Liberal Rage Won't Stop the Tea Party's Rise
by John Samples
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ShareThisThe tea-party contingent in Congress drove the Republican leadership to bargain harder than it otherwise would have on last week's debt-ceiling deal. Liberals have rightly concluded that the tea party is changing political outcomes. Their response has been to equate tea-party members with terrorists.
Vice President Biden recently told House Democrats that tea-party Republicans had "acted like terrorists." And a New York Times columnist claimed that "Tea Party Republicans have waged jihad on the American people." Many people on the left no doubt take their cues from the vice president and the Times, so we should expect more such venomous rhetoric castigating the movement as an enemy of America.
Ironically, the movement being portrayed this way takes its name from an iconic event in American history. The Boston Tea Party of 1773 helped establish the principle of "no taxation without representation." And the members of the current tea-party movement clearly believe in the American system of representative government. They worked to change Congress through the election of 2010, and now they expect their efforts to bear fruit in the form of new policies.
Even if their anger is understandable, liberals should be ashamed of their over-the-top anti-tea party rhetoric.
"Tea Party Patriots" — the name of one tea-party organization — is closer to the truth. Far from being enemies of America, these people believe deeply in the nation's history, promise, and Constitution.
Differing visions
The liberal anger toward the tea party is justified in one sense. The tea-party movement's vision of America is distinct from the reality of the welfare state the country has built since 1936. So a powerful tea party is understandably disturbing to liberals — even if their recent campaign of vilification against it is reprehensible.
But is the tea-party movement really all that powerful? The budget deal, after all, hardly restrained the growth of spending over the next year, when the government will still run a deficit in excess of $1 trillion. Even with the restraint prescribed by last week's deal over the long term, the federal government will still be spending $4.25 trillion a year. The deal may lower federal spending, but it clearly will not bring about a substantially smaller government.
The evident rage among liberals, however, may have more to do with the battles to come than it does with the battle they've just lost (or won). We stand at the beginning of a long struggle. For the next few years — and maybe many more — our politics will be occupied by the same kind of fights over spending, deficits, and taxes.
These battles will be about more than just money. They reflect two different ideas of what the U.S. government should be. On one side is the tea party's vision. On the other is the welfare state of Franklin Roosevelt, Lyndon Johnson, and President Obama, which taxes and spends more and more in pursuit of security and fairness for its citizens.
As recently as 2008, the big-government vision seemed poised to win the day. Then came the tea-party mobilization of 2009, which led to the election outcome of 2010.
Here to stay
That victory was remarkable but, in a way, unconvincing. After all, protest movements have emerged, affected elections, and then disappeared before. The Reform Party of Ross Perot comes to mind. Last year, it was far from certain that the tea party would be more than a memory by the summer of 2011.
John Samples is director of the Center for Representative Government at the Cato Institute and the author of The Struggle to Limit Government.
More by John SamplesEven before the election of 2010, tea-party leaders were concerned that electing fiscally responsible members of Congress would not be enough to save the nation from financial ruin. They knew they had to follow up their victory with oversight to ensure that new members would remember who had elected them and why. The recent pressure on House Speaker John Boehner from tea-party representatives reflected that strategic choice.
Political scientists tell us that to bring fundamental change to the nation, political movements must become permanent organizations. The civil rights movement accomplished such a transformation. Will the tea party also become a permanent part of our politics?
It's too soon to say, of course, but the debt-ceiling deal suggests the answer may be yes. In fact, the Republican Party might be the permanent organization the tea party becomes.
Even if their anger is understandable, liberals should be ashamed of their over-the-top anti-tea party rhetoric. The tea party could become a lasting force in American politics — one that slowly ends the long era that began with the New Deal. Though it's often criticized as rooted in the past, the tea party may be a harbinger of the future.
Rick Perry's Texas-sized Justice
Rick Perry's Texas-sized Justice
by Nat Hentoff
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ShareThisTexas Gov. Rick Perry and the state legislature have finally recognized — unlike many other U.S. states — that the brutal incarceration of juvenile offenders "too often turns potentially productive citizens into hardened criminals" (San Antonio Express News, May 24).
Also severely abused are these juveniles' constitutional rights.
I first became aware of this triumph of realistic justice from a July 10 editorial in the New York Times ("Texas' Progress on Juvenile Justice"). Under the new system: "Troubled children receive guidance and rehabilitation services in or near their communities, where families, churches and other local organizations can be part of the process."
Nat Hentoff is a nationally renowned authority on the First Amendment and the Bill of Rights. He is a member of the Reporters Committee for Freedom of the Press, and the Cato Institute, where he is a senior fellow.
More by Nat HentoffBecause of this common-sense justice system revolution, according to the editorial, the number of imprisoned youth has been reduced "from more than 4,000 in 2006 to about 1,400 today." Except for this editorial, I haven't seen anything else in the national media about this Texas enlightenment in the midst of all the growing interest in Perry as a 2012 presidential candidate.
After all, who cares that much about a bunch of locked-up kids?
Texas continues to confront this national problem. The New York Times editorial continued, Texas "lawmakers this year passed another sweeping reform bill that commits the state to creating a unified juvenile justice agency that works in partnership with local governments, the courts and communities to provide comprehensive services to troubled young people and their families."
A juvenile justice model for the nation! Even though Perry is now a hot national figure, I expect that none of this will figure in the 2012 elections. Will the Texas governor himself point to it? I've not heard it mentioned in his speeches so far.
The admirable editorial that first clued me in to this news did omit a vital shaping force in getting the Texas legislature to restructure the state's juvenile-justice system to focus on concentrated rehabilitation instead of isolated incarceration. Great credit is due to Texas Appleseed.
According to its website, the mission of this nuts-and-bolts justice-advocacy group is, simply, "to better protect the rights of the most vulnerable — our children, persons with mental disabilities, the indigent, recent immigrants, and those who have lost so much to the hurricanes that have battered the Gulf Coast in recent years."
But to have any positive effect, and Texas Appleseed often does, it's required to keep facing an unyielding stream of challenges — like Sisyphus, condemned to forever roll a boulder uphill that only rolls down again. For example, its efforts don't end with protecting and rehabilitating juvenile prisoners. It also helps many other youths still in school.
For years, Texas Appleseed has been revealing and condemning the grimly excessive expulsions and suspensions of students in Texas public schools. From its "Texas' School-to-Prison Pipeline: School Expulsion" report available on its website, legal director Deborah Fowler cites the following:
"Special education students make up only 10 percent of the student body statewide, but account for 21 percent of all expulsions in Texas (2008-09). African-American special-education students are over three times more likely to be expelled than other students, and Hispanic special-education students are two-and-a-half times more likely to be expelled."
Remember the 14th Amendment? Each of us is guaranteed "equal protection of the laws."
