Latest / The Capitalism and Freedom in the Twenty-First Century Podcast / Economic Freedom and Market Reforms in Latin America With Sebastian Edwards | Hoover Institution

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Economic Freedom and Market Reforms in Latin America With Sebastian Edwards | Hoover Institution · The Capitalism and Freedom in the Twenty-First Century Podcast

• 0:09
  - This is The Capitalism and Freedom in
• 0:10
  the 21st Century podcast, the official podcast
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  of the Hoover Institution's Economic Policy Working group,
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  where we talk about economics, markets, and public policy.
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  I'm Jon Hartley, your host.
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  Today we are at the Hoover Institution's 2026 Monetary
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  Policy Conference where I'm joined by my special guest,
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  Sebastian Edwards.
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  Sebastian is one of the world's leading authorities in Latin
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  American economics, international macroeconomics,
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  and economic development.
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  A Chilean economist, professor Edwards,
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  received his PhD in economics from the University
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  of Chicago in 1981.
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  That same year, he joined the faculty at the UCLA Anderson
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  School of Management, where he remains on the faculty today.
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  Over the course of his career,
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  Sebastian has served in a number of policy positions,
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  including his chief economists of the Caribbean,
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  in Latin America at the World Bank.
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  He is the author of numerous books, including most recently,
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  the Chile Project, the Story of the Chicago Boys,
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  and the Downfall of Neoliberalism.
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  Sebastian, welcome to the podcast,
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  - John.
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  Thanks so much for having me.
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  - So, I, I wanna start with your background.
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  You grew up in Chile,
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  and you got your PhD in economics from the University
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  of Chicago in 1981.
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  One. What drove you to study economics growing up in Chile,
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  and what was it like at the University of Chicago?
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  Why did you choose there
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  and what was the environment like at the
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  time in your formative years?
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  - Well, Chile is
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  a very long country and a very interesting one.
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  So people that look at the map
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  and they see this spaghetti looking country on the west
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  of South America, they usually wonder,
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  well, how is it there?
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  When I was growing up, it was an economic disaster.
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  Inflation was year in, year out,
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  around 30% per capita growth,
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  maybe one half of 1%.
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  And Chile was a declining from an economic point of view,
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  a country within Latin America.
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  And in particular,
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  it looked very bad relative to Argentina.
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  And we'll talk some more about Argentina, I think the,
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  the neighbor to, to the east on the other side of the Andes.
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  And so I, I come from a generation where there was a,
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  a lot of concern about the future of Chile,
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  and there was a sense that
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  economics was something that had
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  to be fixed one way or another.
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  And that's why I decided to, to do, to do economics.
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  And during the first part of my
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  studies, there was a socialist experiment of Salvador,
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  and things went from bad to worse.
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  And I, what, what I think John is very interesting is
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  that now here at Hoover, there is this interest.
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  Victor Davis Hanson and
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  and Neil Ferguson have been writing about
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  what socialist was really about
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  because there is some interest among young people.
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  And after that, the coup came, the Pino Sheku,
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  and couple of years later I did go to Chicago.
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  Chicago was extremely exciting at the
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  time, exciting.
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  I was there for five years
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  or four years, four to five years.
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  And I think every year the Nobel Prize went
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  to someone in the faculty.
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  The year I arrived, Milton had just,
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  Milton Friedman just got the prize,
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  and then it, it went on and on and on.
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  And most of my professors
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  that were younger got the Nobel Prize later.
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  So very, very exciting indeed.
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  - So in, I guess Freeman had won the prize in 76, I think.
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  And, and he shortly after, I think came here.
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  But my understanding is he was still back in
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  - Chicago often.
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  I, so this is, this is very interesting.
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  I, I got
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  to Chicago when Milton already had left.
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  So he did go and I saw him a couple of times.
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  He gave a couple of lectures,
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  but I never talked to him now,
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  who took over his monetary
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  economics sequence.
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  And, and the workshop was Robert Lucas,
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  who won the Nobel Prize a few years later.
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  And he re Lucas took
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  Friedman's views on the trade off between inflation
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  and unemployment, the Phillips curve,
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  and then revolutionized macroeconomics
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  with rational expectations with Tom sart and, and,
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  and, and, and others.
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  Soman left. But we got Lucas
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  and it was extremely, like outta this world.
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  Everything was new. The level of mathematics was very high.
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  It was, we struggled a little bit with that,
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  but I got to meet Milton when he
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  and I were colleagues in the Council of Economic Advisors
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  of Governor Schwarzenegger, which was another of my, in,
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  in, in terms of my professional career, Chicago, the four,
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  four or five years in Chicago.
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  Extremely exciting. And then being a member of this council,
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  which was chaired by George Schultz
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  and Milton was a member
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  and a lot of people here from, from from Hoover,
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  John Taylor, Eddie Lazier.
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  And we met in Sacramento,
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  I think once every five weeks or so.
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  So I got to know Milton very well in those meetings.
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  - Fantastic. And what a great Hoover story.
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  I mean, you know, between Milton Friedman
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  and George Schultz, certainly too of the, you know,
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  the most famous names that, that have
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  come through through Hoover.
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  I wanna talk, I, I guess also on the,
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  the policies advising side of things,
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  you spent some time at the World Bank.
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  What was, what, what's it been like sort of advising
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  politicians, I guess, like Arnold Schwarzenegger
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  or the World Bank, did working in policy institutions sort
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  of change your view in terms of how economics was done
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  and how influential and powerful it can be?
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  - It did. So I,
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  so my career, undergrad economics in Chile,
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  which is a country
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  that has a continental university system,
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  so you don't get a BA in liberal arts,
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  you go straight into a career stream.
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  And so five years of undergrad economics.
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  So the training is equivalent to a master's degree
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  in the US and
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  - This is at Pontifical University in
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  - She, the Catholic University, right?
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  - This is where also many of the,
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  - The Chicago undergrad - Chicago
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  - Boys - Went as undergrads and they would come to
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  - Exactly - Chicago for their PhD,
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  - Right?
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  So the Chicago boys brand name has, it's,
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  it's Ancor at the Catholic University in, in Santiago,
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  which is where I, I got my undergraduate from.
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  So I went from there to Chicago, Chicago to UCLA
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  as a young academic.
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  Then at UCLA, I got tenure, then I became a full professor,
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  and then I was recruited by the World Bank
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  and I took leave from UCLA
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  and I went to the World Bank in
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  1991 or 92, I forget.
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  And this was particularly unique
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  because the World Bank had a number of new members,
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  and those members came from Eastern Europe.
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  So the World Bank was moving away, or, or
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  or expanding its purview from emerging markets,
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  developing countries to developing countries
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  and former Soviet sphere countries.
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  And they moved a whole bunch of people
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  that worked in Latin America to work on Russia
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  and the Czech Republic and so on.
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  So there was a gap in Latin America. They hired me.
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  And what was going on at that time is that there was a lot
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  of cross fertilization
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  and we were trying to learn on how
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  to do market oriented reforms in Latin America,
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  and what could be learned from that that was useful for
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  Russia and Eastern Europe.
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  So for instance, how do you privatize when everything is
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  to be privatized?
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  Do, who do you start with? Manufacturing firms?
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  Do you start with agriculture, with land?
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  When do you privatize the banks early in the middle,
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  gradually spread out if you
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  privatize them early on
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  and you don't have a regulatory system, the oligarchs
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  use the banks to buy everything else as is being privatized,
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  but it's very fragile.
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  So Chile did it one way, Mexico did it another way.
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  So we would learn lessons from Latin America
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  and then pass them on to the people at the bank
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  that were working.
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  And, and, and, and something that is coming up now back
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  with this emphasis on industrial policy, people at the bank
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  that worked on East Asia were also trying to convince
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  the, the, the former Soviet countries that
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  that was the way to go.
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  More, more, more government intervention.
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  So one of the things that I did at the bank,
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  which was very interesting, was,
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  and I have a beautiful anecdote there, sequencing
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  of reforms, what I was just telling you, what do you, do?
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  You do everything at the same time.
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  Do you start with labor markets?
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  Do you put an end to inflation
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  before you attempt to privatize?
