Looking for the Copper Lining

I’ve been earning my creds as a dismal scientist lately.  However, it’s spring, it’s sunny here in the Big Easy where Jazz chile-torresdelpaineFest season is rocking on and I’d just like to share an example of an administration somewhere in the world that’s done the right thing.   I’d like to introduce you to a dismal scientist that’s doing the right thing for his country.  I found the news at Dani Rodrik’s weblog Unconventional thoughts on economic development and globalization and it’s about Chile and the Minister of Finance, Andres Velasco.

When macroeconomists talk about Keynesian policy, politicians only like the one side.  That would be the side where they get to cut taxes and increase spending.  This usually leads to re-election.  However, that’s the one side of fiscal policy.  You get to deficit spend, throw every one tax cuts, and run up your budget when the economy is in a recession.  The other side is that the government should restrain itself and run a surplus during the good times.  We had that after Bill Clinton left office.  Dubya blew it with his rebates for every one.  Then he started a war and kept spending and giving tax cuts when the economy was recovering.  This is a classic no-no because it leaves you very little wiggle room when you need to take care of a recession.  This is especially true when it’s as bad as it is now.  The U.S. generally has a larger national credit card than most countries so we might not hit our limit any time soon although China and taxpayers have been grumbling recently as well as Republicans for whom bellicose grumbling is a fine art.  However, small countries, especially those in Latin America, don’t have the national credibility of European countries or North America.  They can only borrow so much.

Enter Chile, it’s nationally owned copper industry, and its finance minister, a macroeconomist, Andres Velasco.   He andres_velascoactually did the politically unpopular thing of not increasing Chile’s spending or decreasing its taxes during the good times and because of this huge surplus Chile now enjoys, Chile’s in excellent shape to weather the current global economic crisis.

So, here’s Dani’s bragging on his friend and colleague who deserves the accolades and popularity he now enjoys.

Until the current crisis hit, Chile’s economy was booming, fueled in part by high world prices for copper, its leading export.  The government’s coffers were flush with cash.  (Chile’s main copper company is state-owned, which may be a surprise to those who think Chile runs on a free-market model!)  Students demanded more money for education, civil servants higher salaries, and politicians clamored for more spending on all kinds of social programs.

Being fully aware of Latin America’s commodity boom-and-bust-cycles and recognizing that high copper prices were temporary, Velasco stood his ground and decided to do what any good macroeconomist would do:  smooth intertemporal consumption by saving most of the copper surplus.  He ran up the largest fiscal surpluses Chile has seen in modern times.

This didn’t make Velasco very popular.  Last November, public sector workers marched in downtown Santiago, burning an effigy of Velasco.

But by the time the financial crisis hit Chile, Velasco (and the Central Bank governor Jose de Gregorio, another fine macroeconomist) had accumulated a war chest equal to a stupendous 30% of GDP.

The price of copper plummeted 52 percent from Sept. 30 to year-end, and Velasco dusted off his checkbook. In the first week of January, he and Bachelet unveiled a $4 billion package of tax cuts and subsidies…  Velasco’s stimulus spending, includ[ed] 40,000-peso ($68.41) handouts to 1.7 million poor families…

The surpluses accumulated during the good years has given the Chilean government unusual latitude in responding to the crisis.  As a result, the economy is doing much better than its peers.  As Bloomberg reports, “the country’s economy is expected to grow 0.1 percent in 2009, as the region contracts 1.5 percent, according to the International Monetary Fund.”

And does good economics pay off politically?  Eventually, yes.  Five months after being burned in effigy, Velasco is currently President Bachelet’s most popular minister.

This is what happens when a president chooses economists that don’t make decisions based on pleasing a base or worrying about ideology or for that matter, worrying about the next election.  Minister Velasco cares about the well-being of his country’s economy which is what the job should be all about.   Oh, and when he’s not doing the right thing in Chile, he teaches at the Kennedy School.

He’s now earned the title “Peso Doctor” because not only has he put Chile in a great position during this crisis, he also brought credibility to their currency. This is from Bloomberg.com.

The Chilean peso has risen almost 10 percent against the dollar this year to become the best-performing currency among emerging markets. The country’s economy is expected to grow 0.1 percent in 2009, as the region contracts 1.5 percent, according to the International Monetary Fund. While Chile stashed away copper profits, neighboring Argentina boosted spending when revenue from soybean exports rose, leaving it short on cash to stimulate the economy this year.

Velasco, 48, applied the lessons learned from decades of economic failure in Latin America — ones he said could also help the U.S. The current crisis followed “a massive regulatory failure in many advanced financial markets over the last decade or so,” Velasco said in an interview April 21 in his office overlooking the presidential palace in downtown Santiago.

Notice his recognition of ‘massive regulatory failure’ and don’t you just wish Geithner and POTUS would sit in his classroom for awhile?  However, the most interesting thing is that he has worked with Larry Summers because of the Harvard thing.  Bloomberg reports that they used to spend some time together back in their Cambridge days.

Velasco taught economics for most of the 1990s at NYU, according to his resume. From 2000 to 2006 he was a professor at Harvard University in Cambridge, Massachusetts, where he worked with Lawrence Summers, now U.S. President Barack Obama’s National Economic Council director.

“In this world, there are some people who are smart. There are some that are practical,” said Summers. “Andres Velasco is both.”

Before Summers joined the Obama administration, Velasco said, the two men would meet several times a year in Washington and Cambridge.

Velasco is on leave from Harvard’s Kennedy School of Government, where he taught international finance and development. He has an option to return when his period in office ends next March, he said.

3 Comments on “Looking for the Copper Lining”

  1. 1539days says:

    I have a hard time seeing President Clinton as an economic genius given three important factors in the second half of his administration.

    First, spending reductions were due to both him and a Republican Congress where neither side got what they wanted and budgets were smaller just to get passed. Second, strong economic activity during the internet bubble led to reduced deficits with larger than expected tax revenue. Finally, I can’t consider something a “surplus” when the national debt was trillions of dollars above the surplus amound and Social Security is included in the budget calculations.

    Bush ran lower than predicted deficits in the last years of his administration due to unexpected economic activity and higher revenue. There was another economic crisis after 9/11 but Bush had a consistent message that people should spend unlike Obama who preaches gloom and hope in random measure.

    I think a rainy day fund is a good idea, but it can’t be created until national debt is paid down. Current evidence seems to show that communities in states that did save in the good times are being punished now by being left out of the big bailout party. The federal government cannot consistently pass a balanced budget, national debt hasn’t been been paid down in decades and I can’t see a situation where a Congressman would ever say there isn’t some “emergency” that requires tapping into the surplus.

    • dakinikat says:

      Just fyi, by definition, Social Security can never been in the black due to the legacy debt.

      • 1539days says:

        True, Social Security was in debt from day 1 since it started as an orphans and widows fund.

        I must also correct myself. Bush blew up the deficit in his last year when he passed TARP.