Oh, but surely they must have done something seriously disruptive? Fowler's answer: "The vast majority of Texas students are expelled for subjective, discretionary reasons, including minor, noncriminal Student Code of Conduct violations.
"In too many cases, expelling students for 'serious and persistent misbehavior' in a DAEP (Disciplinary Alternative Education Program) is introducing young people to the juvenile-justice system when they have committed no crime — which is an extreme consequence for behavior that would not be an expellable offense in any other educational setting."
So what happens when they're in prison at the end of this pipeline — and their in-school education is over? Again, Deborah Fowler: "Eighty percent of Texas' prison population never graduated from high school — and most never completed the ninth grade. Without a commitment to successful early intervention strategies, we will continue consigning more children to failure and bear the huge financial burden of the school-to-prison pipeline."
This is the personal and social price of dead-end abandonment of the young, not only in Texas. But Fowler's last phrase — the huge social costs of the school-to-prison pipeline — may disturb and anger some taxpaying voters enough to demand in-school support of such students in need.
Here comes another New York Times editorial (July 31) instructing Perry and the state legislature on how much they still have to do ("One Way to Guarantee More Trouble"): "Nearly six in 10 public school students in Texas were suspended or expelled at least once between seventh and 12th grade. ... California and Florida have even higher out-of-school suspension or expulsion rates."
What say you, Republican presidential candidates? I don't ask President Barack Obama for any change I can believe in, except to clear out his office and make room in the White House for a real president.
Meanwhile, so many of our young are left behind bars because none of their teachers and principals cared to find out who they could be.
European Endgame
European Endgame
by Johan Norberg
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ShareThisIf you owe your bank a hundred dollars, you have a problem. But if you owe it a million, it has a problem, the saying goes. Today we can add that if the governments of Italy, Spain, Portugal, Greece and Ireland owe your banks one trillion dollars, we're all dead. And that might be where the Euro-zone is headed.
Instead of fixing the financial crisis, the EU postponed it with a get-poor-quick pyramid scheme, by sending the debts of households to banks, who sent it to governments, and governments passed it on to the Euro-zone. Now the Euro governments find that they are at the end of the chain, with a crushing burden. Markets are beginning to price in a small risk that the entire European financial system can collapse — and reacting accordingly.
Debts that were unsustainable in 2008 aren't more sustainable just because they were transferred from banks to governments. Especially when those governments overspent in good times, and have few reserves to deal with bad times when the budget of big welfare states suffer more than others when tax revenue is down and benefits expand automatically.
Sooner or later Europe has to stop throwing bad euros after good euros.
In a way this is 2008 again, with the same toxic mix of misguided regulation and moral hazard at work. Back then, it was banks and mortgage securities; this time, it's euro states and government bonds.
Basel regulations categorizes sovereign debt as risk-free, and a bank's exposure to sovereign debt in its own currency has zero risk weights when capital requirements are calculated. And right now, banks are actually preparing themselves for Basel III, which forces them to build bigger liquidity buffers, and most of it has to come in the form of sovereign debt.
The ECB also subsidized government debt because banks could buy short-term government bonds from weak states and deposit them with ECB as collateral for loans. It was a way to make a decent profit from the margin between bond yields and lending rates — which they invested in more bonds.
Poor Euro economies used the implicit guarantee that Germany would bail them out, to lend cheaply and increase spending and wages as competitiveness collapsed. This is what made it seem like a good idea to retire at 55 and give Greek engine-drivers a bonus of $5,000 a year if they washed their hands.
The Euro-zone has now had to bail out Greece, Portugal and Ireland, but this just creates larger problems in the future. If someone can't pay his debts, you don't help him by giving him a larger loan. It expands the total debt burden and creates a need for more bailouts.
It also undermines the strong economies that have to pay up. Italy and Spain have already gone from being trusted life-savers to becoming potential drowning victims. The €440 bn European Financial Stability Facility (EFSF) was enough to deal with small, peripheral countries. But it will be difficult to bailout Spain, and impossible to deal with Italy. Hence the proposals to double its size.
But the EFSF can only borrow cheaply on capital markets as long as it is backed by rich triple-A countries. The second biggest is France, but after more than 35 years of deficit spending, bigger guarantees could result in a downgrade. If France goes, the whole burden ends up with Germany, which would have to contribute with guarantees amounting to a quarter of its GDP. We think of Germany as indestructible, but it already has a public debt of 82 percent and growth of 0.1 percent in the second quarter of 2011. Trying to save more drowning victims could end up sinking the life boat.
The assumption that the European Central Bank can always step in is dangerously flawed. It has already lent around $700 billion to weak Euro countries and their banks. It is grossly leveraged and it wouldn't take large losses on those loans for the central bank's capital base to be wiped out — and in need of a bailout itself.
Hope is fighting a losing battle against arithmetic. Sooner or later Europe has to stop throwing bad euros after good euros. Hopefully it can be done in an orderly way, with debt-restructuring, far-reaching long-term debt reduction plans and reforms to get back to growth.
Johan Norberg is a senior fellow at the Cato Institute and author of Financial Fiasco: How America's Infatuation with Homeownership and Easy Money Created the Economic Crisis.
More by Johan NorbergThe alternative is a chaotic end game, where reforms are postponed and more money is sent to mismanaged economies until strong economies are also on the brink. Sooner or later the bailouts will end — either when states are out of money or when voters are out of patience. Then the markets would also flee big euro economies and we would see a series of defaults and banking crises around Europe.
That would probably end with the ECB abandoning all the pretense of being a strong, independent central bank, and starting to print money on a massive scale, and erase debts by also erasing savings and retirement funds. One day, Europeans might wake up and realize that the euro did not become the new D-mark, it became the new Italian lira.
Free Trade 101
Free Trade 101 for Members of Congress
by Daniel Griswold
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ShareThisIf I were a member of Congress back home for the August recess and a constituent asked me at a town-hall meeting why I support free trade, here's what I would say in my policy-wonkish way:
Free trade empowers the individual and limits the state. The government should not be telling us where we can and can't spend our money. We don't need big government rigging markets to favor one producer over another at the expense of competition and the little guy.
Free trade helps American families balance their budgets. Import competition means lower prices, more choice, and better quality — for shoes, clothing, cars, computers and smartphones. Lower prices for consumer goods mean higher real wages for workers.
Free trade promotes liberty, prosperity, and peace. That’s a good deal for America.
Protectionism is really a tax on the poor. Our highest remaining trade barriers unfairly tax products made and grown by poor people abroad and consumed disproportionately by poor families at home. We still impose unconscionably high tariffs on imported food, clothing, and shoes — the basics of a poor family's budget. The $26 billion we collect each year from duties on imports represent the federal government's most regressive tax. Free trade is a tax cut for the poor.