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  So sequencing, which is a very complicated issue
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  'cause it involves dynamics was something that was,
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  we were trying to, to deal with.
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  And so I have good anecdotes about that.
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  - So, so I wanna transition a bit to Chile
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  and really wanna talk about your book.
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  What motivated you to write the Chile project?
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  Who exactly were the Chicago boys
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  and how influential were they really in shaping the economy
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  as Pinoche took power from Ida in 1973?
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  And how economically successful, you know,
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  were these reforms?
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  And I mean, at some level, you know, are, do you think,
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  are they the reason
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  or the chief reason why Chile today remains arguably the
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  most prosperous nation Latin America?
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  - Yeah, so let, let, let's start
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  with your question about success.
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  The reforms were incredibly successful.
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  And as you point out, Chile today is
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  if not the most prosperous, one of the two most represent,
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  and really the country that people in Latin America look up
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  to in terms of all sorts of policies and so on.
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  So in 1974,
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  the CO is in 73, Peter Rashad takes over in 73,
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  he deposes President AE 1974, Chile,
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  Costa Rica and Ecuador have identical income per capita,
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  identical 3,300 and something dollars per capita.
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  Chile today has double that of Ecuador twice. Wow.
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  And 50% more than Costa Rica.
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  And as I said earlier, when I was growing up,
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  we looked up at Argentina, they were better in everything,
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  certainly soccer, and they continue to be here.
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  But everything, and in 2001,
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  Chile surpassed Argentina in a number of indicators,
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  including life expectancy, nutrition,
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  social indicators, and income per capita.
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  And in terms of the, of the, the, the, the Chilean view
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  of themselves,
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  surpassing Argentina was very, very important.
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  So the ref,
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  the Chicago boys reforms were incredibly successful.
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  And if you look at the data, that's what, what, that's
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  what the data show.
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  But more than that, the governments
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  that followed the dictatorship,
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  which were center left governments, some
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  of the cabinet members had been imprisoned by the military,
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  some had been tortured, many
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  of them had spent years in exile.
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  They took the Chicago boy policies
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  and they actually deepened them.
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  They did not turn around, they did not suppress them.
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  They said, this is the way to go
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  because there's nothing more attractive
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  and seductive than success.
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  And so the, the very important step in the history
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  of Chile is that when the democracy came back,
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  the new economic team, which had been very critical
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  of the Chicago wars in the early years, realized, no,
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  these guys really were able to transform this country.
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  We're gonna stick with this, these policies.
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  - And, and I mean, just for those that aren't familiar with
• 14:00
  what market reforms,
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  what Congress would call market reforms,
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  could you give maybe a few examples of what some
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  of these market reforms entailed?
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  Like, I, I think, I guess one example that would maybe come
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  to mind is like, you know, price controls, you know,
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  you know, the price of milk was set at, I don't know,
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  you know, $2 a gallon
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  or something like that, you know, both
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  below the market price, right?
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  You know, were there were the fiscal reforms,
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  were there other things that were part of this?
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  - Yeah, so, so that's a great question.
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  The main thing is that Chile is a little bit
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  of a distortion in terms of looking at it
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  because the Chicago boys took over a country that was trying
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  to move to real socialism, not social democracy,
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  but socialism in the Soviet style, what is
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  as known as real socialism
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  - Where government wants to, you know,
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  - Control industries.
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  But no, the government wants
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  to own all the means of production.
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  Yes, own everything. So
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  - Everything is nationalized,
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  - Everything is nationalized exp ated
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  confiscated. So the first totally
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  - Different from, you know, the sort of Nordic welfare
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  - State - Idea of, you know, generally free markets.
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  - So that's why we have to, we have to make a distinction
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  between what the East Germans started calling in
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  1971
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  or so, real socialism real in the sense
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  that it's the socialism that really existed
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  on the other side of, of the, of the
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  wall, of the Berlin wall.
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  Okay. And not, not just having the Empire State.
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  And, and, and we have to, so real socialism is Soviet type
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  Cuba, China at the time, not now,
• 15:43
  Vietnam at the time, not now.
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  And it's not social democracy, welfare state
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  that's different like you see in
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  - The Nordics or, - Right.
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  So it's not Sweden, Norway, or Denmark.
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  So what the market, so Chile had
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  3000 prices were controlled by the government,
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  interest rates were controlled, inflation was, depending on
• 16:03
  how you measure it, but about a thousand percent per year
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  credit was allocated by bureaucrats.
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  There had been about 300 large manufacturing firms
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  that had been nationalized.
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  And the corporate mines that
• 16:24
  where joint ventures within the Chilean government
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  and large American multinationals, very famous companies,
• 16:31
  Anaconda Copper
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  and Icut Copper, they were nationalized as well.
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  So everything, or, or, or,
• 16:39
  or very vast number
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  of firms were belonged to the state.
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  Everything was controlled.
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  And what the market reforms mean is to undo all of that
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  and go back to some level
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  of market operation.
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  And whether Chicago boys did, is that they said, no,
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  we're not gonna free 500 prices out of the 3000.
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  We're gonna free them all, every single one of 'em.
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  And we are going to allow the market
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  to determine interest rates
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  and we're gonna privatize banks, banks in Chile,
• 17:19
  were privatized early, so, but we're gonna privatize banks
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  and who are they going to lend money?
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  Whoever they want to lend money to, they're going
• 17:26
  to look at projects
• 17:27
  and they're gonna assess the risk, assess
• 17:30
  how profitable those investment projects are,
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  and they're gonna lend to the better projects.
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  And what they did is that they started moving in a direction
• 17:38
  that at the time was unthinkable.
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  And that created a lot of fuss.
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  And people around the world in the, the World Bank
• 17:50
  and some people at the IMF said, this is not going to work.
• 17:55
  And after a period of adjustment,
• 17:58
  because bringing down inflation from a thousand percent
• 18:01
  to 2% ain't easy.
• 18:03
  Okay? So that's why we don't want
• 18:05
  inflation to get outta hand.
• 18:07
  When it gets outta hand, it's very
• 18:08
  hard to bring it back down.
• 18:10
  But so, and
• 18:13
  after some mistakes that were, were, were, were done,
• 18:16
  Chile started growing, and then it was a, a, a true miracle
• 18:21
  and, and the mechanics of moving a country from being
• 18:26
  totally government controlled into being one
• 18:29
  of the freest markets in the world,
• 18:34
  that's very challenging and very difficult.
• 18:36
  And it was done in a very good way.
• 18:39
  - So I think it, it's fair to say that, you know,
• 18:42
  this is an example market reforms causing growth.
• 18:47
  And I, I certainly subscribe to the idea
• 18:49
  that market reforms cause growth.
• 18:50
  I think it's something that I think a lot
• 18:52
  of even political economists today have sort of, sort
• 18:55
  of forgotten since the global financial crisis.
• 18:58
  When, when people talk about,
• 19:00
  say neo neoliberalism in Latin America,
• 19:04
  what do they usually get wrong in those critics?
• 19:06
  I mean, there,
• 19:07
  there was this big backlash against markets in Chile
• 19:10
  that was led by Gabriel Bork, who was elected in 2021,
• 19:13
  attempted to change the constitution, failed.
• 19:16
  And just recently was, you know, is now out
• 19:21
  of office with a cast now taking the,
• 19:25
  the reigns and,
• 19:27
  and you know, not a, a reversion from socialism,
• 19:32
  you know, what do you think that upset, sort of led
• 19:37
  by boric, you know, several years ago now reflected?
• 19:40
  Was that something sort of those cultural, political,
• 19:43
  you know, Chile sort of went from being this, you know,
• 19:47
  shining example in Latin America for a very long time
• 19:50
  to experiencing some major political unrest
• 19:53
  and in your constitutional turmoil and what changed there?
• 19:57
  And was that sort of a flash in the pan?
• 19:59
  And are we now sort of back to sort of
• 20:03
  what you could call free market sort
• 20:04
  of economic success in your mind?
• 20:06
  - Yeah, so one of the questions
• 20:08
  that you asked me when we started this conversation was
• 20:13
  what motivated me to write my book, the,
• 20:17
  the Chile project where I tell the story
• 20:20
  of the Chicago boys and so on.
