The Fall of Chile Is a Warning to America
By Stephen Moore
3/25/2021
Back in the 1970s, the nation of Chile embarked on one of the boldest sets of free market economic reforms in history. The government called in the Chicago Boys, as they were called, led by Milton Friedman and other University of Chicago free market economists.
They were given a free hand to redesign the Chilean economic system with property rights, a low flat tax, privatization of the Social Security system and industry deregulation. In 1991, Friedman wrote that Chile now “has all three things: political freedom, human freedom and economic freedom. Chile will continue to be an interesting experiment to watch to see whether it can keep all three.”
For four decades, the experiment worked better than anyone could have imagined. According to a study by economist Axel Kaiser for the Cato Institute: “Between 1975 and 2015 per capita income in Chile quadrupled to $23,000, the highest rate in Latin America. As a result, from the early 1980s to 2014 poverty fell from 45 percent to 8 percent.” Chile became one of the wealthiest nations in South America. And it happened in three decades, an eye blink of history.
The Marxists and intellectual class of Latin America always hated the free market reforms. They disparaged the Chicago Boys as “fascists.” They spent decades attacking the policies (with the stooges in the American media echoing their protests), even as Chile became the jewel of South America.
The Marxists invented a narrative of “inequality”: “The rich were getting richer, and the poor were getting poorer, and capitalism is evil.”
They infiltrated all of Chile’s cultural institutions: the media, the schools, the universities, the Catholic Church, the arts, the unions and even the corporate boardrooms. They spread their poisonous creed of collectivism to the populace.
Is any of this sounding familiar to our situation today?
Eventually, the leftists pulled off a political coup. In 2013, the left won the Chilean presidency. The free market reforms were systematically replaced with “spread the wealth” platitudes. In October 2020, voters approved a rewrite of the constitution, and now property rights and the rule of law are in danger.
Chile is now in economic free fall. The poor are getting crushed. The rich are pulling their money out of the country. They have arrived at “equality”: Nearly everyone is suffering.
Meanwhile, back in America, we have an economic transformation of our own going on. The Biden administration promises to help the middle class by handing out trillions of dollars of free money to citizens and paying people more money for not working than working. We will borrow trillions of dollars and pray that the Chinese continue to buy up our bonds and that our currency holds up.
Many of our constitutional protections and congressional rules of behavior, such as the filibuster, which protects the rights of the minority, may be headed to the shredder. The election laws are getting rewritten to benefit, significantly, the party now in power — the Democrats. The House has passed a bill requiring millions of working-class people to join unions and pay dues. The left is saying, don’t worry, this compulsion is going to help the working class. Sure.
A sock-it-to-the-rich tax increase is coming that will make the productive class and the job creators pay their “fair share” with tax rates of 50%, 60% and 70%.
Will this story have a happy ending?
The answer to that question might be contained in the frightening example of what happened in Chile. It is what our children and college students should be learning in the classrooms — fat chance. The left runs our schools now, too.
Source: https://www.arcamax.com/politics/fromtheright/stephenmoore/s-2494818
Sep 12, 2018
The Agenda welcomes Pulitzer Prize-winning journalist Chris Hedges, who over the past decade and a half has made his name as a columnist, activist and author. He’s been a vociferous public critic of presidents on both sides of the American political spectrum, and his latest book, ‘America, the Farewell Tour,’ is nothing short of a full-throated throttling of the political, social, and cultural state of his country.
You may also want to watch Pulitzer Prize-winning reporter and New York Times columnist Nick Kristof discuss his latest book, “Tightrope: Americans Reaching for Hope.” It examines a variety of issues, including unemployment, health care, substance-use disorder, and the prison system. He also talks about the challenges of bringing humanitarian stories forward, and his thoughts on the state of U.S. politics.