Trade is not about more jobs or fewer jobs; it's about better jobs. Trade only accounts for 3 percent of job displacement. Technology and internal competition displace far more workers. Just ask folks laid off from Borders, Blockbuster or Kodak. (Bought any film lately?) Our high unemployment today has nothing to do with trade but with our "Made in the USA" housing bubble and failed stimulus.
Imports fuel American industry. More than half of what we import each year is not consumer goods but the stuff businesses buy to produce their final products — raw materials, intermediate inputs and capital machinery. Anti-dumping duties on steel and import quotas on sugar drive up costs for U.S. manufacturers, giving them one more reason to relocate their production offshore.
Exports are key to expanding U.S. output. Three-quarters of the world's spending power is outside the United States, and most of the world's growth is now in emerging markets. China is now the No. 3 market for U.S. exports and the No. 1 market for U.S. agricultural exports.
Exports allow American companies to raise productivity through specialization and economies of scale. A quarter of a million small- and medium-sized U.S. companies are now selling abroad, accounting for almost a third of U.S. exports. Trade agreements such as NAFTA and the pending agreements with South Korea, Colombia and Panama give U.S. exporters the level playing field the politicians say they want.
Daniel Griswold is director of the Herbert A. Stiefel Center for Trade Policy Studies at the Cato Institute and author of the 2009 book, Mad About Trade: Why Main Street America Should Embrace Globalization.
More by Daniel GriswoldForeign investment in America is the flip side of the trade deficit. If foreigners don't use the dollars they earn selling in our market to buy U.S. exports, they buy U.S. assets — Treasury bonds, stock in U.S. companies, direct investment in U.S. factories. Today more than 5 million Americans work for foreign-owned affiliates in the United States, earning 30 percent more than the average American worker. Companies such as Honda, Nissan, Toyota, BMW, Michelin and Severstal steel employ one out of eight American manufacturing workers. Raising trade barriers will only make it harder for people in other countries to earn the dollars they need to buy our exports and invest in our economy.
Protectionism is a fool's game. The Smoot-Hawley tariff bill of 1930 didn't create or save jobs. Instead, it provoked retaliation against U.S. exports and only deepened the Great Depression. Republicans and Democrats worked together after the war to promote more open trade and peaceful commerce with our allies. It would be a huge mistake to turn our backs on such a successful bipartisan policy.
Free trade promotes liberty, prosperity, and peace. That's a good deal for America.
Santelli: Go Read Some Austrian Economists Instead of the Funny Pages
Stockholm, Sweden –
Rick Santelli, who has already gained plenty of notoriety for rants on CNBC, takes it to a new level in the video below. In this instance, with a message worth repeating, he screams at least five other hosts… “I want the government to stop spending, stop spending, stop spending, stop spending… STOP spending! That’s what we want, stop spending!”
He caps it off with other comments including, “c’mon, go read some Austrian economists instead of the funny pages,” and “go back to Russia where you understand the state and the citizen.” It’s outrageous and gratifying all at the same time, especially given CNBC is the source. You can see the video below – it really heats up at about minute 8:39 — which came to our attention via The Daily Bail’s post on Santelli losing it and calling fellow CNBC reporter Steve Liesman a communist.
Rocky Vega
7 Potential Economic Effects Of A War With Iran
As each day passes, war in the Middle East seems increasingly likely. The truth is that Israel will never allow Iran to develop nuclear weapons, and Iran is absolutely determined to continue developing a nuclear program. So right now Israel and Iran are engaged in a really bizarre game of "nuclear chicken" and neither side is showing any sign of blinking. In fact, even prominent world leaders are now openly stating that it is basically inevitable that Israel is going to strike Iran. For example, Italian Prime Minister Silvio Berlusconi recently made the stunning admission that the G8 nations "absolutely believe" that Israel will attack Iran. But a conflict between Israel and Iran would not just affect the Middle East - it would have staggering implications for the rest of the globe.
So just what would a war between Israel and Iran mean for the world economy?
The following are 7 potential economic effects of a conflict between Israel and Iran....
#1) The Price Of Oil Would Skyrocket - One of the very first things a war with Iran would do is that it would severely constrict or even shut down oil shipments through the Strait of Hormuz. Considering the fact that approximately 20% of the world’s oil flows through the Strait of Hormuz, world oil markets would instantly be plunged into a frenzy. In fact, some analysts believe that oil prices would rise to $250 per barrel.
So are you ready to pay 8 or 10 dollars for a gallon of gasoline? What do you think that would do to the U.S. economy?
The truth is that every single transaction that we make every single day is influenced by the price of oil. If the price of oil suddenly doubles or triples that would absolutely devastate the already very fragile U.S. economic system.
#2) Fear Would Explode In World Financial Markets - Even without a war, the dominant force in world financial markets in 2010 is fear. We are already seeing unprecedented volatility in financial markets around the globe, and there is nothing like a war to turn fear into a full-fledged panic. And what happens when panic grips financial markets? What happens is that they crash.
#3) World Trade Would Instantly Seize Up - Once upon a time the economies of the world were relatively self-contained, so a war in one area would not necessarily wreck economies all over the globe. But all of that has changed now. Today, the economies of virtually every nation are highly interdependent. That has some advantages, but it also has a lot of disadvantages.
If a war with Iran did break out, nations all over the globe would start taking sides and world trade would seize up. The global flow of goods and services would be severely interrupted. That would be enough to push many nations around the world into a full-blown depression.
#4) Military Spending Would Escalate - Even if the United States was not pulled directly into a conflict between Israel and Iran, there is little doubt that the U.S. would be spending a lot of money and resources to support Israel and to build up military assets in the region in case a wider war broke out. The U.S. has already spent somewhere in the neighborhood of a trillion dollars on the wars in Iraq and Afghanistan. If war does break out with Iran the amount of money the U.S. government could be forced to spend could be absolutely staggering.
The truth is that the U.S. is already drowning in debt. At this point the U.S. government is over 13 trillion dollars in debt, and another Middle East war is certainly not going to help things.
#5) Russia Would Greatly Benefit - Russia and other major oil producers outside of the Middle East would greatly benefit if a war with Iran erupts. Russia is already the number one oil producer in the world, and if supplies out of the Middle East were disrupted for any period of time it would mean an unprecedented windfall for the Russian Bear.
#6) Massive Inflation - A huge jump in the price of oil and dramatically increased military spending by the U.S. government would most definitely lead to price inflation. We would probably see a dramatic rise in interest rates as well. In fact, it is quite likely that if a war with Iran does break out we would see a return of "stagflation" - a situation where prices are rapidly escalating but economic growth as a whole is either flat or declining.