• 20:22
  And one of the reasons why I decided to write it is that
• 20:26
  many people who knew that I was born in Chile
• 20:30
  started asking me the question that you asked me, how come
• 20:33
  that this country, which went from being out
• 20:37
  of the 20 Latin American countries, there are 18,
• 20:39
  but being number 10, number 10, 11 went
• 20:44
  to number one by a wide margin.
• 20:46
  And why is there now, are there riots and, and,
• 20:50
  and this unhappiness?
• 20:54
  And they, they, they elect this
• 20:57
  far left president Gabriel Borich.
• 21:01
  And I decided, I'm gonna tell the story of Chile in,
• 21:05
  in this book, starting from how these economists,
• 21:09
  the Chicago boys were trained, how they went to Chicago, how
• 21:13
  Milton Friedman influenced them, and Al Harberger
• 21:16
  and the whole Chicago faculty.
• 21:19
  And one of the things that happens is that there,
• 21:22
  there were several things.
• 21:25
  One is that the rate
• 21:29
  of growth of Chile.
• 21:31
  So, so Chile started growing at 7% for about a decade,
• 21:35
  started slowing down for a number of reasons,
• 21:38
  including the fact
• 21:39
  that the low hanging fruit had already been picked.
• 21:44
  And a lot of, and regulation over regulations started
• 21:48
  creeping in, and the economy slowed down.
• 21:51
  So people had, were aspiring
• 21:55
  that their incomes grew at the rate of growth
• 21:57
  of the economy in the past six, 7%.
• 22:00
  And it started going down to four, three, 2%.
• 22:04
  So there were frustrated aspirations,
• 22:08
  and that created some unhappiness.
• 22:11
  The second thing that that happened is that the
• 22:17
  pro market people decided
• 22:20
  to declare victory in the battle of ideas
• 22:24
  and then went home basically to put it in a sort
• 22:29
  of like a simple illustration.
• 22:32
  They joined corporate boards instead of doing research
• 22:35
  and doing what you do, having a podcast explaining
• 22:39
  market ideas, right?
• 22:40
  And the left did not join boards.
• 22:45
  They went to school and they read ramche
• 22:49
  and they started studying the
• 22:55
  radical environmentalist,
• 22:58
  and they were able to produce a,
• 23:03
  a discourse, a narrative
• 23:04
  that was very attractive to young people.
• 23:07
  So when you put the narrative that talks about unfairness,
• 23:11
  social injustice,
• 23:16
  collusion, and at the same time the people
• 23:19
  who defend the market are not defending it anymore,
• 23:22
  you create a situation that is
• 23:27
  a spark can make, make, make things explode.
• 23:31
  And that's what, what happened in 2019.
• 23:34
  And there were demonstrations, protest, riots,
• 23:39
  and then the, the, the political class said, well, well,
• 23:44
  let's try to this by rewriting the social contract.
• 23:49
  And a way of doing that is writing a new constitution.
• 23:53
  And that did, it was attempted.
• 23:57
  We can talk about the details,
• 23:58
  but basically the, the draft was very,
• 24:02
  very slanted to the left.
• 24:06
  Totally crazy in my opinion.
• 24:07
  And when there was the, the referendum, it lost big time.
• 24:13
  They got 38% in favor.
• 24:15
  So the country's now back trying to
• 24:20
  find it's, it's, it's footing how to, to,
• 24:24
  to move, to move forward and, and go back to faster growth.
• 24:29
  That's, that's the challenge that the new
• 24:31
  administration is facing.
• 24:34
  - And, and I guess for the viewers that,
• 24:35
  that aren't familiar, I mean, at some level that you bill
• 24:39
  and Friedman's, I guess reputation for a long time.
• 24:41
  Certainly I think on the part of the left, I think sort
• 24:46
  of got really wrapped into his,
• 24:48
  I think only week long visit with Pinoche.
• 24:50
  - Well, he spent 45 minutes yes, with Pinoche.
• 24:53
  He was in Chile maybe for five days.
• 24:56
  I talked to Milton Extensively on this in Sacramento.
• 25:01
  There were two topics that I tried to get from him.
• 25:04
  One was the abrogation of the gold clause
• 25:08
  in 1933 by FDR.
• 25:14
  And he, he, he has, he covers
• 25:17
  that in his monetary history of the United States.
• 25:20
  And I wrote a book about that. And the other
• 25:22
  topic was Chile.
• 25:23
  So he spent 45 minutes with Pinochet total.
• 25:27
  What really was problematic for Milton's perspective is
• 25:32
  that he wrote a letter to Pinochet that was leaked
• 25:35
  to the press where he said, the only way
• 25:39
  to end inflation is to have a shock treatment.
• 25:43
  And the term shock treatment was, has been taken by the left
• 25:48
  as inhumane, a way of, of, of,
• 25:52
  of creating poverty and so on.
• 25:55
  So where shock
• 25:56
  - Therapy comes from - Identity shock therapy, right?
• 25:58
  Shock therapy. So Milton said in, and,
• 26:03
  and he gave examples very interesting how when in Germany,
• 26:10
  I, our neighborhood freed prices,
• 26:13
  they did it on a Friday night.
• 26:15
  And it was a long weekend so that the occupying forces, the,
• 26:20
  in particular the Brits who are now labor was in Germany,
• 26:23
  could not turn the turn that back and said, and, and,
• 26:26
  and that's a way in Japan.
• 26:28
  And he, he gives examples and said, shock therapy.
• 26:31
  Shock treatment. And that letter was leaked to the press.
• 26:36
  And that's what created a lot of frauds for, for Milton.
• 26:38
  He has a lot in his book,
• 26:43
  joined with Rose, two lucky people, the autobiography.
• 26:48
  He has a very long appendix on Chile, which
• 26:51
  otherwise would've been unnecessary, right?
• 26:53
  And he, he reproduces the letter that he sent to Pinochet,
• 26:56
  the letter that Pinochet wrote back to him.
• 26:59
  And he goes over that episode, a 45
• 27:03
  minutes episode that takes like 30 pages of the book.
• 27:07
  - Oh wow. You know, Milton Friedman spent much of his,
• 27:11
  you know, later years here, you know, from 1976
• 27:13
  to his death in 2006.
• 27:16
  I, I think many of the viewers I'm sure familiar with
• 27:18
  Milton Friedman and, you know, some of his work and, and,
• 27:23
  and of course his famous involvement in, in Chile.
• 27:27
  Talk to us a little bit about Al Harberger.
• 27:29
  I feel like Al Harberger is less well known,
• 27:31
  but perhaps even more important in this story in terms
• 27:35
  of training these economists who are coming from Chile,
• 27:39
  you know, had done their undergrad at, you know,
• 27:41
  Catholic University of Chile,
• 27:43
  - Right?
• 27:44
  So, so Har is Harberger is the real
• 27:45
  father of the Chicago boys.
• 27:47
  And in the meeting
• 27:48
  of the Monte Pean society here at Hoover a few years ago,
• 27:52
  George Schultz tells a story
• 27:54
  and he says he's the godfather,
• 27:57
  or I forget the term that, that he uses.
• 28:01
  So everything goes back to TW Schutz.
• 28:04
  Theodore Schutz, who was the chairman
• 28:07
  of the economics department at Chicago for a long time,
• 28:10
  - He was an agricultural - Comm, agricultural economies.
• 28:11
  He got the Nobel Prize, maybe 1979.
• 28:15
  I was assure that Chicago, when Ted got the Nobel Prize,
• 28:18
  and Ted was advising a number
• 28:23
  of agriculture of Latin American countries in agriculture.
• 28:27
  And he came to the, this is
• 28:28
  after the war, he came to the conclusion of early fifties
• 28:32
  through a, the, the predecessor
• 28:36
  of U-S-A-I-D, which doesn't exist anymore now.
• 28:42
  So it was called ICA
• 28:45
  and Ted was advising agricultural
• 28:50
  agriculture ministry,
• 28:52
  and he concluded that it will never work if only
• 28:56
  agriculture was addressed,
• 28:58
  that the Latin American countries needed
• 29:00
  overall good policy.
