¿Hard Keynesianism Chileno? ¡Claro po!
By Mark Dow
Matthew Yglesias has an interesting new post on Hard Keynesianism. It was succinct enough for me to be able to read the whole thing in between my tactical trades this morning and write a brief response.
He makes the basic points that (1) symmetric countercyclical fiscal policy is at heart of true Keynesian thinking (as opposed to much of the faux and pseudo Keynesian characterizations that pass for public discourse these days) and (2) it is hard to do.
He also insinuates by way of the case of Chile that the courage to do this comes from the center-left (in this case, the Concertación coalition) that governed over the surplus years, only to fall apart in 2010 when the center right took over.
I don’t myself want to insinuate that Matthew Yglesias isn’t serious or smart. In my view, he is both. And I sympathize very much with the two basic points. But, as I like to say, the most dangerous place to be is in between someone and what they want to believe. And I think his desire to confer virtue onto the center left and vice on the center right misses two important idiosyncratic, Chilean features that have more to do with outcomes there than do politics.
First, Chile is a small open economy dominated by trade. Copper is its most prominent export. Its Copper Stabilization Fund, established in 1985, makes it much tougher to spend windfall proceeds from copper sales. And copper prices quadrupled in the 2004-2008 period. In fact, given this structure and that kind of rise in copper, it would have been next to impossible not to generate big surpluses in Chile.
Fine. Well than why the big fiscal deficit in 2010? Yes, center-right Sebastián Piñera was elected that year. But it was not Chile’s biggest event. The tragic 8.8 earthquake in February that hit Chile’s central coast was. The deficit corresponded to the massive amount of spending the government trotted out to counter its effects. It was not reflective of the difficulties of time-consistent fiscal policy.
Now, back to trading….