#7) The Price Of Gold Would Go Through The Roof - When there is a high degree of uncertainty in world financial markets, where do investors turn? As we have seen very clearly recently, they turn to gold. As high as the price of gold is now, the truth is that it is nothing compared to what would happen if a war with Iran breaks out. When times get tough, we almost always see a flight to safety. Right now none of the major currencies around the globe provide much safety, so investors are increasingly viewing precious metals such as gold and silver as a wealth preservation tool.
War is never pleasant. If war with Iran does break out it could potentially set off a chain of cascading events that would permanently alter the world economy for the rest of our lifetimes.
So let us hope that war does not erupt. It wouldn't be good for anyone. But the reality is that at this point it almost seems like a foregone conclusion. Tensions in the Middle East are rising by the day, and all sides are certainly preparing as if they fully expect a war to happen.
Even without a war with Iran, incredibly hard economic times are on the way, so if a war does happen it could mean a complete and total economic disaster.
So what do you think? Will a war with Iran devastate the world economy? Feel free to leave a comment with your opinion....
New Yorker Magazine's Pathetic Attack
New Yorker Magazine's Pathetic Attack on Heroic Freedom Fighter Ayaan Hirsi Ali
Ayaan Hirsi Ali is an ex-Muslim who is guarded round-the-clock because of Islamic jihadist threats to murder her. She is also a fearless champion of human rights and especially the rights of women who suffer under the institutionalized discrimination mandated for them by Islamic law.
The New Ideological Divide
The New Ideological Divide: Stimulators vs Austereians
Economies do not grow because consumers spend; consumers spend because economies grow.
Despite the apparent deficit-cutting solidarity that emerged from this weekend's G-20 meeting in Toronto, it is clear that the great powers of the industrialized world have not been this philosophically estranged since the end of the Cold War. Ironically, in this new contest, the former belligerents have switched sides - the capitalists are now the socialists, and vice versa.
We now are witnessing a struggle between two camps that I playfully call the "Stimulators" and the "Austereians." Both warn that a worldwide depression will ensue if governments now make the wrong choices: the Stimulators say the danger lies in spending too little and the Austereians from spending too much. Each side also has their own economic champion: the Stimulators follow the banner of Nobel Prize-winning economist Paul Krugman, while the Austereians are forming up behind the recently reformed former Fed Chairman Alan Greenspan. (It is cold comfort to witness "The Maestro" belatedly returning to the hard-money positions that characterized his earlier years.)
In a recent Wall Street Journal editorial, Greenspan argued that the best economic stimulus would be for the world's leading debtors (the United States, UK, Japan, Italy, et al) to rein in their budget deficits, a strategy dubbed "austerity" by the press. Greenspan explains that because lower deficits will restore confidence, diminish the threat of inflation, and allow savings to flow to private-sector investment rather than public-sector consumption, the short-term pain will lead to gains both in the mid- and long-term. Rather than redistributing a shrinking pie, this approach allows the pie to grow. Greenspan's Austereian view has been echoed loudly in the highest policy circles of Berlin, Ottawa, Moscow, Beijing, and Canberra.
Meanwhile, in several articles for his New York Times column, including one today, Krugman has argued that those who push for austerity in the face of recession are either doing so for political expediency or out of a "crazy" fealty to archaic economic views. Krugman has apparently judged inadequate the trillions of dollars worth of deficit spending unleashed by the United States and European governments in the last 24 months. He believes our only remedy is to spend more - no matter how much debt results. Absent this, he claims, millions of workers "will never work again." Unfortunately, Washington has clearly aligned itself with Krugman and the Stimulators.
Reading straight from the Keynesian playbook, Krugman argues that cutting government spending now will simply send the economy back into recession. He asserts that by flooding the economy with money, i.e. "stimulus," governments can encourage consumers to spend. Once the spending creates better conditions, so the argument goes, the economy will be better positioned to withstand the spending cuts, tax hikes, and higher interest rates necessary to address the staggering deficits left behind.
Krugman proposes an enticing argument that is nevertheless built on rubbish. Economies do not grow because consumers spend; consumers spend because economies grow [for a detailed explanation of how this works, read my latest book: How an Economy Grows]. Investment capital comes from savings, and when governments borrow, savings are diverted from private investment. While it is possible for governments to invest as well, it is much more likely that the money will be spent on entitlements or "invested" in projects that may be politically advantageous but economically useless.
Any money spent by governments is not available to the private sector to invest. The Stimulators don't make this connection because they believe money grows on trees and that a printing press is a legitimate creator of wealth. However, printing money merely encourages people to spend their savings now rather than wait for it to lose value through inflation. This is okay to Stimulators, because stimulating "demand" by any means necessary is the only goal they can see.
What really grows an economy is not more demand, but more supply [also explained in my book]. The Austereian argument is that reductions in government spending will allow the private sector to generate the additional supply of goods and services. Europe seems to understand this; unfortunately, the US does not. Judging by the recent weakness of the dollar - not only against gold, but other fiat currencies, including the pound and the euro - the markets are coming to the same conclusion.
As sovereign-debt worries initially spread throughout Europe, the dollar benefitted. However, now that Europe has demonstrated a willingness to reduce its debts, while we have committed to make ours even larger, the sovereign-debt worries are moving west.
If Greenspan and the Austereians are correct, the stimulus will fail and leave us in a much deeper hole. As long as governments create bigger deficits, we will never have a sustainable recovery. Instead, we will be chasing our tail, and wearing ourselves out in the process. When we finally realize the folly of this approach, the austerity measures that we will then be forced to adopt will make those currently proposed by the Europeans seem relatively painless.
My guess is that before year-end, our stimulus-induced recovery will falter, prompting Obama and Congress to administer even more stimulus. After all, the Stimulators have no other answer. However, given the adverse reaction this will produce in the currency and debt markets, this next jolt will likely vindicate the Austereians, as the world witnesses its greatest power careen into inflationary depression.
If global jihad isn’t the enemy, what is?
If global jihad isn’t the enemy, what is?
By BOAZ GANORIn fact, those pesky terms like “Islamist,” “jihadist” and even “terrorism” don’t seem to fit in his vision of a US security strategy at all, a point that was made clear late last month with the release of Obama’s new National Security Strategy (NSS) document.
Keeping religious rhetoric out of the document – and out of the NSS in general – may indeed soften the image of the US in the Muslim world. But it may also be the source of the strategy’s ultimate and inevitable failure.
The public got a preview of the strategy’s key points during a presentation by John Brennan, assistant to the president for homeland security and counterterrorism, at an event hosted by the Center for Strategic and International Studies last month.
Brennan outlined the president’s new strategic approach to the threats of terrorism facing the US, laying out two primary challenges: first, “the immediate near-term challenge of destroying al-Qaida and its allies...,” and second, “the longer-term challenge of confronting violent extremism generally.”
Disconcertingly, the subsequent doctrine presented by Brennan, designed by the Obama administration to address those two challenges, seems to be based on inaccurate, inconsistent and even misleading assumptions.