• 29:01
  Mm. Okay. So if he gave market oriented advice
• 29:06
  for agriculture and the central bank behaved in the wrong
• 29:09
  way, and, and the, the tax system was totally screwed up.
• 29:13
  And so he said, we need to create an environment
• 29:18
  where there are economists that understand how modern
• 29:22
  economists work.
• 29:25
  And so he, he,
• 29:28
  he found someone at ICAA Princeton grad who was a,
• 29:33
  a or an official at, at,
• 29:38
  at ICA, pat Patterson, who agreed with him.
• 29:43
  And Patterson was in Paraguay,
• 29:45
  but he was transferred to Chile.
• 29:46
  So they picked, we tried to do this in Chile.
• 29:50
  So they said, well, but Chile doesn't have good economists.
• 29:54
  Well, we'll train them at Chicago.
• 29:56
  And that's how the program starts.
• 29:58
  And the idea was that they would train about five
• 30:00
  or six, they would come back to Chile
• 30:02
  and they would train others
• 30:06
  and they would be, so these would be like the grandchildren
• 30:09
  of the, of Chicago.
• 30:11
  They, they, they did not go to Chicago.
• 30:13
  They were trained by, by Chicago.
• 30:15
  And that's a story that I tell in the book, right?
• 30:18
  And so Ted Schulz goes
• 30:22
  to Chile in 1955
• 30:26
  to see if a university in Chile is
• 30:29
  interested in this program.
• 30:31
  And he then decides I have to bring some
• 30:34
  of my colleagues from Chicago.
• 30:35
  So he brings a very,
• 30:37
  very prominent economic historian called Earl Hamilton,
• 30:41
  who has, is, he was an expert on Spain
• 30:45
  and had written a very important book on inflation in Spain
• 30:48
  after the Discovery of America,
• 30:50
  because of the increase in the money supply silver from
• 30:56
  Peru and Mexico.
• 30:57
  And silver was the, the medium of exchange.
• 31:02
  So the money supply increased inflation in Spain.
• 31:05
  So Earl spoke Spanish, he
• 31:12
  rottenberg Cy Rottenberg, Simon Rottenberg,
• 31:15
  who had worked in Puerto Rico and knew a lot about baseball.
• 31:19
  So he was a baseball expert.
• 31:22
  And if you, if you are a baseball expert, you need to go
• 31:26
  to the Dr the me Republic in Puerto Rico
• 31:28
  in, at the time, Cuba.
• 31:30
  So he spoke and, and Harberger a young assistant professor,
• 31:34
  he also was proficient in Spanish.
• 31:36
  Oh. And that's why they go to Chile.
• 31:40
  And Harberger then falls in love with the country.
• 31:44
  And a few years later he marries a Chilean woman, and he,
• 31:48
  and then he becomes sort of the first,
• 31:52
  like the older brother to the younger Chicago boys,
• 31:57
  and then the father.
• 31:59
  So he's, he, he's still alive. He's 101 years old. That's
• 32:03
  - Amazing.
• 32:04
  - And I, to my kids, he's like, like the grandfather
• 32:07
  because my kids' grandparents were in Chile,
• 32:10
  so they didn't have a, a grandfather figure.
• 32:13
  And al became the, the, the grandfather figure.
• 32:15
  And so he's the real father of the Chicago boys, a a,
• 32:21
  a real giant in public finance and development economics,
• 32:26
  - Well known for the Har worker triangles.
• 32:28
  - Exactly. - The weight loss, you know, triangles.
• 32:30
  - Exactly. - Trying to measure inefficiency in economy,
• 32:33
  I think, you know, it's basically a economic sort
• 32:36
  of one-on-one, you know.
• 32:38
  - So I, intro textbook topic, yeah, I was, I I I traveled
• 32:42
  around the world with al all over.
• 32:46
  We went, we spent time in Indonesia,
• 32:48
  spent time all over Central America.
• 32:52
  We went to the Dominican Republic, we were hired
• 32:54
  by the arch bishop
• 32:57
  of the Dominican Republic at that point when there was a big
• 33:02
  rou in terms of the economy.
• 33:04
  And the archbishop decided, I have to interfere here
• 33:07
  and be like the referee.
• 33:09
  And he said, but I don't know any economics.
• 33:11
  I'm gonna hire Professor Harberger.
• 33:12
  So I went with Al to the Dominican Republic, we went
• 33:15
  to Russia, we all over the world. Africa.
• 33:17
  - Amazing. That's fantastic.
• 33:19
  And yeah, I, I, you know, he's a huge figure, you know,
• 33:23
  he started the, the Alamos Alliance as well, you know,
• 33:26
  which is an annual gathering of Latin American
• 33:29
  and American economists.
• 33:30
  And yeah, really, I think his influence, it's
• 33:35
  - Big, bigger, and he's, he's also a nice guy.
• 33:36
  So the combination of very bright
• 33:41
  and, and, and great economists with being truly generous
• 33:45
  and nice, it's in short supply.
• 33:48
  Absolutely. So that's, that's great. Great guy.
• 33:51
  - And, and certainly, you know, you know,
• 33:53
  under underappreciated
• 33:54
  and I think could, could take a lot more credit
• 33:57
  for, for all these things.
• 33:58
  If, if you wanted to, I wanna pivot
• 34:02
  or zoom out a a bit more from, from Chile to Latin America,
• 34:06
  just more broadly, you know, why, just from a,
• 34:10
  a development, economic growth standpoint,
• 34:12
  why is Latin America in your mind, struggled so persistently
• 34:17
  with inflation, fiscal crises, you know,
• 34:21
  socialism, political economy issues
• 34:24
  and economic growth overall, say compared to Europe,
• 34:28
  the United States, Canada, you know, why in your mind,
• 34:33
  has Latin America lagged?
• 34:35
  - Well, there's not, there's not one single explanation.
• 34:38
  So it's like the old SAT question, all of the above, right?
• 34:44
  So there's a lot of, to, a lot
• 34:49
  of it has to do with culture and institutions.
• 34:52
  So there is a view
• 34:58
  that, so let me get get to the fact.
• 35:00
  So mid 18th century,
• 35:07
  the main colonies of North America
• 35:10
  and the 13 colonies of Spanish America
• 35:14
  had roughly the same income per capita.
• 35:17
  And today, Latin America, Chile, which is the number one,
• 35:21
  it's like say 23% income per capita, that of the us.
• 35:26
  So there's been this growing gap,
• 35:29
  and the question is, well, why?
• 35:30
  This is what you are asking.
• 35:32
  And I think that a very important reason is this cultural
• 35:38
  institutional difference.
• 35:41
  And that has to do with
• 35:46
  Spain and England.
• 35:49
  And this theory, which is a little bit sort of
• 35:55
  maybe elaboration of Max Weber's theory, of the role
• 35:59
  of Protestantism in, in, in,
• 36:03
  in helping the big jump of, of capitalism is
• 36:08
  that North America was very decentralized.
• 36:12
  And Alexis Tokyo, democracy in America, one of the things
• 36:16
  that he was impressed by is
• 36:18
  that every town had its own sheriff,
• 36:22
  it elected its officials.
• 36:24
  It's, it was decentralized. There was no central power.
• 36:29
  And Latin America was exactly the opposite.
• 36:32
  And that has had to do, I think with the Reformation
• 36:36
  and the counter reformation.
• 36:39
  So the Spanish decided to side with the Pope
• 36:42
  after the Reformation,
• 36:44
  and they were the armed, the armed armed
• 36:50
  of the counter reformation.
• 36:52
  And in order to protect the Pope, they had
• 36:55
  to centralize things because
• 36:57
  otherwise another Luther could come up, right?
• 37:00
  Or Henry vii. So they, everything was highly centralized
• 37:05
  and you could not in Latin America
• 37:07
  or in the Spanish colonists make any decision
• 37:10
  unless it was ratified in Spain.
• 37:14
  And it took, I don't know, three months, four months.
• 37:16
  So you ask a question
• 37:17
  and they had to send some guy to go to Seville
• 37:20
  and from Seville to Madrid
• 37:22
  and come back while North America was
• 37:26
  local communities were making their own decisions
• 37:29
  and their own, and they were governing themselves.
