Friday, October 17, 2008


Chile is often cited as an example of the successful implementation of the libertarian economic ideas of Milton Friedman and the Chicago School. It's worth remembering however that a failure to properly regulate the banks and other industrial conglomerates which resulted from privatisation under Pinochet meant that Chile suffered worse than most of its neighbours from the '82 debt crisis. Its economy shrank by 14%, as real wages fell by 10% and unemployment soared to 30%. The government had little choice but to re-nationalise most of the key institutions within its collapsed financial system. 

Under a democratic and un-alternated centre-left adminstration Chile has since made a full recovery. One of the more interesting ideas that this regime has codified is that of a stabilisation fund, which requires the government to run a surplus during years of strong economic performance. My father very much holds it against Gordon Brown that our own government in the UK has failed to operate a similar counter-cyclical fiscal policy: "He had no business borrowing so much...."

To some extent Brown just got carried away along by the prevailing current. The more stable things appear to be the harder it gets to imagine that someone out there is doing something that's eventually going to look REALLY stupid. 

In the past few years the US has been running a current account deficit of 6%, which is getting close to Third World levels.  George Soros has suggested that the US has only managed - up to now at least - to avoid the full implications of its status as the world's largest debtor because of a peculiar set of historically-defined circumstances: 

"There was a symbiotic relationship between the United States, which was happy to consume more than it produced, and China and other Asian exporters, which were happy to produce more than they consumed...The United States accumulated external debt: China and the others accumulated currency reserves."

Soros reckons this situation has contributed to the formation of a 'super-bubble' which is regretably on the point of bursting now just as other mini-bubbles (like the US domestic property market, commodity prices etc.) have been going pop in close sequence. 

As a trained historian I am more attracted to Soros's ideas about the play of 'reflexivity' in market cycles than the 'rational expecation' approach favoured by some economists. Adam Smith has to shoulder a lot of the blame for the persistant and naive belief in rational human agency. One only has to take a closer look at the world around Smith during the last two decades of his life to see how feedback loops can act as both a channel and a constraint on the practice of governance. 

So, counter-cyclical fiscal policy or not, I do have some sympathy for our beleaguered PM. Sometimes our rulers need a special historical opportunity (or an institutional loophole) in order to be able to properly demonstrate prudence in times of apparent bonanza. Chile's government has come under intense pressure at times to stop saving and start spending - such as during the protest led by students in 2006, which took place at a time of record copper revenues, precisely when the rules about stashing money under the bed apply!)

It may well be the case that Brown is a better economist than he ever was a politician and that current circumstances will see an upswing in his fortunes.  Either way his electorate aren't going to be feeling especially chipper come polling day.

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