The most troubling statements made by Brennan related to his very definition of the enemy itself; he argued that the war being fought by the US is not against “terrorism,” because “terrorism is but a tactic.”
Nor, he argued, should it be described as a war against “jihadists” or “Islamists,” because “jihad is holy struggle, a legitimate tenet of Islam meaning to purify oneself of one’s community.”
So who is the enemy of the US, according to the president’s number one consultant on counterterrorism? Simple. “Al-Qaida and its terrorist affiliates.” Brennan and the Obama administration have essentially taken the complicated, multifaceted security threat posed by the global jihad movement and oversimplified it, making it seem that the challenge is limited to dealing with the nucleus of al-Qaida and its secluded affiliates.
These terrorists, according to Brennan’s argument, seem to have nothing in common.
They are not Islamist in nature; they are not jihadists. He argues that they have nothing to do with Islam. They can hardly even be described as terrorists, since terrorism is not the US’s enemy. They are just a bunch of villains that happen to hate the US and despise its liberal and democratic values.
According to this logic, it seems the US will once again be secured once Obama manages to smoke them out of their caves and eliminate them.
TO COMPREHEND the full scope of fallacies being adopted by the administration in its references to counterterrorism, we should borrow a metaphor from the medical world.
Many scholars and decision makers have referred to international and local terrorism as a cancer. Today the worst form of international terrorism is global jihadi terrorism, with al-Qaida at its epicenter. Global jihadi terrorism is the metastatic cancer of the 21st century – a disease that spreads from one organ or body part to another. This is a cancer that has spread all over the Muslim world – from Arab and Muslim countries to Muslim communities in Western countries.
This is not meant to imply that the body of Islam itself is constructed of cancer cells, or that the majority of the cells of this body are infected. Just the opposite. The body is otherwise healthy; most of these cells are productive, functioning and serve a positive end.
Nevertheless, this body of Islam is suffering from a severe disease – the metastasis of global jihadi cancer.
There are four possible treatments to this disease.
One is chemotherapy. The Obama administration perceives president Bush’s counterterrorism doctrine as a counterproductive and overly intrusive treatment that poisons the whole body while trying to get rid of the cancer cells.
What Obama’s administration fails to understand is that, unfortunately, one can’t treat a metastatic cancer that has spread all over the body only with focused radiation or even a surgery. His doctrine not only turns a blind eye to the nature and the severity of the disease, but it also refuses to acknowledge the fact that the Muslim world indeed has a problem. The administration ignores the fact that the tactic of global jihadi terrorism and the birth of al-Qaida and its affiliates is a result of extreme radical Islamic indoctrination – religious indoctrination.
The administration refuses to acknowledge the need to contend with an extremist interpretation of Islam that calls for the killing of “infidels” – i.e., anyone who does not hold its extreme miscalculated interpretation of Islam. The administration is deluding itself and misleading the American people to believe that this is a limited, concrete problem that can be solved if only al-Qaida and its affiliates are defeated.
As Brennan put it, “Describing our enemy in religious terms would lend credence to the lie propagated by al-Qaida and its affiliates to justify terrorism, that the United States is somehow at war against Islam.” Brennan tends to forget or even intentionally prefers to ignore the severity and the complexity of the threat of this global jihadi cancer. Moreover, he is not even ready to acknowledge that there is an illness in the body of Islam – that there is a religious nature to this threat.
Without calling a spade a spade, the Obama administration will find itself dealing with the negligible symptoms but will not find the needed cure for the disease.
IT SEEMS that both the Bush and Obama administrations overlooked the only real cure – the need to develop a strong autoimmune response within the Muslim body, with healthy cells designed to attack the body’s own diseased cells.
The only solution to the global jihadi threat is a Muslim counterreaction. Only Muslims can educate Muslims. Only Muslims can prevent global jihadists from seducing their constituencies and buying their hearts and minds. Only Muslims can save Islam from militant Islamists. But unfortunately, many Muslims ignore their responsibility.
They believe that this is a phase that will run its course, a wave that will recede with the tide. Many are not brave enough to take a stand against this dangerous and negative trend gripping the Muslim World.
The US will not be able to motivate Muslims and promote the necessary autoimmune reaction with policies of appeasement, nor will Islamophobic doctrines be successful. The US must look straight into the eyes of those in the Muslim world and say the following: Dear friends, you have an enormous problem. You are suffering from a fatal illness. There is only one cure for your disease – you need to identify and neutralize these bad seeds, these diseased cells – the metastatic cancer cells of global and local jihad. You need to save your body and soul, your prestige, your culture and your religion and prevent the deterioration of Islam to the dark days of illiteracy, militancy, hate and suffering. It is your responsibility to save Islam from the Islamists, and we will always be there for you and support you in this crucial campaign.
You should not waste your efforts by telling us that Islam is the religion of peace and clemency, and that jihad is all about good deeds and charity. We believe you. Your task, however, is to teach those violent Islamists – those who are beheading innocent civilians and blowing up weddings, schools and kindergartens in the name of Islam and under the flag of jihad – that their actions do not promote or honor Islam, nor do they fulfill the obligation of jihad. This is a misinterpretation of Islam that humiliates the whole religion and degrades the great Muslim people wherever they are.
We can put rhetoric aside, but let’s not sacrifice or undermine our understanding of the threat while we do so.
The writer is founder and executive director of ICT – The International Policy Institute for Counterterrorism, and deputy dean of the Lauder School of Government at the Interdisciplinary Center, Herzliya (IDC).
Empowering Workers: The Privatization of Social Security in Chile
Empowering Workers: The Privatization of Social Security in Chile – by José Piñera
A specter is haunting the world. It is the specter of bankrupt state-run pension systems. The pay-as-you-go pension system that has reigned supreme through most of this century has a fundamental flaw, one rooted in a false conception of how human beings behave: it destroys, at the individual level, the essential link between effort and reward — in other words, between personal responsibilities and personal rights. Whenever that happens on a massive scale and for a long period of time, the result is disaster.
Two exogenous factors aggravate the results of that flaw: (1) the global demographic trend toward decreasing fertility rates; and, (2) medical advances that are lengthening life. As a result, fewer and fewer workers are supporting more and more retirees. Since the raising of both the retirement age and payroll taxes has an upper limit, sooner or later the system has to reduce the promised benefits, a telltale sign of a bankrupt system.
Whether this reduction of benefits is done through inflation, as in most developing countries, or through legislation, the final result for the retired worker is the same: anguish in old age created, paradoxically, by the inherent insecurity of the “social security” system.
In 1980, the government of Chile decided to take the bull by the horns. A government-run pension system was replaced with a revolutionary innovation: a privately administered, national system of Pension Savings Accounts.
