Felix Salmon

¿Hard Keynesianism Chileno? ¡Claro po!

By Mark Dow
September 30, 2011

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….

4 comments so far | RSS Comments RSS

I think you missed Matt’s point. He approves of the big fiscal deficit in 2010, in response to the big drop in Chile’s GDP in 2009 (and to the earthquake). The point is that no matter what policies you implement prior to a recession, your party is very likely to lose power during a recession. So there is no incentive to run big budget surpluses during the boom years, even if it is the right “hard Keynesian” thing to do, since doing the right thing doesn’t win elections.

Posted by TimInMA | Report as abusive

@TimInMA: I agreed with his big points. The point I found overstated was his article’s “punch line”. He said:

“But here’s the punchline. Chile had been governed by the center-left Concertación ever since the end of military rule in 1990, and it was this Concertación who wisely implemented the Hard Keynesian big surplus policy. But unfortunately for them, Chile had a presidential election scheduled for the bust year of 2009 and they got unceremoniously turned out of power. That illustrates, I think, exactly how politically difficult it is to implement these kind of policies on a consistent basis.”

He writes that the center left was punished for its virtue–implicitly for the sacrifice that generated the surpluses. One of my points was that the “sacrifice” required in Chile to generate surplus is not as great as a surface assesment would suggest, due to the economic and fiscal features particular to Chile.

The second point of course was I thought there was also a tendentious implication that there wasn’t continuous policy in Chile, due to the virtuous center-left getting booted in favor of the center right.

Posted by markdow | Report as abusive

I didn’t really mean to say anything about the virtue of the Concertacion vis-a-vis Pinera. My point was just that budgeting appropriately during the boom years didn’t protect the Concertacion from defeat when the crash hit.

Posted by mattyglesias | Report as abusive

It’s an interesting idea, but I think that Chile in 2009 is a poor example. The prior Concertacion president – Michelle Bachelet, who was not running for re-election as the Chilean constitution does not permit consecutive terms for Presidents – was unpopular for most of her term. One of the biggest issues was a botched overhaul of the Santiago public transit system, as well as other charges of mismanagement or corruption directed at her cabinet. I would submit that the Concertacion loss in 2009 was largely due to the public’s view of management/execution failures – as well as a sense that 19 consecutive years in power for the party was long enough – and was not a vote against their macroeconomic policies.

Posted by realist50 | Report as abusive

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