• 37:32
  So I think that that has a lot to do with it.
• 37:35
  So it's culture, it also has to do with natural resources.
• 37:40
  So Latin America is,
• 37:46
  as you go, especially to the south,
• 37:48
  mining is very important.
• 37:50
  And in order to do to, to, to do serious mining,
• 37:53
  you need a different type of
• 37:56
  economic organization than if you have agriculture in
• 37:59
  particular in the plains of the US
• 38:01
  where you can have family owned farms.
• 38:05
  So an interesting thing is the Wizard of Oz.
• 38:08
  So it's the uncle, I forget his name, and the, and the aunt
• 38:11
  and the Dorothy Toto is a dog.
• 38:14
  And then there are three hired helps, okay?
• 38:17
  The lion, the tin man, and the, the, the third guy is the,
• 38:22
  - And the the lion, the tin man.
• 38:25
  And what is it? The Scarecrow. The
• 38:28
  - Scarecrow, okay.
• 38:29
  So there, there were basically no forms in Latin America
• 38:33
  that were family owned with only three hired helps.
• 38:36
  They, you had to have 7,500 Indians, right?
• 38:41
  And so the property, so everything and then bad policies
• 38:46
  and the policies in Latin America, again,
• 38:49
  because of the centralization, a lot of regulation,
• 38:51
  you couldn't start a business
• 38:53
  unless you had the, the permit from the king.
• 38:58
  So Latin America was left behind.
• 39:00
  I have a book which I think I published in 2010,
• 39:03
  called Left Behind.
• 39:04
  And, and I, for the first time I told the story of Chile
• 39:07
  that is trying to get out of the pack.
• 39:11
  And, but now at least I think I,
• 39:15
  I'm very optimistic about Argentina.
• 39:17
  So I think that Argentina is moving in the right direction.
• 39:21
  Chile now is trying to get back in the right direction
• 39:24
  after the four years of the, the,
• 39:26
  the far left being in charge.
• 39:29
  Uruguay, although it has a center left government,
• 39:32
  it's always very reasonable.
• 39:35
  Peru is a very strange country where the, the head
• 39:39
  of state is replaced at risk 10 months or so.
• 39:43
  And the vast majority of the, of,
• 39:46
  of previous ones are either in jail
• 39:49
  or have been prosecuted,
• 39:52
  but the economy continues to function.
• 39:54
  Inflation is very low.
• 39:56
  So I think that that, that Latin America maybe is turning
• 40:01
  for the Ecuador is moving in the right direction.
• 40:04
  Columbia is a concern.
• 40:06
  Mexico's a concern, Venezuela, we hope
• 40:10
  that it, it will improve.
• 40:12
  - So I'm totally with you on, I think there,
• 40:16
  there's some story, you know, perhaps about institutions.
• 40:20
  I mean, this is part of the story that Aal Glu
• 40:22
  and Robinson tell and why nations fail that.
• 40:25
  - Well, but Douglas North told the story before that,
• 40:27
  and Adam Smith before that, so chapter part four,
• 40:31
  chapter seven of the Wealth of Nations.
• 40:36
  It's titled on the Colonies and it's everything.
• 40:40
  And at the end that there's a beautiful passage
• 40:44
  where Adam Smith sort of ranks the colonial
• 40:51
  forces, the colonial, the, the, the,
• 40:54
  and he says the Brits are the, the, the best,
• 40:57
  the Dutch are the worst.
• 40:59
  And then he's, and, and the, the French second
• 41:01
  and the, the Spanish third.
• 41:04
  And he explains why. And it's all about institutions. Mm.
• 41:08
  So the civil, civil service created in India,
• 41:11
  and the bridges do that,
• 41:13
  and the Dutch are completely the,
• 41:15
  don't create any local institutions
• 41:19
  and it's all extracting the wealth.
• 41:21
  And so it's, it's, everything comes from Adam Smith.
• 41:24
  It's that we didn't read that chapter
• 41:26
  because it was called on the Colonies.
• 41:28
  - Well, and, and you know, I I think, you know,
• 41:30
  the inclusive versus extractive institutions nomenclature
• 41:34
  of AAL Glenn Robinson, I think it's so wrong.
• 41:36
  I like the, I guess you could call like liberal versus more
• 41:38
  illiberal or,
• 41:39
  or more, you know, decentralized, you know,
• 41:41
  liberal institutions, you know, maybe the sort of framing
• 41:44
  of Smith versus, you know, more, more illiberal ones.
• 41:47
  And you know, slavery, not only is it extractive,
• 41:49
  but I it's obviously illiberal.
• 41:52
  And also you could talk about like just legal traditions
• 41:55
  as well and legal origins.
• 41:56
  You know, obviously the British had common law, you know,
• 41:59
  law that could very much be local, you know,
• 42:02
  two people can contract together.
• 42:03
  Law can kind of evolve, adapt
• 42:05
  to technology as it comes along.
• 42:07
  Whereas, you know, civil law, you know,
• 42:08
  you're dealing with, you know,
• 42:10
  - Yeah.
• 42:11
  So Latin America is all Napoleonic code.
• 42:13
  - Exactly. - Right? So everything comes from
• 42:15
  Napoleon and France,
• 42:16
  - Which is - Right.
• 42:17
  And, and, but what is interesting is
• 42:20
  that the scaffolding is French,
• 42:22
  but the constitutions are all copied from our constitution,
• 42:26
  from the American constitution.
• 42:27
  So they are all presidential countries.
• 42:29
  There's no parliament, there's no not a single country in
• 42:33
  Latin America.
• 42:35
  It's a parliamentary democracy.
• 42:37
  The parliamentary democracies are in the Caribbean
• 42:39
  because come from England.
• 42:41
  So, and there's been a lot
• 42:43
  of discussion in these countries whether there should be
• 42:47
  more of a semi parliamentary like the French,
• 42:50
  that they do have a prime minister.
• 42:52
  Although I don't think that you
• 42:53
  or I remember who is the prime minister right now in France.
• 42:57
  I don't, and they have a president.
• 43:00
  But it's interesting that the scaffolding is from Napoleon,
• 43:03
  it's French, and the Constitution is American.
• 43:07
  And IIII haven't talked to historians that if they think
• 43:12
  that this is a sort of a lethal cocktail.
• 43:15
  - Yeah, certainly. I mean, 'cause you know, certainly,
• 43:17
  you know, you've got the, you know, the other issue
• 43:18
  of I guess separation of power as well.
• 43:21
  I mean, the US sort of, you is fortunate, you know, the,
• 43:25
  the one downside, you know, parliamentary systems is,
• 43:27
  you know, you don't have many separations of, of, of power.
• 43:31
  So you don't, you don't have many powers.
• 43:32
  It's very much, you know,
• 43:34
  parliament is supreme correct in the sense that, you know,
• 43:37
  one, you know, if you get a simple majority in a parliament,
• 43:41
  you know, they can change everything
• 43:42
  and you can, if you win parliament back, you can
• 43:44
  - Change it all back.
• 43:45
  Well that's, you know, that, that's, that's what mad,
• 43:47
  that's was Maduro's argument to stay in power for 13 years.
• 43:51
  He said Margaret Thatcher stayed in power for,
• 43:54
  I don't know, 10 years.
• 43:55
  And Billy Brandon, he said,
• 43:57
  these guys in Europe do it all the time.
• 44:00
  Why cannot I stay on forever?
• 44:03
  And now he's he's not there anymore.
• 44:07
  - Yes, yes. So I, I wanna sort of jump into some of that.
• 44:11
  So, I mean, it seems like we see we've had some sort
• 44:15
  of a reversion to free market,
• 44:18
  more free market Latin American,
• 44:20
  - Not everywhere.
• 44:21
  Mexico is a concern. Yes.
• 44:22
  And Columbia, certainly I'm, I'm very worried about
• 44:25
  - Columbia, but I'm just saying compared to sort of,
• 44:27
  I feel like past decades where we've had, you know,
• 44:30
  pink tides of, of, you know, new sort of, you know,
• 44:35
  leftist more anti-market candidates, you know,
• 44:39
  now we've got obviously heavier Malay in Argentina.
