There is a small band of economists who oppose all forms of market intervention, even those designed to 'smooth out' the natural boom-bust cycles of capitalist economies. They would oppose Keating's 'recession we had to have', not because they didn't believe the recession was inevitable, but because they believed that the underlying forces were best dealt with through market forces, even if it meant a much worse recession. They would oppose the role of the reserve bank in controlling itnerest rates. Such economists have been rejected by western societies for many decades, which is why we have had small recessions, but no repeat of the great depression. However, there was one case where they were able to get around the 'problems' of democracy and impose their style of 'free market utopia' by dictatorship.

CHILE: THE LABORATORY TEST

http://www.huppi.com/kangaroo/L-chichile.htm

Many people have often wondered what it would be like to create a nation based solely on their political and economic beliefs. Imagine: no opposition, no political rivals, no compromise of morals. Only a "benevolent dictator," if you will, setting up society according to your ideals.

The Chicago School of Economics got that chance for 16 years in Chile, under near-laboratory conditions. Between 1973 and 1989, a government team of economists trained at the University of Chicago dismantled or decentralized the Chilean state as far as was humanly possible. Their program included privatizing welfare and social programs, deregulating the market, liberalizing trade, rolling back trade unions, and rewriting its constitution and laws. And they did all this in the absence of the far-right's most hated institution: democracy.

The results were exactly what liberals predicted. Chile's economy became more unstable than any other in Latin America, alternately experiencing deep plunges and soaring growth. Once all this erratic behavior was averaged out, however, Chile's growth during this 16-year period was one of the slowest of any Latin American country. Worse, income inequality grew severe. The majority of workers actually earned less in 1989 than in 1973 (after adjusting for inflation), while the incomes of the rich skyrocketed. In the absence of market regulations, Chile also became one of the most polluted countries in Latin America. And Chile's lack of democracy was only possible by suppressing political opposition and labor unions under a reign of terror and widespread human rights abuses.

