In Economists’ Paradise, Lessons for US

December 19, 2011
by Edward Glaeser

Boston Globe

GOVERNOR PATRICK visited Chile this month in an attempt to enhance the state’s collaborations with Latin America in education, clean energy, and biotechnology. But I hope he looked around, for Chile has plenty of lessons to teach America. That country has long allowed economists to reform its infrastructure, social safety net, and education system. The Chilean experience illustrates the great strengths of the economics field, especially its insights into taming the public leviathan. But Chile also illustrates its besetting weakness - tolerating massive inequality.

After General Augusto Pinochet took power in 1973, he eventually turned to a cadre of free-market economists, the “Chicago Boys’’ who, like me, received their PhDs at the University of Chicago. Chile’s subsequent rapid growth allowed economists to retain some influence. Chile’s current president, Sebastián Piñera, taught economics after earning his PhD at Harvard, and his administration has consistently engaged American economists, including me, to provide advice. As a result, policy ideas that would be hard to pursue in the United States have become reality in Chile.

The Chilean government is a model of fiscal prudence. During boom years, it ran significant surpluses, which covered deficit spending during the recent global downturn. Yet Chile’s fiscal health also owes much to its aggressively free-market approach to infrastructure, education, and retirement savings. Large infrastructure projects are provided by public-private partnerships and funded, at least in part, through user fees. Chile’s children receive vouchers that allow them to choose private or public schools. Instead of relying on a program like our Social Security, workers are required to save for retirement by investing in privately managed pension funds.

In a similar spirit, public pensions in Chile are essentially a defined-contribution system, not a defined-benefit one. So Chile doesn’t face a vast unfunded pension liability. The system’s transparency means that, unlike our leaders, Chilean politicians can’t promise golden retirement packages that will be paid for by future taxpayers. The American cities and states that face a multi-trillion dollar pension shortfall for their public employees should follow Chile towards a defined-contribution system.

Yet while Chile’s hard-nosed policies limit public waste, they also close off the government’s capacity to make society more just. The whole point of a social-security system is to reduce poverty among the elderly. The original Chilean system, adopted in 1981, ensured nothing for people who didn’t contribute. Before the 2008 reforms, which partially remedied the problem, only 55 percent of the labor force contributed to the system. Moreover, while US-style Social Security is an amazingly cheap system to operate, pension funds typically charge high management fees.

Since highways aren’t built to eliminate social inequities, Chilean infrastructure policies seem more unambiguously successful. Public-private partnerships have transformed Chile, and, to date, they have invested about 5 percent of Chile’s current GDP, primarily in roads. The great benefit of this system is that infrastructure is paid for largely by user fees, which limits giant boondoggles in which taxpayers foot the bill for ever-longer commutes.

The downside of these partnerships is that they can involve subsidies, and transfers from taxpayers to private companies provide mammoth corruption opportunities. This problem is relatively modest in law-abiding Chile, but I wonder whether Massachusetts can match Chilean probity.

Chile’s school voucher system may be its most important experiment, but it leaves an imperfect track record. The Program for International Student Assessment finds that Chilean test scores lead Latin America, but are far below the scores produced by more centralized school bureaucracies such as Singapore and Korea. Chile has among the greatest level of income inequality in the world, and this reflects, in part, the unequal distribution of education.

One problem is that the size of the voucher is modest. The Chilean protesters who demand an end to the private voucher-funded schools that currently educate over 40 percent of Chileans are misguided, but the voucher system needs more funding - and a way to reward schools that perform well.

All of this should remind us that economics is better at promoting efficiency and curbing government waste than in eliminating injustice. America should certainly fund more infrastructure with user fees, allow more choice in education, and transform public pensions. But America also needs to ensure poor children have a brighter future. And as Chile’s experience shows, that requires more than just economic theory.

Edward Glaeser is director of the Rappaport Institute for Greater Boston at Harvard Kennedy School and author of the book "The Triumph of the City." The views expressed in this article are his own.

Edward Glaeser, director, Rappaport Institute for Greater Boston.

"All of this should remind us that economics is better at promoting efficiency and curbing government waste than in eliminating injustice."

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