• 44:43
  We've got cast in Chile, PAs in Bolivia, Fernandez
• 44:46
  and Costa Rica, Asura
• 44:49
  and Honduras, possibly Fujimori and, and Peru.
• 44:53
  And, you know, it's, it's possible that Lula could,
• 44:56
  you know, be out in, in Brazil
• 44:58
  and you know, Bolsonaro sun could be in,
• 45:02
  in power soon as well.
• 45:04
  I mean, do you think that, you know, this new wave is,
• 45:06
  is something that could bring about sustained economic
• 45:09
  growth, or do you think it's gonna be
• 45:10
  short-lived that can break that political
• 45:13
  - Economy or - Barrier?
• 45:15
  - I, I hope it brings back
• 45:20
  economic growth.
• 45:25
  The one, the one case I'm following more closely
• 45:28
  for a number of reasons, including
• 45:30
  that I was born there is the Chilean case
• 45:33
  and the new government president, Jose Antonio cast,
• 45:37
  it's only been in power for about two months now.
• 45:41
  And they're trying to do too much too fast.
• 45:46
  And although the left is in complete disarray,
• 45:51
  they have been able to mount a campaign of saying,
• 45:56
  you are trying to do reforms
• 46:00
  that only favor the rich.
• 46:04
  And I think that that, that
• 46:07
  you cannot do too much at the same simultaneously.
• 46:10
  Although one of the anecdotes that I was talking
• 46:15
  to you about when I was at the World Bank,
• 46:17
  which is interesting, and I think it's, we,
• 46:20
  we have to think about this more.
• 46:21
  So in 1991, I still had not gone to the World Bank, but I,
• 46:26
  or, or or I had done some work
• 46:29
  for the World Bank on sequencing.
• 46:31
  So there's a big, big conference.
• 46:33
  Everyone in the profession went in Prague.
• 46:37
  And the Minister of Finance was VLA Klaus,
• 46:41
  who then became the Prime minister
• 46:42
  and then the president of the Czech Republic.
• 46:45
  And there was a reception,
• 46:47
  and it was with there a long line
• 46:49
  of all US American economists,
• 46:52
  and he was shaking the hands of everywhere.
• 46:54
  And when it was my turn, I said,
• 46:57
  I'm Sebastian Edward Edwards.
• 46:58
  And he said, oh, you are the sequencing professor.
• 47:01
  And I was very happy.
• 47:04
  I mean, I was honored, said, oh, Mr.
• 47:06
  Ministry, I'm so happy that you, I said you.
• 47:09
  And he said, professor, you got it all wrong.
• 47:12
  Your paper is completely wrong. And I said, why?
• 47:15
  And he said, because when you are in power,
• 47:18
  you don't think about sequencing.
• 47:19
  You do as much as you can, as fast as you can
• 47:21
  because your window of opportunity is very small.
• 47:25
  And the Czech Republic has done very well compared
• 47:27
  to the other countries in, so I am now criticizing
• 47:31
  or questioning what Mr.
• 47:32
  Cast is doing too much, too fast.
• 47:36
  On the other hand, I do remember that Vcl Klaus told me
• 47:39
  that I was wrong by thinking that you should go more slowly.
• 47:41
  So to answer your question, I think that there is a lot
• 47:46
  of hope in particular, I think that deregulation is the key.
• 47:51
  And reg regulatory laws
• 47:56
  have creeped up one on top of the other.
• 48:00
  And now we have Chile, the number one producer
• 48:02
  of copper in the world by far the largest copper deposits
• 48:07
  and reserves in the world.
• 48:08
  And it takes 12 years to get the permits approved
• 48:13
  to open a new copper mine in Chile.
• 48:14
  Chile is the number two in lithium reserves in the world.
• 48:18
  It takes 12 to 15 years if you get them the permits
• 48:22
  to start lithium,
• 48:25
  new lithium project.
• 48:28
  Chile has the best winds in the world in Patagonia for
• 48:33
  wind e energy.
• 48:35
  It takes 12 to 15 years
• 48:37
  to get the approvals has the best sun in the world.
• 48:39
  In the atta caama desert
• 48:41
  for solar takes 15 years to get approvals.
• 48:45
  Makes totally no sense.
• 48:47
  And I think that if they are able to bring these down
• 48:51
  to reasonable periods, now reasonable is,
• 48:53
  I'm not saying 15 days, one year to three years,
• 48:58
  then they will be a boom in terms of investment and that,
• 49:01
  but, but, but they have to really do it.
• 49:03
  And the, the, the, the adversaries are
• 49:08
  highly ideological.
• 49:09
  There is a group of Degrowth people even
• 49:12
  and radical environmentalists that are trying
• 49:16
  to put a stop to this.
• 49:18
  - So countries like Chile
• 49:20
  and Uruguay generally perform better than Argentina
• 49:23
  and Venezuela, I think it's fair to say.
• 49:26
  And you know, due to, you know, these market reforms
• 49:29
  and you know, pursuing more sort
• 49:31
  of economic freedom in their policies, you know,
• 49:34
  comparatively, I mean, Argentina, Venezuela though,
• 49:36
  you know, were once amongst, you know, some
• 49:38
  of the richest countries in the world as of 1950, you know,
• 49:42
  what in your mind, you know, caused their sort
• 49:45
  of long run dec decline, you know, you know,
• 49:47
  socialists took over
• 49:48
  and you know, in some cases, you know,
• 49:50
  were were actually elected and, and, and,
• 49:53
  and certainly changed very quickly, you know, thinking
• 49:56
  to say, you know, Venezuela
• 50:00
  with Maduro gone and Venezuela
• 50:02
  and Malay at the Helman, Venezuela, sorry,
• 50:05
  with Malay at the Helman in Argentina, is there hope
• 50:09
  for Venezuela and Argentina in your mind?
• 50:12
  Could Argentina,
• 50:13
  Venezuela realistically become a high
• 50:15
  growth set of economies? Again,
• 50:18
  - I am very optimistic about Argentina
• 50:22
  and I think that the work that
• 50:27
  Minister Federico Zenger is doing in the
• 50:31
  deregulation sphere is fantastic.
• 50:35
  And he is totally convinced,
• 50:38
  and I think that he is quite persuasive.
• 50:41
  I think you've had him here at Hoover recently give a talk
• 50:45
  and he's unearthed the
• 50:51
  quote unquote rationale behind many of those regulations.
• 50:56
  And it is very difficult
• 50:59
  to understand why they were put in place at all ever.
• 51:04
  And so he's moving in the right direction.
• 51:08
  And I think that Argentina has a potential
• 51:12
  that is amazing.
• 51:16
  Again, the question is, it's not easy
• 51:20
  to bring down 200% inflation to 2%.
• 51:24
  And it's like a saying
• 51:29
  that we have in Latin America.
• 51:30
  I think we have it here too.
• 51:31
  You cannot make eggs an omelet without breaking some eggs.
• 51:35
  You have to break the eggs, otherwise the
• 51:36
  omelet will never be made.
• 51:39
  I, I, I am, I am hopeful about, about Argentina
• 51:43
  and I think that there is a generational
• 51:47
  contrary to other countries.
• 51:48
  There's a generational thing in Argentina
• 51:50
  where the young people are very pro millet.
• 51:54
  So I I I think that, that, that could work Venezuela,
• 51:58
  I think it's more difficult,
• 52:03
  but it's doable now.
• 52:09
  Del Rodriguez has to really control and, and,
• 52:14
  and, and clean things up before there is election.
• 52:18
  And, and I, I think that
• 52:22
  Secretary Rub has said that the US is pushing
• 52:25
  for elections next year.
• 52:26
  I hope that that works out
• 52:28
  and that now one thing about Venezuela is
• 52:31
  that the opposition until recently had been so fragmented
• 52:35
  or the, the, the pro-democracy forces, I hope
• 52:39
  that they unite and, and either behind the Maria Corina
• 52:44
  or or behind someone else.
• 52:47
  - And I mean, it's, it's an interesting, you know,
• 52:49
  situation too.
