratic rules all over the place. The third term is fraudulent (they changed the Constitution to allow for it), the political power has co-opted the judicial system entirely and the public administration is corroded with incredible levels of corruption all covered by the political apparatus. And here are two more fresh examples of cynical political abuse.

First, the Vice-President publicly admits that he ordered (with public funds, of course) the publication of grave accusations against the governor of Santa Cruz (opposition) even though he has not been found guilty of any wrongdoing. The governor has been accused in several cases but has never been proved guilty. Why not let the judicial process take its course without political interference? Why is the Vice-President publishing accusations?

Second, Evo Morales, publicly said that he will not work with any mayor or governor elected that belongs to a different political party. Can you believe the abuse? Is he just the president of MAS sympathizers? What about the rest of the Bolivian citizens that could democratically elect somebody from a different political view? Disgraceful.