After 15 years of operation, the results speak for themselves. Pensions in the new private system already are 50 to 100 percent higher — depending on whether they are old-age, disability, or survivor pensions — than they were in the pay-as-you-go system. The resources administered by the private pension funds amount to $25 billion, or around 40 percent of GNP as of 1995. By improving the functioning of both the capital and the labor markets, pension privatization has been one of the key reforms that has pushed the growth rate of the economy upwards from the historical 3 percent a year to 6.5 percent on average during the last 12 years. It is also a fact that the Chilean savings rate has increased to 27 percent of GNP and the unemployment rate has decreased to 5.0 percent since the reform was undertaken.
More important, still, pensions have ceased to be a government issue, thus depoliticizing a huge sector of the economy and giving individuals more control over their own lives. The structural flaw has been eliminated and the future of pensions depends on individual behavior and market developments.
The success of the Chilean private pension system has led three other South American countries to follow suit. In recent years, Argentina (1994), Peru (1993), and Colombia (1994) undertook a similar reform. In the four South American countries, around 11 million workers have a personal retirement account.
The Chilean experience can be instructive to countries around the world. Even the United States is beginning to seriously debate privatizing its 60-year-old pension scheme. It should be noted that the U.S. Social Security system is the largest single government program in the world, spending more than $350 billion per year (more than the U.S. defense budget during the Cold War).
As an indication of the power of ideas, even officials from the People’s Republic of China have come to Chile to study the private pension system. One of the results is this particularly interesting feud reported recently by The Economist:
There is usually more acrimony than comedy in the long-running row between Britain and China over the future of Hong Kong. Yet a smile may have flickered across the face of Chris Patten, Hong Kong’s governor, even as China scuppered his plans to introduce a (pay-as-you-go) pension scheme in the colony. Zhou Nan, Communist China’s main representative in Hong Kong, harrumphed that Mr. Patten, a British conservative, was trying to bring “costly Euro-socialist” ideas to Hong Kong [11 February 1995].
It is possible that before entering the new millennium, several other countries, including all those in the Americas, will have privatized their pension system. This would mean a massive redistribution of power from the state to individuals, thus enhancing personal freedom, promoting faster economic growth, and alleviating poverty, especially in old age.
The Chilean PSA System
Under Chile’s Pension Savings Account (PSA) system, what determines a worker’s pension level is the amount of money he accumulates during his working years. Neither the worker nor the employer pays a social security tax to the state. Nor does the worker collect a government-funded pension. Instead, during his working life, he automatically has 10 percent of his wages deposited by his employer each month in his own, individual PSA. This percentage applies only to the first $22,000 of annual income. Therefore, as wages go up with economic growth, the “mandatory savings” content of the pension system goes down.
A worker may contribute an additional 10 percent of his wages each month, which is also deductible from taxable income, as a form of voluntary savings. Generally a worker will contribute more than 10 percent of his salary if he wants to retire early or obtain a higher pension.
A worker chooses one of the private Pension Fund Administration companies (“Administradoras de Fondos de Pensiones,” AFPs) to manage his PSA. These companies can engage in no other activities and are subject to government regulation intended to guarantee a diversified and low-risk portfolio and to prevent theft or fraud. A separate government entity, a highly technical “AFP Superintendency,” provides oversight. Of course, there is free entry to the AFP industry.
Each AFP operates the equivalent of a mutual fund that invests in stocks and bonds. Investment decisions are made by the AFP. Government regulation sets only maximum percentage limits both for specific types of instruments and for the overall mix of the portfolio; and the spirit of the reform is that those regulations should be reduced constantly with the passage of time and as the AFP companies gain experience. There is no obligation whatsoever to invest in government or any other type of bonds. Legally, the AFP company and the mutual fund that it administers are two separate entities. Thus, should an AFP go under, the assets of the mutual fund — that is, the workers’ investments — are not affected.
Workers are free to change from one AFP company to another. For this reason there is competition among the companies to provide a higher return on investment, better customer service, or a lower commission. Each worker is given a PSA passbook and every three months receives a regular statement informing him how much money has been accumulated in his retirement account and how well his investment fund has performed. The account bears the worker’s name, is his property, and will be used to pay his old age pension (with a provision for survivors’ benefits).
As should be expected, individual preferences about old age differ as much as any other preferences. Some people want to work forever; others cannot wait to cease working and to indulge in their true vocations or hobbies, like writing or fishing. The old, pay-as-you-go system did not permit the satisfaction of such preferences, except through collective pressure to have, for example, an early retirement age for powerful political constituencies. It was a one-size-fits-all scheme that exacted a price in human happiness.
The PSA system, on the other hand, allows for individual preferences to be translated into individual decisions that will produce the desired outcome. In the branch offices of many AFPs, there are user-friendly computer terminals that permit the worker to calculate the expected value of his future pension, based on the money in his account, and the year in which he wishes to retire. Alternatively, the worker can specify the pension amount he hopes to receive and ask the computer how much he must deposit each month if he wants to retire at a given age. Once he gets the answer, he simply asks his employer to withdraw that new percentage from his salary. Of course, he can adjust that figure as time goes on, depending on the actual yield of his pension fund. The bottom line is that a worker can determine his desired pension and retirement age in the same way one can order a tailor-made suit.
As noted above, worker contributions are deductible for income tax purposes. The return on the PSA is tax free. Upon retirement, when funds are withdrawn, taxes are paid according to the income tax bracket at that moment.
The Chilean PSA system includes both private and public sector employees. The only ones excluded are members of the police and armed forces, whose pension systems, as in other countries, are built into their pay and working conditions system. (In my opinion–but not yet theirs — they would also be better off with a PSA). All other employed workers must have a PSA. Self-employed workers may enter the system, if they wish, thus creating an incentive for informal workers to join the formal economy.
A worker who has contributed for at least 20 years but whose pension fund, upon reaching retirement age, is below the legally defined “minimum pension” receives that pension from the state once his PSA has been depleted. What should be stressed here is that no one is defined as “poor” a priori. Only a posteriori, after his working life has ended and his PSA has been depleted, does a poor pensioner receive a government subsidy. (Those without 20 years of contributions can apply for a welfare-type pension at a much lower level.)
The PSA system also includes insurance against premature death and disability. Each AFP provides this service to its clients by taking out group life and disability coverage from private life insurance companies. This coverage is paid for by an additional worker contribution of around 2.9 percent of salary, which includes the commission to the AFP.
The mandatory minimum savings level of 10 percent was calculated on the assumption of a 4 percent average net yield during the whole working life, so that the typical worker would have sufficient money in his PSA to fund a pension equal to 70 percent of his final salary.