Mar 22, 2021
3月18-19日，中共中央政治局委员、中央外事工作委员会办公室主任杨洁篪，国务委员兼外长王毅在安克雷奇同美国国务卿布林肯、总统国家安全事务助理沙利文举行中美高层战略对话。双方共举行了3场会谈。这是美国拜登政府执政以来的中美首次面对面会晤，也是中美元首除夕通话后的首次高层接触。
Apr 18, 2017
William Lazonick, professor at University of Massachusetts Lowell, explains how rationalization, marketization, and globalization characterize the U.S. economy during the past 50 years, and how the behavior of companies and fate of American workers have changed during this process.
Apr 11, 2019
With around 120,000 people declared bankrupt each month, many of the squeezed middle-class see the American dream slipping away.
How the Fed Found Itself at the Heart of America’s Inequality Crisis
By Matt Peterson
3/03/2021
Karen Petrou has for decades played the quiet role of consultant and adviser to banks, central banks, and large investors, helping them slash through the confusion of constantly evolving monetary and regulatory policy. It’s a job that prioritizes dispassionate analysis over advocacy.
Today, that changes, with the publication of her new book, Engine of Inequality: The Fed and the Future of Wealth in America.
“This book is taking that sword and beating it into a plowshare,” Petrou told me. The book, Petrou’s first, charges that the Federal Reserve is at the heart of an inequality crisis that has hollowed out the middle class. She believes the Fed has misunderstood and misdiagnosed the country’s economic malaise. Its interventions to stave off calamity have, ironically, made America more prone to financial crises like 2008 and the one that was narrowly averted in 2020. Low interest rates and other elements of the Fed’s unconventional monetary policy have failed to spur middle-class growth, even as markets roared, leaving the country more unequal than ever.
Petrou believes the problems start with analytical errors. “It may seem geeky to talk about statistical mistakes, but bad data make bad policy,” she says. The Fed itself seems to agree at times. Last week, Lael Brainard, a Fed governor who was on the Biden administration’s shortlist for Treasury secretary, gave a speech in which she acknowledged that the Fed had relied too much on a single measure of unemployment that masked major problems in the labor market. That kind of admission is exactly what Petrou wants to see, though she’d rather it came a decade earlier.
I called Petrou last week to walk through her arguments, and reached out to the Fed for comment. A spokeswoman pointed to a recent press conference by Fed Chair Jay Powell at which he discussed the Fed’s role in addressing inequality. “We want an economy where everybody can take part,” he said.
This transcript of my conversation with Petrou has been condensed and edited for clarity.
Barron’s: You write that the Federal Reserve is aiming policy at a middle class that no longer exists and that therefore policy is fizzling. What has happened to the middle class?
Karen Petrou: The middle class is hollowed out. The idea of what being in that middle means—which is financial comfort, family security, and a better life for one’s children—that’s gone. All but the top 10% in this country have more debt than they have assets. We have a scenario in this country, where, for example, in 2018, when the Fed thought the economy was in a “good place,” a quarter of people in the middle class skipped medical treatments they couldn’t afford. That’s just not what middle class was supposed to mean.
Why does that matter for monetary policy?
Monetary policy, both conventional and the post-2008 unconventional policy, is premised on two things that don’t exist anymore: one, banks as the sole driver of how money moves through the private sector and, two, a middle class that when interest rates drop takes out more debt to buy something like a car or a house that then fuels employment and promotes economic growth. Instead, leaving the question of what the banks do aside for the moment, when the middle class is already way over its head in debt, and can’t afford a new car or is not eligible for mortgage refinancing because their credit scores are too low, those traditional signals of that theoretically resilient middle where there’s a strong “marginal propensity to consume” don’t work.
Why hasn’t the Fed come to grips with this reality?
It’s not that the Fed wants to make America less equal. It does genuinely want to make economic growth resilient and shared. But it hasn’t because all of its decision data points are averages or aggregates. Often they’re based on measures that once might have told us, for example, about price stability, but now don’t reflect the real economy for the majority of Americans. A good example is unemployment. Jay Powell and now Lael Brainard have made speeches saying we didn’t measure unemployment right. That nominal record-low unemployment that made us feel so good? Actually unemployment was higher than we thought.