• 52:50
  You know, certainly, you know, who controls the military
• 52:55
  matters and, you know, I mean the US is, you know,
• 52:59
  it takes time you to make these things happen.
• 53:02
  So, so I I I think that the US approach being careful is,
• 53:06
  is I think, more thoughtful than maybe some people.
• 53:09
  - Yeah, no, I think, I think I, I I think
• 53:11
  that they're doing the right thing.
• 53:16
  The, the, there's an article recently in the New York Times,
• 53:20
  which I think they put it in an interesting way out
• 53:22
  of $2 from the oil business in Venezuela.
• 53:27
  $1 goes to corrupt people, it's stolen.
• 53:31
  So it's interesting that they, they use as a basis the,
• 53:36
  the amount that goes to corruption.
• 53:38
  So instead of saying out of $1 50 cents go to corruption,
• 53:41
  they say out of $2, one goes to garage, which is the same.
• 53:44
  Right.
• 53:47
  - I, I wanna talk just a bit, you know,
• 53:49
  close here a little bit, talking beyond Latin America
• 53:52
  and talking about, you know, markets, you know,
• 53:56
  freedom market, market economies at at large, you know,
• 53:59
  some might call neoliberalism.
• 54:02
  You, you've written a lot on inflation crises,
• 54:07
  you know, during, I wanna talk just a
• 54:09
  little bit about inflation.
• 54:10
  You know, that we've recently had this inflation surge
• 54:14
  during the Biden years in, in, you know,
• 54:17
  the post pandemic years.
• 54:21
  Do you see sort of,
• 54:22
  and it wasn't exclusive to the us this was, you know,
• 54:25
  inflation all around the world.
• 54:27
  I mean, do you see echoes of Latin America in some of these,
• 54:31
  I guess macro mistakes of, you know, there's certainly,
• 54:34
  there was a ton of fiscal spending during this period,
• 54:38
  you know, how important do you think is, you know,
• 54:40
  are central banks and preventing inflationary spirals?
• 54:43
  It seems like there's an argument, you know,
• 54:45
  some people argue that, you know, the inflation,
• 54:48
  the global inflation of the early 2020s was largely,
• 54:50
  you know, supply shock, pandemic driven.
• 54:53
  But there's another view that, you know, is in part,
• 54:55
  you know, fiscally driven.
• 54:56
  It seems that, you know, Malay in Argentina is largely que
• 55:00
  inflation, which is fiscal reforms.
• 55:02
  And while, you know,
• 55:04
  real interest rates have actually been negative, I mean,
• 55:06
  do you subscribe to the view that maybe fiscal matters more
• 55:10
  than we thought previously for inflation?
• 55:12
  Or, and,
• 55:14
  and hence maybe, you know, Latin America is starting to,
• 55:17
  to learn this lesson, you know, Malay and, and elsewhere.
• 55:20
  I mean, many other countries have,
• 55:21
  I I feel like gotten inflation un under control over the
• 55:24
  years, you know, Chile, Brazil and others.
• 55:27
  I think Latin America's doing much
• 55:29
  better in, in in that regard.
• 55:30
  But I'm just curious what you think about, you know,
• 55:33
  this early 2020s inflation surge.
• 55:36
  Are we learning or, or are we unlearning old lessons that,
• 55:40
  you know, fiscal policy matters for inflation?
• 55:42
  - Well, I, I, I think that
• 55:47
  the whole issue of fiscal dominance
• 55:50
  being in many cases
• 55:55
  at the basis of inflation is something that at least some
• 55:59
  of us have always had in mind.
• 56:01
  And I think that now that we are at the Hoover Monetary
• 56:05
  Policy Conference, I've been coming to this event
• 56:09
  for a number of years now,
• 56:10
  and it's something that everyone who comes here
• 56:14
  in including the incoming chair of the Federal Reserve,
• 56:17
  Kevin Walsh, have always had in the Raiders.
• 56:22
  And I think that also other people at, at, at
• 56:25
  who are John Cochran
• 56:26
  and so on, have now insisted
• 56:28
  that there is a fiscal route to inflation.
• 56:31
  I think that that lesson has been learned.
• 56:35
  And the problem is
• 56:39
  that it's hard to to know
• 56:44
  what the thresholds are after, after,
• 56:47
  because it's very non-linear.
• 56:49
  It's not that if you do a little more,
• 56:51
  it's going to be proportional.
• 56:53
  And I think that probably what happened
• 56:56
  in the 2020s had to do, had to do with that.
• 57:02
  I think that the, the, the lessons are learned at the end.
• 57:04
  The, the, the thing that I want to
• 57:08
  policy makers to understand is that,
• 57:11
  to put it in a technical terms,
• 57:13
  and I'll try to explain it's R minus G
• 57:16
  since the interest rate minus growth.
• 57:20
  And one of the things that is very important is
• 57:24
  that you have to deregulate enough
• 57:27
  or avoid overregulation so that the G part
• 57:31
  growth is fast enough.
• 57:33
  So if growth is fast, then debt over GDP
• 57:38
  goes down because the denominator starts growing fast.
• 57:42
  So, so let me go back to, to Chile.
• 57:44
  Chile had debt to GDP say 30%,
• 57:49
  and then when it grew for a decade at 7%, the debt
• 57:53
  to GDP ratio went to 7% or 6%.
• 57:57
  It collapsed, not because they didn't issue more debt, it's
• 58:01
  because the GDP was growing so fast.
• 58:04
  So I think that the combination
• 58:06
  of maintaining the economy competitive through
• 58:11
  very agile regulations,
• 58:17
  making sure that we don't kill investment projects
• 58:22
  and so on, and the having a fiscal side that is healthy
• 58:27
  and sustainable, it's a way to go.
• 58:30
  Now, every time you say that, in a group of economists
• 58:33
  that have different persuasion, someone will come up with,
• 58:36
  what about Japan?
• 58:38
  They have 260% debt to GDP ratio
• 58:41
  and they seem to be doing okay.
• 58:44
  And that's part of the problem.
• 58:46
  We really don't know what the thresholds are.
• 58:49
  You, you're too young, John.
• 58:51
  But when the euro was being discussed,
• 58:54
  we all thought we as the profession,
• 58:58
  that 60% of GDP was the absolute limit in terms of debt.
• 59:03
  And the US had 60% to GDP for about 20 years.
• 59:09
  - It informed the master treaty and
• 59:11
  - Fiscal rules masters, ma masters, if you had a country
• 59:14
  that had more than 60 could not join and the Europe
• 59:19
  and they had to do something about it and Greece
• 59:20
  and had to reduce their debt.
• 59:23
  And then we had Lehman, the, the, the Lehman crisis,
• 59:27
  then they went to 90 and then the pandemic,
• 59:30
  and now we're at 110 or so.
• 59:32
  And we haven't collab, we haven't disappeared,
• 59:35
  but we are worried, but we haven't disappeared.
• 59:38
  And the the, what is interesting is
• 59:39
  that we really don't know
• 59:41
  what the number is at this conference.
• 59:43
  We're gonna have Ken OV who assured us a few years ago
• 59:46
  that 90% was the limit.
• 59:49
  We passed 90 and here we are. And
• 59:51
  - This is in his book - Carmen
• 59:53
  - With - Carmen Raynard. Yeah.
• 59:55
  - This time is different. That's
• 59:56
  - Right.
• 59:57
  - It's, it's fascinating how the,
• 1:00:00
  I don't know if it's fair to say
• 1:00:02
  that governments have become,
• 1:00:03
  I guess complacent about, you know, public debt.
• 1:00:06
  But it's amazing too, just how, you know, we haven't,
• 1:00:10
  it doesn't seem like we've come close
• 1:00:12
  to hitting crises quite yet.
• 1:00:13
  I mean, you could argue maybe the inflation.
• 1:00:15
  - Yeah, I am concerned. But I I,
• 1:00:17
  but I think that the solution that,
• 1:00:20
  lemme put it another way, we should not forget
• 1:00:25
  that growth is part of the solution.
• 1:00:28
  - Absolutely. - And if the country grows at a healthy rate,
• 1:00:32
  and that's the main difference between the us,
• 1:00:35
  which is a country that grows in spite of everything
• 1:00:38
  and Europe, which does not grow.