The so-called legal retirement age is 65 for men and 60 for women. Those retirement ages — the traditional ages in the pay-as-you-go system — were not discussed in the privatization reform because they are not a structural characteristic of the new system. But the meaning of “retirement” in the PSA system is different than in the traditional one. First, workers can continue working after retirement. If they do, they receive the pension their accumulated capital makes possible and they are not required to contribute any longer to a pension plan. Second, workers with sufficient savings in their accounts to fund a “reasonable pension” (50 percent of the average salary of the previous 10 years, as long as it is higher than the “minimum pension”) may choose to take early retirement whenever they want.
Thus, the 65-60 threshold is not a rigid fixture of the system. Rather, a worker must continue making a 10 percent contribution to his PSA until he reaches that age, unless he has chosen early retirement–that is, to retire his money, as a monthly pension, which is not the same as retirement from the workforce. In addition, however, a worker must reach those threshold ages to be eligible for the government subsidy that guarantees a minimum pension.
But in no way is there an obligation to cease working, at any age, nor is there an obligation to continue working or saving for pension purposes once you have assured yourself a “reasonable pension” as described above.
Upon retiring, a worker may choose from two general payout options. In one case, a retiree may use the capital in his PSA to purchase an annuity from any private life insurance company. The annuity guarantees a constant monthly income for life, indexed to inflation (there are indexed bonds available in the Chilean capital market so that companies can invest accordingly), plus survivors’ benefits for the worker’s dependents. Alternatively, a retiree may leave his funds in the PSA and make programmed withdrawals, subject to limits based on the life expectancy of the retiree and his dependents. In the latter case, if he dies, the remaining funds in his account form a part of his estate. In both cases, he can withdraw as a lump-sum the capital in excess of that needed to obtain an annuity or programmed withdrawal equal to 70 percent of his last wages.
The PSA system solves the typical problem of pay-as-you-go systems with respect to labor demographics: in an aging population the number of workers per retiree decreases. Under the PSA system, the working population does not pay for the retired population. Thus, in contrast with the pay-as-you-go system, the potential for inter-generational conflict and eventual bankruptcy is avoided. The problem that many countries face — unfunded pension liabilities — does not exist under the PSA system.
In contrast to company-based private pension systems that generally impose costs on workers who leave before a given number of years and that sometimes result in bankruptcy of the workers’ pension funds — thus depriving workers of both their jobs and their pension rights — the PSA system is completely independent of the company employing the worker. Since the PSA is tied to the worker, not the company, the account is fully portable. Given that the pension funds must be invested in tradeable securities, the PSA has a daily value and therefore is easy to transfer from one AFP to another. The problem of “job lock” is entirely avoided. By not impinging on labor mobility, both inside a country and internationally, the PSA system helps create labor market flexibility and neither subsidizes nor penalizes immigrants.
A PSA system is also much more efficient in promoting a flexible labor market. In fact, people are increasingly deciding to work only a few hours a day or to interrupt their working lives — especially women and young people. In pay-as-you-go systems, those flexible working styles create the problem of filling the gaps in contributions. Not so in a PSA scheme where stop-and-go contributions are no problem whatsoever.
The Transition
One challenge is to define the permanent PSA system. Another, in countries that already have a pay-as-you-go system, is to manage the transition to a PSA system. The transition has to take into account the particular characteristics of each country, of course, especially constraints posed by the budget situation.
In Chile we set three basic rules for the transition:
- The government guaranteed those already receiving a pension that their pensions would be unaffected by the reform. This rule was important because the social security authority would obviously cease to receive the contributions from the workers who moved to the new system. Therefore the authority would be unable to continue paying pensioners with its own resources. Moreover, it would be unfair to the elderly to change their benefits or expectations at this point in their lives.
- Every worker already contributing to the pay-as-you-go system was given the choice of staying in that system or moving to the new PSA system. Those who left the old system were given a “recognition bond” that was deposited in their new PSAs. (The bond was indexed and carried a 4 percent real interest rate.) The government pays the bond only when the worker reaches the legal retirement age. The bonds are traded in secondary markets, so as to allow them to be used for early retirement. This bond reflected the rights the worker had already acquired in the pay-as-you-go system. Thus, a worker who had made pension contributions for years did not have to start at zero when he entered the new system.
- All new entrants to the labor force were required to enter the PSA system. The door was closed to the pay-as-you-go system because it was unsustainable. This requirement assured the complete end of the old system once the last worker who remained in it reaches retirement age (from then on, and for a limited period of time, the government has only to pay pensions to retirees of the old system). This rule is important because the most effective way to reduce the size of the government in our lives is to end programs completely, not simply scale them back so that a new government might revive them at a later date.
After several months of national debate on the proposed reforms, and a communication and education effort to explain the reform to the people,[1] the pension reform law was approved on November 4, 1980.
To give equal access to creating AFPs to all those who might be interested, the law established a six-month period during which no AFP could begin operations (not even advertising). Thus, the AFP industry is unique in that it had a clear day of conception (November 4, 1980) and a clear date of birth (May 1, 1981).
In Chile, as in most countries (but not the United States), May 1 is Labor Day. The choice of that date was not a coincidence. Symbols are important, and that date of birth allows workers to celebrate May 1 not as a day of class struggle but as the day when they were freed to choose their own pension system and thus freed from “the chains” of the state-run social security system.
Together with the creation of the new AFP system, all gross wages were redefined to include most of the employer’s contribution to the old pension system. (The rest of the employer’s contribution was turned into a transitory tax on the use of labor to help the financing of the transition; once that tax was completely phased out, as established in the pension reform law, the cost to the employer of hiring workers decreased.) The worker’s contribution was deducted from the increased gross wage. Because the total contribution was lower in the new system than in the old, net salaries for those who moved to the new system increased by around 5 percent.
In that way, we ended the illusion that both the employer and the worker contribute to social security, a device that allows political manipulation of those rates. From an economic standpoint, workers bear nearly the full burden of the payroll tax because the aggregate supply of labor is highly inelastic. Also, all the contributions are ultimately paid from the worker’s marginal productivity, and employers must take into account all labor costs — whether termed salary or social security contributions–in making their hiring and pay decisions. By renaming the employer’s contribution, the system makes it evident that all contributions are made by the worker. In this scenario, of course, the final wage level is determined by the interplay of market forces.
The financing of the transition is a complex technical issue and each country must address this problem according to its own circumstances. The implicit pay-as-you-go debt of the Chilean system in 1980 has been estimated at around 80 percent of GDP.[2] (The value of that debt had been reduced by a reform of the old system in 1978, especially by the rationalization of indexing, the elimination of special regimes, and the raising of the retirement age.)
A recent World Bank study (1994: 268) stated that “Chile shows that a country with a reasonably competitive banking system, a well-functioning debt market, and a fair degree of macroeconomic stability can finance large transition deficits without large interest rate repercussions.”