So when they talked about maximum employment after 2010, all through that “good place” up until the pandemic hit, they were looking at a very misleading measurement of employment. The same thing is true for debt. Debt levels are affordable and sustainable when you look at it on an average. When you break it down and you look at most American households, you realize that we’re living hand to mouth.
The most compelling proof of that is the fact that in 2018—again, in the “good place”—when the federal government briefly shut down, federal employees who on average make $85,000-plus a year, almost two-thirds of them couldn’t pay their rent or the mortgage after missing a paycheck. People live on the edge. And the Fed’s data do not reflect that.
You mentioned Lael Brainard’s speech about unemployment. She said more or less that the headline unemployment figure misses a lot of misery. Do you agree with her prescription for the problem, which is to leave accommodative monetary policy in place for a long time?
I would agree with that, if it had worked. If you look at the Fed’s ultra-accommodative policy, starting from 2010, when the worst of the great financial crisis wore off, to March of 2020, we had the weakest economic recovery since the Second World War. We had exactly the disproportionate employment she points to. The amount of debt most Americans took out rose still higher. Financial markets zoomed. But none of that turned into capital investment or growth. Economic inequality, even with unprecedented amounts of accommodative policy, stymied the Fed. More of it is going to make inequality still worse.
Why are low interest rates not stimulating growth for the middle class?
Rates have been essentially below zero in real terms for most of the last decade. People can’t save. Companies will take on tremendous amounts of debt, because it’s cheap. But because the economy is so weak, they don’t turn the money in that debt into plants and equipment. They’ve turned it instead into capital distributions, dividends, and share buybacks. The Fed’s huge portfolio has driven markets up to very high levels because it’s taken the safe assets out of the system. And it’s also put a safety net under the markets.
The taper tantrum really wasn’t much. But it spooked the Fed when they stepped in. In 2018, they tinkered with rates just a little bit. The market said, “Hey, you’re taking the punch bowl away.” And the Fed said, “Oh, never mind. Here’s some more.”
Look how fragile the financial system was in March of 2020. Of course, the Fed could not have foreseen a pandemic, but the banking system was resilient. The rest of it was incredibly precarious.
And to be clear, you blame 10 years of Fed policy for some of that precarity?
It’s a combination of monetary and regulatory policy. I do not call for deregulation. I think the stability of the banking system wrought by high-capital rules that banks complained bitterly about made banks the bulwark of the financial system. But they aren’t lending a lot to households or startup small businesses, the real engines of growth. They’re starved for credit because banks cannot make money at ultra-low rates when you take their cost of capital into account, even when they’re not paying depositors for anything. We have increasing numbers of banking deserts because the banking system is turning into a business basically focused on trading and wealth management because that’s profitable. That and putting trillions of excess reserves right back at the Fed.
You don’t believe the Fed should simply have done nothing, particularly in 2008, right?
No. You have to differentiate between crisis intervention and then 12 more years. If the economy was in such a good place, why did we need such incredible accommodative policy? That’s the heart of the contradiction of what the Fed said versus what it did from 2010 to 2020.
What kind of policies would you like to see change?
One of the major mistakes the Fed made was viewing regulatory and monetary policy as silos. In the Federal Reserve, they are different parts of the building. They are different people. The two sides barely talk, and the board thinks about them very differently, but they’re actually tremendously intertwined because, for example, when you have rules that raise the cost of bank lending at ultra-low interest rates, then banks will not lend and non-banks will step in. That changes the financial system, which then changes its risks.
Monetary policy fixes need to first include better data to understand America as it is, not the way it was when a lot of the folks at the Fed and I went to graduate school. I think the Fed has to understand how the mechanics of the financial system—marginal propensity to consume, borrowing costs, and how that feeds into purchasing power—have all become really different.
The Fed is beginning to do that. But it’s got a long way to go because the next thing it has to do is to set policy with an eye toward that distributional reality, not just write a lot of papers about it. The Fed has to recognize that monetary policy has an impact on equality. It’s not good enough to just say, whoops, over to fiscal policy. How much people save, how much companies invest—economic inequality is about money, and nothing drives money more directly than the policy set by the Federal Reserve.
