This week’s book learning is part 9 of a 12 part series on The Ascent of Money by Niall Ferguson. (Parts 1, 2, 3, 4, 5, 6, 7, 8)
University of Chicago professor and Nobel prize winning Economist Milton Friedman set out to solve the welfare state problem. Milton Friedman was called to consult the Chilean government as their social system had gone bankrupt.
(Interestingly, the Chile connection was thanks to the fact that one of Chile’s leading universities had an exchange program with the University of Chicago. Thus, many of the leading finance and economic ministers in Chile were Prof Friedman’s students)
Friedman and team worked with Jose Pinera, a Chilean student at Harvard, to work with Pinera’s view that the welfare state had replaced thrift with entitlement. So, they did the following –
– They offered workers in Chile an opt out of the state welfare system and had employers contribute payroll tax to a personal retirement fund managed privately
– By 1990, more than 70% of the population were on the private system – a huge success as the government deficit reduced massively leading to a stable democracy!
– The new savings were invested back into the economy developed at impressive rates. The poverty rate decreased to 15% versus 40% in the rest of Latin America
– The downside has been that the unemployed don’t have any pension. The government, however, uses it’s surplus to take care of the unemployed
This was an example of a huge gamble that did pay off and many nations have attempted to copy the Chilean example with varying results depending on the government’s corruption levels and resolve.
Sketch by EB
The implications for a country like the US is that reform will come (whether liked or not) as only 1 out of 6 Americans can afford health insurance. This is made worse when you add an ageing population with higher life expectancy to the mix. No country, however, is worse off than Japan – 75% of its tax earnings goes into funding welfare. A long life, after all, is good for an individual but a curse for a welfare system. Welfare systems are near impossible to sustain but unfortunately, are great vote-getters…
Wish you a happy weekend and happy week!
A Learning a Day 