Chile used five methods to finance the short-run fiscal costs of changing to a PSA system:
- In the state’s balance sheet (in which each government should show its assets and liabilities), state pension obligations were offset to some extent by the value of state-owned enterprises and other types of assets. Therefore, privatization was not only one way to finance the transition but had several additional benefits such as increasing efficiency, spreading ownership, and depoliticizing the economy.
- Since the contribution needed in a capitalization system to finance adequate pension levels is generally lower than the current payroll taxes, a fraction of the difference between them can be used as a temporary transition tax without reducing net wages or increasing the cost of labor to the employer.
- Using debt, the transition cost can be shared by future generations. In Chile, roughly 40 percent of the cost has been financed by issuing government bonds at market rates of interest. These bonds have been bought mainly by the AFPs as part of their investment portfolios and that “bridge debt” should be completely redeemed when the pensioners of the old system are no longer with us (a source of sadness to their families and friends, but, undoubtedly, a source of relief to future ministers of finance).
- The need to finance the transition was a powerful incentive to reduce wasteful government spending. For years, the budget director has been able to use this argument to kill unjustified new spending or to reduce wasteful government programs.
- The increased economic growth that the PSA system promoted substantially increased tax revenues, especially those from the value-added tax. Only 15 years after the pension reform, Chile is running fiscal budget surpluses.
The Results
The PSAs have already accumulated an investment fund of $25 billion, an unusually large pool of internally generated capital for a developing country of 14 million people and a GDP of $60 billion.
This long-term investment capital has not only helped fund economic growth but has spurred the development of efficient financial markets and institutions. The decision to create the PSA system first, and then privatize the large state-owned companies second, resulted in a “virtuous sequence.” It gave workers the possibility of benefiting handsomely from the enormous increase in productivity of the privatized companies by allowing workers, through higher stock prices that increased the yield of their PSAs, to capture a large share of the wealth created by the privatization process.
There are around 15 AFP companies and they are a diverse group. Some belong to insurance or banking conglomerates. Others are worker-owned or tied to labor unions or specific industry or trade associations. Some include the participation of international financial companies, such as AIG, Aetna, and Banco de Santander. Several of the larger AFP companies are themselves publicly traded on the Chilean stock exchange, and one of them recently issued American depository receipts on Wall Street (helped by the recent “A-” credit rating of Chilean sovereign bonds).
One of the key results of the new system has been to increase the productivity of capital and thus the rate of economic growth in the Chilean economy. The PSA system has made the capital market more efficient and influenced its growth over the past 15 years. The vast resources administered by the AFPs have encouraged the creation of new kinds of financial instruments while enhancing others already in existence but not fully developed. Another of Chile’s pension reform contributions to the sound operation and transparency of the capital market has been the creation of a domestic risk-rating industry and the improvement of corporate governance. (The AFPs appoint outside directors in the companies in which they own shares, thus shattering complacency at board meetings.)
Since the system began to operate on May 1, 1981, the average real return on investment has been 13 percent per year (more than three times higher than the anticipated yield of 4 percent). Of course, the annual yield has shown the oscillations that are intrinsic to the free market — ranging from minus 3 percent to plus 30 percent in real terms — but the important yield is the average one over the long term.
Pensions under the new system have been significantly higher than under the old, state-administered system, which required a total payroll tax of around 25 percent. According to a recent study by Sergio Baeza (1995), the average AFP retiree is receiving a pension equal to 78 percent of his mean annual income over the previous 10 years of his working life. As mentioned, upon retirement workers may withdraw in a lump sum their “excess savings” (above the 70 percent of salary threshold). If that money were included in calculating the value of the pension, the total value would come close to 84 percent of working income. Recipients of disability pensions also receive, on average, 70 percent of their working income.
The new pension system, therefore, has made a significant contribution to the reduction of poverty by increasing the size and certainty of old-age, survivors, and disability pensions, and by the indirect but very powerful effect of promoting economic growth and employment.
The new system also has eliminated the unfairness of the old system. According to conventional wisdom, pay-as-you-go pension schemes redistribute income from the rich to the poor. However, recent studies have shown that once certain income-specific characteristics of workers and of the operation of the political system are taken into account, public schemes generally redistribute income to the rich — and especially to the most powerful groups of workers.[3]
Conclusion
It is not surprising that the PSA system in Chile has proven so popular and has helped promote social and economic stability. Workers appreciate the fairness of the system and they have obtained through their pension accounts a direct and visible stake in the economy. Since the private pension funds own a sizable fraction of the stocks of the biggest companies of Chile, workers are actually investors in the country’s fortunes.
When the PSA was inaugurated in Chile in 1981, workers were given the choice of entering the new system or remaining in the old one. Half a million Chilean workers (one fourth of the eligible workforce) chose the new system by joining in the first month of operation alone — far more than the 50,000 that had been expected. Today, more than 90 percent of Chilean workers who had been under the old system are in the new system. By 1995, 5 million Chileans had PSA accounts, although not all belonged to active, full-time workers, and therefore not all contribute in any given month.
The bottom line is that when given a choice, workers vote with their money overwhelmingly for the free market — even when it comes to such “sacred cows” as social security.
As the state pension system disappears, politicians will no longer decide whether pension checks need to be increased and in what amount or for which groups. Thus, pensions are no longer a key source of political conflict and election-time demagoguery as they once were. A person’s retirement income will depend on his own work and on the success of the economy, not on the government or on the pressures brought by special interest groups.
For Chileans, pension savings accounts now represent real and visible property rights — they are the primary sources of security for retirement. After 15 years of operation of the new system, in fact, the typical Chilean worker’s main asset is not his used car or even his small house (probably still mortgaged), but the capital in his PSA.
Finally, the private pension system has had a very important political and cultural consequence. The overwhelming majority of Chilean workers who chose to move into the new system moved into it faster than Germans going from East to West after the fall of the Berlin Wall. Those workers freely decided to abandon the state system even though some of the national trade-union leaders and the old political class advised against it. Workers care deeply about matters close to their lives, such as pensions, education, and health, and make their decisions thinking about their families and not according to political fashions.
Indeed, the new pension system gives Chileans a personal stake in the economy. A typical Chilean worker is not indifferent to the behavior of the stock market or interest rates. Intuitively he knows that a bad minister of finance can reduce the value of his pension rights. When workers feel that they own a part of the country, not through party bosses or a Politburo, they are much more attached to the free market and a free society.
This is a brief story of a dream that has come true. The ultimate lesson is that the only revolutions that are successful are those that trust the individual, and the wonders that individuals can do when they are free.
* José Piñera is President of the International Center for Pension Reform and Co-Chairman of the Cato Project on Social Security Privatization. As Minister of Labor and Social Security from 1978 to 1980, he was responsible for the privatization of the Chilean pension system. This paper is based on a presentation made at the Mont Pelerin Society’s regional meeting in Cancun, Mexico, January 17, 1996. The author wishes to thank Edward H. Crane for helpful comments.
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