Krugman's Chilean Fantasy

Paul Krugman never ceases to amaze me with how he dishonestly rewrites history. Indeed, he does not so much give us history as he does Democrat-Socialist talking points, which he shouts out while holding his ears shut.

In this blog post, Krugman claims that relative free markets established after the Marxist Allende government fell in 1973 had nothing to do with Chile's prosperity today or the fact that the recent earthquake that hit the country -- one of the most powerful earthquakes ever recorded -- had a relatively small death toll, especially compared to the carnage in Haiti. As usual, the post has a number of howlers. Take the following, for example:

Actually, as you can see from the chart above, what happened was this: Chile had a huge economic crisis in the early 70s, which was, yes, partly due to Allende and the accompanying turmoil. Then the country experienced a recovery driven in large part by massive capital inflows, which mostly consisted of making up the lost ground. Then there was a huge crisis again in the early 1980s — part of the broader Latin debt crisis, but Chile was hit much worse than other major players. It wasn’t until the late 1980s, by which time the hard-line free-market policies had been considerably softened, that Chile finally moved definitively ahead of where it had been in the early 70s.

So: free-market policies are applied, and presto! prosperity follows — fifteen years later.

Ah! Where does one begin? First, Krugman glosses over the fact that Allende was trying to establish a full communist state. His government seized businesses, both foreign and domestic, printed money out the wazoo (creating 1,000 percent inflation), erected huge tariffs and trade barriers, and decimated civil liberties. Yeah, I guess that would cause some economic problems.

Next, just why might have Chile experienced some capital inflows following the overthrow of Allende? Maybe it was because the new government promised not to seize capital invested in Chile by foreign firms, and maybe because the government lowered many of its trade barriers.

Chile was hardly the only country to experience a serious recession in the early 1980s. As I recall, a country named the United States of America suffered its biggest downturn since the Great Depression, and, like Chile, had a robust recovery. There is no doubt that Chile has a much more free economy than do most Latin American countries, and also has a higher standard of living. (I'm sure Krugman has another explanation for Chile's prosperity. Maybe it finally is experiencing the "good effects" of all that money Allende printed nearly 40 years ago.)

As for the country's survival rate following the earthquake, Krugman writes:

As a number of people have pointed out, there’s this little matter of building codes. Friedman wasn’t exactly fond of such codes — see this interview in which he calls such codes a form of government spending, because they “impose costs that you might not privately want to engage in”.

First, building codes by themselves are meaningless. One must have the wherewithall to build structures that actually meet codes. Second, Chile has a strong record of private property rights.

Haiti, on the other hand does not. I recently read that about 80 percent of Haitians live on land of which no one holds clear title. That means that people basically are squatters, and squatters do not build strong buildings. (I am sure that Haiti also has building codes, but even the presidential palace was heavily damaged and the Haiti earthquake was not nearly as strong as what recently hit Chile.)

Being a good socialist, however, Krugman is going to claim that Chile's survival rate following the earthquake is due entirely to state power. And there is one more issue to address: the false notion that economic booms immediately follow economic liberalization.

That often is not the case, as what we saw in the early 1980s. Economies that are heavily regulated or have a lot of state ownership engage in malinvestments that cannot stand after an economy is liberalized. Indeed, given the massive malinvestments and the utter chaos that accompanied the Allende government, I would expect Chile's recovery to take a long time after liberalization, and that is what happened.

However, Keynesians believe that all economies are homogeneous, and that all a government needs to do is add money. Interestingly, that is exactly what Allende did, and even Krugman's little graph does not show that the communist government brought prosperity.

Guess Krugman needs to go back to the drawing board.