• 1:00:41
  And we are seeing that the gap between the US
• 1:00:43
  and Europe is getting larger and larger.
• 1:00:46
  And so yes, let's worry about the debt,
• 1:00:51
  let's bring the public's deficits under control.
• 1:00:56
  But let's not forget about growth.
• 1:00:59
  - I I couldn't agree with you more.
• 1:01:01
  I mean, I guess the other challenge too is even though,
• 1:01:04
  you know, the US is certainly a star compared to European
• 1:01:09
  and, you know, European countries, Canada,
• 1:01:12
  I'd say many Latin American countries and,
• 1:01:14
  and Japan on a growth standpoint,
• 1:01:16
  GB growth standpoint overall
• 1:01:20
  in including the US growth rates are still much lower than
• 1:01:23
  what they were in the middle
• 1:01:24
  of the 20th century when we had all these incredible
• 1:01:27
  innovations from, you know, air conditioning
• 1:01:29
  to commercial air travel automobiles in the early part
• 1:01:32
  of the 20th century, you know, computers,
• 1:01:33
  - Well that's, that's Bob Gordon's yes. Book, right? So,
• 1:01:36
  - So - The
• 1:01:37
  - Stagnation thesis in general.
• 1:01:38
  - So - It's,
• 1:01:39
  - But we see what AI does.
• 1:01:40
  Absolutely. I I, I was asked
• 1:01:44
  to give a talk in Latin America about AI a few years ago,
• 1:01:47
  and the group that asked me to do this was a group
• 1:01:51
  of AI enthusiasts,
• 1:01:53
  and they were very unhappy with what I said
• 1:01:54
  because I said it's very artificial
• 1:01:57
  and not very intelligent.
• 1:01:59
  And now if I gave that same talk,
• 1:02:01
  I would say it's not very artificial
• 1:02:04
  and it's really super intelligent.
• 1:02:06
  And what is interesting to me is the rate at which the ai,
• 1:02:11
  the, the LLMs are improving.
• 1:02:14
  It's week by week.
• 1:02:16
  And I use, now I,
• 1:02:17
  I still have my ra a PhD student at UCLA.
• 1:02:21
  He was a great guy, but I almost don't use him.
• 1:02:26
  I mean, he gets paid, but I, he comes to me
• 1:02:29
  and says, do you need anything?
• 1:02:30
  And I say, no, I have my other RA called Claude
• 1:02:35
  doing a lot of work for me.
• 1:02:36
  - Yeah, Claude Co. And it's, it's amazing just, yeah,
• 1:02:39
  all these advances in AI also, I mean part of that too is,
• 1:02:42
  you know, economic freedom and to
• 1:02:44
  what degree these technologies are, I think allowed
• 1:02:47
  to develop, I mean obviously there, there are, I think,
• 1:02:49
  you know, some, you know, concerns about
• 1:02:51
  where things could end up in the very long run with ai.
• 1:02:54
  But I think it's least dangerous at the beginning. And
• 1:02:56
  - Yeah, I'm not, I'm not, I'm not as opt as pessimistic
• 1:03:00
  and worried as say Darren as ammo.
• 1:03:03
  I think that he, he is, he's
• 1:03:07
  way too pessimistic and too concerned about what's going on.
• 1:03:11
  I'm, I'm more, more optimistic.
• 1:03:14
  - And, and just for my last question for you, you know,
• 1:03:18
  in your mind, you know, have, have, you know,
• 1:03:20
  thinking about the Washington consensus, a lot
• 1:03:22
  of those ideas yes.
• 1:03:24
  Some people sort of also label
• 1:03:26
  as neoliberalism have those sort
• 1:03:28
  of free market ideas in your mind.
• 1:03:31
  I mean they've, I think they sort of, it's fair to say
• 1:03:33
  that they took a pretty big beating in the sort
• 1:03:37
  of general public sphere after the 2008 financial crisis
• 1:03:40
  and, and,
• 1:03:42
  and you, the rise of sort
• 1:03:44
  of this democratic socialists in the us you know,
• 1:03:48
  you have labor, you know, echoing those concerns in the uk
• 1:03:53
  you know, this massive surge in interest in inequality
• 1:03:56
  as being this major social issue of our time.
• 1:04:00
  I mean, do you think that, you know,
• 1:04:01
  maybe there's some reversion that's maybe starting to go on,
• 1:04:04
  we talked a little bit about yeah,
• 1:04:06
  this way in Latin America, certainly, you know, we,
• 1:04:08
  we've had, you know, president Trump in, in the us
• 1:04:13
  you know, there's certainly some other
• 1:04:16
  examples as well out there.
• 1:04:18
  I'm curious, what, what do you think about this?
• 1:04:20
  - Yeah, so let me, there are two things we really do not
• 1:04:23
  talk about, which are related to our general theme.
• 1:04:26
  The first one is that we talked a lot about neoliberalism
• 1:04:30
  and we never defined it, you and I.
• 1:04:32
  So my definition in the book is that it is a system
• 1:04:37
  that relies on market solutions
• 1:04:40
  for almost every problem in the, in the, in a society
• 1:04:46
  almost is very important.
• 1:04:47
  'cause Michael Sandel said he built sort of a strawman
• 1:04:52
  and used Gary Becker, my former professor at Chicago, saying
• 1:04:56
  that Gary said that economics should be used for everything.
• 1:04:59
  He never said that. But so neoliberalism is
• 1:05:02
  that we use markets for, to deal with issues like education,
• 1:05:06
  health, culture, ev almost everything.
• 1:05:09
  And that's what Chile did, okay.
• 1:05:11
  And it went well beyond market solutions
• 1:05:14
  for economic problems.
• 1:05:15
  It's, it, it made it much broader.
• 1:05:19
  And so, so we don't need that
• 1:05:24
  broad approach necessarily in every country.
• 1:05:27
  I am happy if the economy is governed by market principles,
• 1:05:32
  prices are free, interest rates are free,
• 1:05:35
  the exchange is allowed to float.
• 1:05:37
  We make sure that there's no
• 1:05:38
  inflation and so on and so forth.
• 1:05:40
  The other thing we didn't talk about is identity
• 1:05:42
  politics and wok.
• 1:05:44
  And I think that what is going on now is
• 1:05:49
  that the pendulum moved way too far
• 1:05:54
  into identity politics.
• 1:05:56
  And what we are seeing now is we're seeing it in the us
• 1:05:59
  we're seeing I think almost every, everywhere that, that,
• 1:06:03
  that, that people got fed up with that.
• 1:06:05
  And so we are
• 1:06:10
  looking for a more reasonable
• 1:06:15
  common sense solution to problems.
• 1:06:19
  And I think that we're seeing that in the us we are seeing
• 1:06:23
  that in Europe, in, in spite of the differences between the,
• 1:06:27
  the, the, the, the two parts
• 1:06:29
  of those two parts of the world.
• 1:06:30
  And we are seeing it in Latin America.
• 1:06:32
  And I think that millet, he has a very
• 1:06:37
  personal way of phrasing things, but,
• 1:06:40
  but it's, it's bringing back some common sense and,
• 1:06:47
  and I think that that, that, that is good for society,
• 1:06:50
  it's good for, for the people.
• 1:06:53
  And, and, and,
• 1:06:55
  and I am hopeful that combination of
• 1:07:00
  less woke
• 1:07:01
  and identity politics, it's going to bring us to,
• 1:07:05
  to, to the center Now.
• 1:07:08
  Interesting question. Will Manami do well in, in New York?
• 1:07:11
  I don't think so, but we'll see.
• 1:07:16
  - Absolutely. Well, it's a real honor
• 1:07:18
  to have you on Sebastian, really wanna
• 1:07:19
  thank you for coming on the show,
• 1:07:21
  - John. Thanks for having me.
• 1:07:22
  - This is the Capitalism and Freedom
• 1:07:23
  and the 21st Century podcast, an official podcast
• 1:07:26
  of the Hoover Institution's economic policy working group
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  where we talk about economics, markets, and public policy.
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  I'm John Hartley, your host.
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  Thank you so much for joining us.