Back in March of 2009, in a CNBC interview, investor Warren Buffett suggested
that President Obama should prioritize reviving the economy which “had fallen
off a cliff…and put other problems on the back-burner”. Buffett, a life-long Democrat, had made it clear
that he supported President Obama so that there was every reason to believe
that he was offering his best advice.
As we know, the White House
chose “not to let a good crisis go to waste”[1] and,
instead, focused on launching Obamacare and on other policies aimed at income
redistribution. In the rush to complete its critical piece of legislation while Democrats controlled the Congress, the
White House didn’t spend much political capital trying to reach a consensus
with their political opponents[2].
So far, Obamacare has had
very mixed results, with both increases and decreases in insurance coverage as
well as very large rises in premia for middle class enrollees, particularly at
Medicare. The economy itself has been
lackluster, although performing better than its European counterparts. Sadly, the country is much more divided today
than it was in 2008.
A similar situation has
developed in Chile, long the best performing economy in South America. For years, it consistently outpaced its
neighbors both in terms of GDP growth and growth in the ranks of its middle class. In 2014, President Michelle Bachelet started
her second mandate with much more radical political, social and economic objectives
than in 2006-2010.
The gist of these was to step
back from the liberal economic system, increase state participation in such
areas as pensions, increase union power, effectively increase corporate
taxation (even at the cost of new investments) and generally engage in income
redistribution. Crucially, the
government rushed these far-reaching reforms in Congress with the intent of
steamrolling the opposition. So far, it
has been an embarrassing failure.
This new orientation, plus a
number of political scandals[3], has
resulted in a sharp drop in GDP growth, from 4.1% in 2013 to 1.8% in 2014, 2.1%
in 2015 and probably 1.7% or so this year.
Worse, growth in GDP per capita on a PPP basis was only half as much
over the same 2013-2015 period.
As in the US, the rush to
impose income redistribution measures without spending substantial political
capital in search of a broad consensus[4]
and without setting the base for strong economic growth has proven ineffective
and divisive.
Lest we forget, in 1999 newly
elected President Chavez started a far greater redistribution effort which was
financed initially by booming oil prices, then price freezes, and
finally via nationalizations and expropriations. No serious effort was made to boost or
diversify the economy; every effort was made to replace private initiative with
bureaucratic state control.
With the passing of time and
the drop in oil prices, any social gain[5]
obtained was reversed and turned into massive losses. Today, Venezuela is on the brink of economic
and social implosion.
Critics will object that this
post is about promoting selfish capitalism and rejecting socially progressive
policies and governments. They would be
wrong.
Case in point, the Socialist
President of Chile, Ricardo Lagos.
During his term (2000-2006), he reached a consensus to create a number
of major social programs to benefit the less affluent among the population, including
unemployment insurance, an anti-poverty program extending into many areas
deemed essential[6], healthcare and
others. At the same time, he expanded
Chile’s foreign trade potential by signing trade agreements with the EU, the US
and others.
President Lagos clearly
understood that to finance income transfers without being socially divisive,
you needed to create more revenues by growing the economic pie, via free-markets
and prudent fiscal policies. By the end
of his term, GDP per capita on a PPP basis had grown at a rate of 6.5% p.a[7].
It is quite possible that the
social programs of President Lagos slowed real economic growth from the 7%+
p.a. of the 1990s down to 5% p.a.[8] But the purpose of government is not to
maximize economic growth but to improve the overall well-being of the
population, and 5% in real terms isn’t bad when it also brings social harmony.
I recall a meeting I attended
back then between US investors and the President in which he very bluntly told
Wall Streeters that if they wanted to continue enjoying the fruits of Chile’s
growth, the less affluent could not be left behind. He was right.
Mr. Lagos has announced that he is considering running for a second term
in 2017. If he does and wins, I expect
him to succeed where many current political leaders are struggling: healing
national divisions.
The global economy has been
slowing down for almost a decade. The
Great Recession of 2008, excessive reliance on debt to sustain growth and the
end of the Chinese investment boom have been as many headwinds. As Ringo Starr would say, economic growth don’t
come easy.
So far, many governments have
taken the easy route: borrow more, inflate financial asset prices, avoid
reforms and pit the haves against the have nots. The dividends of such choices are currently zero.
A wiser, more difficult but
more rewarding, course is to recognize that people will accept some necessary hardship
if the burden sharing is viewed as fair.
In that same vein, income redistribution in a democracy, unless it is
accompanied by (the prospects of) real economic growth is inherently
destabilizing.
[1] Famous quote attributed to then White House
Chief of Staff Rahm Emanuel.
[2] Conservative Republicans but also the Roman
Catholic Church and unions and others opposed Obamacare as drafted but often
for different reasons.
[3] Some but not all involving people in the
President’s entourage or political party.
[4] Even if it meant less ambitious reforms.
[5] Such gains are highly suspect. Poverty rates were calculated by the
government National Statistics Institute and changes were made to the basic
food cost index (canasta familiar) so
that it was not comparable with data from before 1999. So while the apparent purchasing power of the
poor was raised, that of the ones better off was reduced as a result of a
failing economy.
[6] Such as health, children education, housing,
family, income.
[7] Despite a difficult first two year period due
to external shocks.
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