Conservatives have developed an apologist literature defending Chile as a huge success story. In 1982, Milton Friedman enthusiastically praised General Pinochet (the Chilean dictator) because he "has supported a fully free-market economy as a matter of principle. Chile is an economic miracle." (1) However, the statistics below show this to be untrue. Chile is a tragic failure of right-wing economics, and its people are still paying the price for it today.

~~~

From the very start of his rule, General Pinochet moved to suppress all opposition. He banned all other political parties, suspended labor unions, and cracked down on all dissidents to his regime. During his 16 years in power, his repressive apparatus executed at least 1,500 activists, exiled 15,000 others, and imprisoned, tortured, assassinated, or caused the "disappearance" of countless thousands more. (29) According to one human rights group, the Pinochet regime was responsible for 11,536 human rights violations between 1984 and 1988 alone. (30)

As time went on, however, Pinochet did a most unusual thing for a dictator: he dissolved his own regime. Not only did he give total control of the economy over to the Chicago boys, but he eventually returned a growing share of political freedom to the people as well. Once his totalitarian power was secure in the late 70s, he legalized labor unions and political parties once more, albeit under oppressive limitations and controls. And he agreed to a new constitution that would eventually require a plebiscite on his rule, and even democratic elections.

Does the fact that an oppressive military regime enabled the Chicago boys' to carry out their experiments somehow invalidate their results? Not according to Milton Friedman:

"I have nothing good to say about the political regime that Pinochet imposed. It was a terrible political regime. The real miracle of Chile is not how well it has done economically; the real miracle of Chile is that a military junta was willing to go against its principles and support a free-market regime designed by principled believers in a free market. The results were spectacular. Inflation came down sharply. After a transitory period of recession and low output that is unavoidable in the course of reversing a strong inflation, output started to expand, and ever since, the Chilean economy has performed better than any other South American economy.

When will the US stop interfering in the economies of other countries?  This experiment sounds a little like the way Australia has been heading over the past decade or so, but a more modified version has been applied to us.  Instead of creating unemployment to drive wages down, we have just brought in more immigrants to keep wages low.  

mantra wrote on Feb 10^th, 2008 at 5:20pm:

When will the US stop interfering in the economies of other countries?  This experiment sounds a little like the way Australia has been heading over the past decade or so, but a more modified version has been applied to us.  Instead of creating unemployment to drive wages down, we have just brought in more immigrants to keep wages low.

I beg your pardon?  In fact we have had real wages growth over the last decade compared to negative wages growth with the previous Liebor government.  Wages actually fell with the Liebor Party.  In a free market (as the coalition practice) wages rise - and they did.  

What's more they rose so much that household wealth doubled and re-doubled in John Howard's Australia - while the most disadvantaged pay no net tax at all.

The economic interference came with Paul Cheating's deliberate dive into a recession which was completely created by him and completely avoidable had their been competent hands at the wheel.  When it comes to economic interference Liebor are the party you need to wave the stick at.  Hawke and Cheating manipulated the market better than any party in modern times - after Gough of course who ripped Australia off with glee.

Quote:

What's more they rose so much that household wealth doubled and re-doubled in John Howard's Australia - while the most disadvantaged pay no net tax at all

Wages may have doubled for some people but the cost of living has tripled and half of Australia is in so much debt, that it will be passed onto our children.  

Only the top 40% of the high income group have benefitted through Howard & Costello's economic management and now it's unravelling.  We can see it in the overpayment of $2 billion to private schools (30% of the population), the propping up of private health insurance (applicable to 40% of the population) and the massive increase in executive salaries - which by the way is used in the statistics to determine the average wage.

Not to mention the idiotic BAS statements created by the coalition - there is approximately $5 billion being ripped off through false claims every year in Australia and what did the coalition do about it - nothing.

The coalition skimmed the cream off Australia and fed it to the fat cats - so the rest of us have been left with skim milk.  By the end of the year there will no doubt be more incompetencies, mismanagement and rorts exposed that have been kept hidden from an unsuspecting public for a decade by the sneaky former government.

mantra wrote on Feb 11^th, 2008 at 5:29pm:

Quote: What's more they rose so much that household wealth doubled and re-doubled in John Howard's Australia - while the most disadvantaged pay no net tax at all Wages may have doubled for some people but the cost of living has tripled and half of Australia is in so much debt, that it will be passed onto our children.   Only the top 40% of the high income group have benefitted through Howard & Costello's economic management and now it's unravelling.  We can see it in the overpayment of $2 billion to private schools (30% of the population), the propping up of private health insurance (applicable to 40% of the population) and the massive increase in executive salaries - which by the way is used in the statistics to determine the average wage. Not to mention the idiotic BAS statements created by the coalition - there is approximately $5 billion being ripped off through false claims every year in Australia and what did the coalition do about it - nothing. The coalition skimmed the cream off Australia and fed it to the fat cats - so the rest of us have been left with skim milk.  By the end of the year there will no doubt be more incompetencies, mismanagement and rorts exposed that have been kept hidden from an unsuspecting public for a decade by the sneaky former government.

You are dead wrong.

High income tax payers actually pay more taxes than they did due to bracket creep and low income earners have had their taxes reduced to virtually nothing.

Private school subsidies are of immense value to Australian tax payers as the cost of the education of a private school student to the taxpayer is dramatically less than the cost of a public school student.  If the government stopped subsidising private schools and the fees went up parents would be unable to keep their children in school and the load on public schools would crush the public school system.  The federal governemnt is what has kept the Liebor State Government mismanaged public school system afloat.

