SANTIAGO – Latin America has a new export: populist backlash. It first landed on the warm and receptive shores of the Mediterranean, nurturing support for Greece’s Syriza and Spain’s Podemos. Now it has reached the United Kingdom.
Corbynismo, the ideology of the long-marginalized British MP Jeremy Corbyn – who admired Venezuela’s late president, Hugo Chávez, thinks Vladimir Putin was justified in invading Ukraine, and now heads Britain’s venerable Labour Party – sounds familiar to anyone acquainted with Latin America. It calls for monetary financing of fiscal deficits (now called “people’s quantitative easing”), nationalization of industry (beginning with the railroads), and an end to competition and the private provision of public services. This is the stuff that former Prime Minister Tony Blair and his supporters thought – wrongly, it seems – they had consigned to the dustbin of history.
Of course, this new populism (Hillary Clinton’s Democratic rival Bernie Sanders is also a card-carrying member) has much fodder. As Martin Wolf has emphasized, the 2008-2009 financial crisis made voters understandably angry at “greedy plutocrats and their lackeys in politics and media.” Nobel Laureate Paul Krugman (who sometimes sounds like a Corbynista, but isn’t one) and Wolfgang Munchau stress that Europe’s moderate left lost popular support by being too ready to embrace the extreme version of fiscal austerity demanded by Germany and its orthodox allies.
But being mad is not the same as being right. The new European populists are parlaying legitimate frustration into a misguided set of policies that can only produce more of the same. Latin Americans learned this the hard way in decades past. Europeans (and perhaps Americans) may be about to as well.
Three conceptual confusions cause Corbynismo to get crucial matters completely wrong.
The market for potatoes is not like the market for loans. Yes, bankers are greedy. And, yes, financial markets require close supervision and regulation. But what is true of financial markets need not be true of other markets.
A transaction involving potatoes happens at one point in time only: the buyer parts with her money, the seller parts with his tubers, and that is it. A financial transaction, by contrast, happens over time: the borrower gets the money today and promises to repay in a month, year, or decade. This makes finance especially susceptible to crooks and con men. And because expectations and confidence about future events are crucial, governments must, like European Central Bank President Mario Draghi, stand ready to do “whatever it takes” to stabilize financial markets.
As the great Cuban-Argentine-American economist Carlos Díaz-Alejandro pointed out long ago, financial markets are not disciplined by the threat of bankruptcy. When banks get into trouble, governments always save them or wish they had (think Lehman Brothers). Regulation needs to provide the discipline that markets cannot.
But followers of Corbynismo are wrong to infer that the ills of financial markets infect all other markets, all the time. Countries, whether rich or poor, do not need a Potato Supervisory Board with new and enhanced regulatory powers.
It is great to be Keynesian – but during both halves of the cycle. Yes, orthodox economists of (mostly) Teutonic origin peddle a lethal fiscal-policy prescription. When the economy is booming, they claim, expenditure must be cut (or, if all else fails, taxes raised) in order to reduce demand. When the economy is tanking, expenditure also has to be cut in order to restore confidence and revive investment. For some European economies, this prescription has caused a needlessly long recession.
But it does not follow that, as Corbynistas believe, large budget deficits and debts are harmless. On the contrary, when debts become unsustainable and governments have no option but to close hospitals and slash pensions, it is the poor and vulnerable who suffer most.
The way to render an aggressively counter-cyclical fiscal policy feasible is by relying on modern budget rules. A modern Keynesian government does not hesitate to increase spending in the face of a recession. But, in order to do that, it needs the high credibility and low debt that follow from having saved and repaid debt during the upswing.
We did this in Chile during the copper price boom of 2006-2008, running budget surpluses of up to eight percentage points of GDP. When Wall Street melted down, we had the fiscal room to apply one of the most aggressive anti-crisis plans anywhere. A rigorous fiscal rule, designed and applied by center-left governments, made it all possible.
Progressive ends are not the same as statist means. There is nothing inevitable or God-given about suffering, injustice, and inequality. That is why modern social democrats and progressive liberals are eager to right social wrongs. But effectiveness requires agnosticism about the policies required to achieve lofty ends.
Consider health care. Different things work differently in different places. Britain has a single payer and a single service provider: the National Health Service. Canada has a single public payer but mostly private providers. Obamacare establishes a public mandate to buy private insurance (with public subsidies for the poor) to finance services provided by (mostly) private hospitals and clinics.
The same is true in education, pensions, or housing for the poor. States are right to spend generously on education; but, of the world’s top ten universities listed by the Shanghai ranking, seven are private. Successful pension systems often have a solidarity pillar (public) and a contributory pillar (private). And so on. This is old hat to students of modern public policy. Yet the Corbynistas seem to have assimilated none of it.
That is the bad news. The good news is that the ideas already exist to provide a progressive alternative to 1960s-vintage Corbynismo. Some were developed in the rich world; others in emerging countries. Political leadership – Italy’s prime minister, Matteo Renzi, is one example – is now required to push those ideas forward.