Chile Earthquake

Some might find it intellectually provocative to cite Milton Friedman’s authority in an argument that depends on the foundation of successfully enforced government-mandated building code regulations. The building inspector is not exactly a libertarian hero. Others might wonder if a more important factor in Chile’s relatively tough building codes might be the devastating 9.5 earthquake the country endured in 1960. Haiti hadn’t experienced an earthquake as bad as the one this January in 240 years. Earthquake resistant building codes tend to be taken more seriously in regions that are accustomed to regular bouts of annihilation.

But the earthquake is just a side show for the opinion page of the Wall Street Journal — just another opportunity, however shameless, to push free market fundamentalism. One of the great blemishes on Milton Friedman’s legacy is his association with the Pinochet government, which has been held responsible for murdering some 2, 000 to 3,000 people during its 17-year tenure, along with arresting tens of thousands of other citizens and enforcing harsh controls on the press and other civil liberties. Friedman’s acolytes have long tried to wish away the complicity of the Chicago boys and their guiding light in one of the darkest chapters of modern Chilean history, but the stain is tough to get out. If trampling all over the democratically expressed wishes of the people and instituting an authoritarian reign of terror are what it takes to achieve economic growth, is it really worth it?

But a more pertinent question might be to ask just how much credit really is due Chicago-school economics for Chile’s current relative prosperity? Mining alone accounts for 20 percent of Chile’s GDP, and it is very much worth noting that the country’s crown jewel, the copper industry, is completely dominated by one state-owned company, Codelco. Ponder that, for a second: Latin America’s poster child for Chicago school economics features state control of the single most important economic resource. Huh.

Chile also suffers from some of worst income inequality in the world, and in fact, only began to take serious steps to address income disparities after the plebiscite that ended Pinochet’s rule. And how did the government do that? By raising taxes and social spending.

But it’s a job that’s hardly finished, as evidenced by the reports of serious social disorder currently emanating from Chile, which some observers have compared unfavorably with Haiti.

Vast extremes in income equality do not make people happy, especially in the aftermath of huge disasters. That might be the true lesson of Chile, and it’s one that the Chicago boys who make their home in the United States might do well to mull over.

After the military takeover, and the abuse of human rights on a massive scale that it engendered, Chile retained the curiosity of diverse political and intellectual circles. The tragic example of a shattered democracy provided the spark for heated discussions and controversies in various countries. Chile’s sudden shifts in orientation yielded a relentless supply of fascinating political and economic phenomena and fueled the wider debate on development, democracy, and social change.

Valdes’ point is underlined and emphasized by the argument currently raging across the Internet concerning what credit to give Milton Friedman for the relatively low loss of life registered in Chile after the devastating earthquake of Feb. 27. The question of who might be responsible for Chile’s tough building codes is just the latest proxy for a much larger battle over ideology — the economic equivalent to the “culture wars” that have ravaged American society since at least the ’60s. The financial crisis has given this age-old struggle new juice. Few events have done more damage to the Chicago school’s intellectual primacy than the economic collapse of the past few years. On the old guard free market fundamentalist front, nerves appear to be stretched to the breaking point, perhaps explaining Bret Stephens’ foolhardy attempt to recover some ground by rehabilitating Friedman through a comparison between the government-enforced building codes, or lack thereof, existing in Chile and Haiti.

Naomi Klein, while reprising some points from her chapter on Chile in “The Shock Doctrine,” brings us the latest datum on that specific issue.

Chile’s modern seismic building code, drafted to resist earthquakes, was adopted in 1972. That year is enormously significant because it was one year before Pinochet seized power in a bloody US-backed coup. That means that if one person deserves credit for the law, it is not Friedman, or Pinochet, but Salvador Allende, Chile’s democratically elected socialist president.

Chile’s building codes were further extended and revised in the early ’90s, well after Pinochet lost power. But again, the real story here is not about building codes, it is the legacy of the kind of “natural experiment” that economists rarely get the opportunity to investigate in the real world: The first time extreme free market reforms were imposed on a society by fiat.

The Chicago boys, unhindered by dissent or pesky labor unions or a critical press, had a free hand and did not waste it. Greg Palast offered a pithy summary back in 2006.

“… the General abolished the minimum wage, outlawed trade union bargaining rights, privatized the pension system, abolished all taxes on wealth and on business profits, slashed public employment, privatized 212 state industries and 66 banks and ran a fiscal surplus.”

Tyler Cowen, the libertarian-minded economist at George Mason University, responded to Palast’s piece with his own report card on Pinochet, which he recently linked back to while disputing Paul Krugman’s take on Chile. Cowen pans Pinochet’s currency policies and is unenthusiastic about the privatization of Social Security but gives him high marks for opening up trade and privatizing major industries, agricultural diversification and restoring “the economic credibility of Chile.” He also argues that although “many economic mistakes were made” Pinochet’s “moderate and left-wing successors left virtually all of his economic policies in…”

But Cowen somewhat elides the fact that Pinochet was forced to reverse or at least partially roll back many of his reforms because their social cost was simply too great. The disparity in interpretations of Chile’s economic development is truly staggering but I don’t see too many people disputing that, particularly in the first ten years after Pinochet seized power, real wages fell for most Chileans, and unemployment and income inequality rose drastically. Per-capita GNP fell 6.4 percent over the course of the entire Pinochet regime. According to Palast, in response to a brutal recession in 1982, Pinochet restored the minimum wage, allowed collective bargaining, and instituted a classic Keynesian government jobs creation program.

That’s what Milton Friedman called “the miracle of Chile.” It’s really hard to imagine anything less deserving of the word.