Executive salaries are paid by corporations, are caused by the increased globalisation of industry, are not subject to minimum wage standards and are irrelevant to this discussion.

BAS statements are simple to fill in.  But like tax returns they can be exploited.  That is the nature of our society unfortunately -  you will recall that Liebor Treasurer Paul Cheating couldn't be bothered lodging his.  But governments aren't responsible for criminals though so I have no idea why you hold them responsible for criminal activity - is this similar to your attack on the federal police?

If it is criminal activity and rorts you need you only need look to your state and federal Liebor Governments.   I reckon each state currently has Liebor ministers either serving time or before the courts.  And many of them have a slew of anecdotal evidence which would render them guilty if it was proveable in the courts.

The former coalition government was practically squeaky clean.

From crikey. Note that what Shane Oliver meant was that the CPI overstates inflation. For example it doesn't take quality of goods into account. So if the price of a new bicycle goes up by 50% but the bike is 50% better in terms of quality and workmanship, then you have no real inflation, but the CPI will go up.

22 . Interest rates: Does the RBA have its target right?
Thomas Hunter writes:

The Reserve Bank will meet tomorrow to decide whether or not to raise interest rates. Mortgage holders and others carrying debt are awaiting the decision nervously, yet most commentators now think a rate rise is a certainty. For their part, the RBA has made no secret of its target range of 2% to 3%, and with inflation headed towards 4%, there is little reason to keep rates steady. Or is there?

Crikey asked some of Australia’s leading economists if the RBA needs to rethink its inflation targets. Is 2% to 3% still the right target for Australia?

Michael Knox, Chief Economist and Director of Strategy at ABN AMRO Morgans. Glenn Stevens, before he was the RBA governor, gave a speech in which he said that the RBA arrived at that target range by looking at what the US Fed had done for the previous 10 years. They found they’d achieved average inflation rates of around 2.5%. When we look at the levels of inflation that actually damage economic growth, inflation has to be consistently above 4% to damage economic growth. On the other hand, if you get inflation below 1%, many people say that there is a measurement problem because the composition of inflation changes. So if 4% is too high and 1% is too low, then your upper range should be 3%, which is comfortably below 4%, and your lower range should be 2%, which is comfortably above 1%. For practical purposes, I'd say 2-3% is the right range.

Professor John Quiggin, University of Queensland. The real question is, should you have inflation only targets or should you have a separate inflation and growth target? If you have an inflation only target, 2%-3% is pretty reasonable. There’s an assumption that if you focus your monetary policy on inflation and aim to keeping it smooth over the cycle you should also stabilise growth. That’s the theory underlying it. It’s worked well for the time since the policy emerged, but the big question is not so much whether the target band should change to accommodate economic conditions as whether the whole thing has been undermined by asset market inflation and the potential crunch in asset prices, or the potential credit crunch. That’s a much more difficult question. The inflation target is a domestic policy target to do with Australia’s inflation rate, and traditionally has been implemented by looking at how the domestic economy is going. But we don’t know what if anything is coming out of these shocks in the US.

Shane Oliver, AMP Capital Investors. I think the current range probably is the right one. The logic was that if you go much below it, because the CPI understates the rate if inflation, you're verging into deflation. But it's reasonable to ask whether 4% inflation is a disaster. I would say it's not. A disaster was the high double digit inflation we had in the 1970s and the high single digits we had in the 1980s, but the sort of numbers we are dealing with today hardly constitutes a disaster. I think the RBA is worried that if it's not tough enough, Australians will think it's going light on inflation and will therefore build into wage claims and price setting norms and so on the belief that, going forward, inflation won't be 2%-3%, it will be 4%-5%. After a while a higher inflation rate will get entrenched. Up towards 4% is not a disaster but the RBA wants to be seen to be acting tough on it to ensure that expectations on inflation don't steadily rise.

Associate Professor Steve Keen, University of Western Sydney. The danger in focusing on that target range is that it ignores other factors in the economy which can become far more important. Chief among those factors is the level of debt. That is overwhelmingly what the RBA is ignoring by focusing just on the inflation rate. Imagine you’ve got a patient with a whole range of indicators as to their health, and all you look at is the blood pressure. The inflation rate has been between 1%-4% for the last 15 years now, and it’s just reaching the upper end of that band. Meantime, the debt level has gone from 80% of GDP as it was 11 years ago to 160% now and is on an exponential path. If you have an indicator for a patient and it’s on an exponential path, there is only one outcome: death. Ironically, if you get into a debt crisis you want inflation because that reduces the debt burden. That’s where Japan found itself after its bubble economy burst in 1989 and they’ve been trying desperately now for 17 years to cause inflation and they have failed. We’re on the same precipice.

freediver wrote on Feb 8^th, 2008 at 1:39pm:

There is a small band of economists who oppose all forms of market intervention, even those designed to 'smooth out' the natural boom-bust cycles of capitalist economies. They would oppose Keating's 'recession we had to have', not because they didn't believe the recession was inevitable, but because they believed that the underlying forces were best dealt with through market forces, even if it meant a much worse recession. They would oppose the role of the reserve bank in controlling itnerest rates. Such economists have been rejected by western societies for many decades, which is why we have had small recessions, but no repeat of the great depression. However, there was one case where they were able to get around the 'problems' of democracy and impose their style of 'free market utopia' by dictatorship.

The Chicago School is very similar to the Austrian school.


deepthought wrote on Feb 10^th, 2008 at 9:37pm:

I beg your pardon?  In fact we have had real wages growth over the last decade compared to negative wages growth with the previous Liebor government.  Wages actually fell with the Liebor Party.  In a free market (as the coalition practice) wages rise - and they did. What's more they rose so much that household wealth doubled and re-doubled in John Howard's Australia - while the most disadvantaged pay no net tax at all.

The most disadvantaged have nothing to pay tax with, isn't this bleedingly obvious?

Of course there was no real wage rises under the Accord.  That was the point.  To keep the Libs and big business happy.