EspañolIn many Latin-American countries, there is a predominant tendency on the part of people in government: ambitious promises to save their countries from the prevalent problems that confront them — poverty, low economic growth, corruption, drug trafficking — as well as problems yet to arise.
This tendency already exists in Venezuela, Bolivia, Brazil, Cuba, Ecuador, and Nicaragua — and now, to a greater extent, it is in Argentina and even Chile, with the triumph of socialist Michelle Bachelet in the last election. These promises and the willingness of people to believe them give license to the state for a much larger influence over those economies.
As a result, a block of countries exists where interventionist populism rules, disguised as democracy. In addition to the countless broken promises from these overly powerful states, the regions they rule over suffer under inefficient bureaucracies that use taxes as nothing more than a tool to stay in power, rather than to maintain hospitals, roadways, or schools.
To deflect from these failures, at least from the constituent perspective, the demagogues of the day pursue a range of direct attacks against capitalism. They then promote socialism — in other words, more power in their hands — without any realization that socialism is destroying their economies and dissuading investment, and in a manner open for all to see.
Given these experiences, we must ask ourselves: how can we still believe these socialist promises, especially after seeing product shortages and hunger in Venezuela, one of the richest countries in Latin America? Socialism has made one of the most oil-affluent nations in the world see a reduction in its petroleum production, leading to the necessity for imported gasoline.
Those in power turn around and propagandize us at our own expense. They blame capitalism for their countries’ misfortunes — not that they have it as it exists in more prosperous parts of the world — and they distort its meaning to imperialism and crony-capitalism. Unfortunately, the corrupt cronyism and industry protectionism, the real causes for the underdevelopment, remain in place or grow stronger.
This failed and reinforcing feedback loop is just one more reason why the powers of government should be limited — so those at the helm cannot use political grandstanding to perpetuate the privileged positions of a few, while promising the opposite.
As is abundantly clear from economic freedom rankings, the existence of free enterprise is paramount to generating wealth and employment. However, we suffer as a result of Latin-American leaders’ thirst for power, and they maintain a dependent, subservient population with various forms of welfare and entitlements. They also avoid the undeniable truth that the best social program is generating employment.
By free enterprise, I mean an economic system in which, through peaceful and voluntary exchange, individuals can use their own property to generate profit — limited only by the respect they have for the rights of others.
Innovation and diversified production meet correspondingly diverse human needs, and consumers have the ultimate say regarding who wins and loses in the market. As consumers follow their preferences, and reward or punish those engaged in healthy competition — free from barriers to entry — market diversity blossoms.
Once these conditions are met, employment opportunities open up as well, as does the freedom to enjoy the fruits of one’s labor.
Politicians oppose this, of course, since it requires limited control and less room for parasitism. Therefore, they will continue utilizing populism and making political promises they can never fulfill.
It is important to stress too that, in addition to capitalism, development must stand on an unwavering respect for the law — a rule of law that guarantees free enterprise and contracts on an ongoing basis. It is this rule of law, along with superior human and physical capital, that differentiates developed from undeveloped nations.
Poverty, unemployment, and the stunted growth of many countries, especially in Central America, are real and must be fought. It is more than proven that socialism — whether of the 21st Century flavor or otherwise — isn’t the solution but the problem.
We must defend free enterprise without fear!
Translated by Melisa Slep.
Read: Part I, Part II, and Part IV. As we have discussed here, the Commonwealth of Puerto Rico faces a massive debt problem. I’ve also discussed the importance of basic math in solving Puerto Rico’s problems. However, I would to take time and get a little more specific. If you are a liberal/progressive, you view Puerto Rico’s financial situation (and the United States') as a revenue problem. If you are a conservative or libertarian (I’m actually both) then you see it for what it really is: a spending problem. When you factor in Puerto Rico’s declining population and tax base, 14 percent plus unemployment rate, and only about 1 million of the island's 3.6 million people actually in the workforce (a third of those employed by government at some level), then there is not doubt: Puerto Rico spends too much money for its current resources. Fixing this aspect of the troubled US territory is as simple as it is painful: cut spending. However, cutting spending now will only fix today’s problem for a short time. In order to actually fix the problem, the government must address the fundamental reasons it got into deficit spending in the first place. The Primary Drivers of Expenses? I won’t take the time to dissect the budget for the island over the last 10 years; I will leave that to the elected politicians. However, when one third of your employed population is employed by the government and the public is on the hook for their retirement, you probably don’t need to look beyond payroll and pensions to find the immediate solution. The first equation Puerto Rico needs to use is this one: R-E, revenues minus expenditures. While revenues are up, according to the Puerto Rico Treasury Department and Government Development Bank, and while some effort has been made to curb pension costs, the result of that equation is still a negative number. This fiscal year is underway and there are roughly 9 months left (and a hurricane season) so there is no way to clearly judge what the final numbers will be for this year — but the previous seven years tell a very sad story. There are a lot of numbers in that Bloomberg article and the others I’ve referred to in past articles, so let’s use a simple number to start with as an example. If your total budget is US$10 billion dollars and you only raise $9 billion in revenues, you have few options: raise taxes quickly, borrow money and raise taxes later, or cut spending by 10 percent ($1 billion to make up the shortfall). Politicians hate pain, especially pain that might be inflicted on the majority of voters so borrowing money and raising taxes later is always the preferred plan. That is especially the case when you consider that the tax increase is probably not going to affect most of the population, since they are not employed and live on government subsidies. The right choice, of course, is to cut spending. That may also mean cutting services in some cases, but with as many people as the government currently has on the books, it’s a wonder they do anything other than show up and fill out their time sheets. Okay, maybe that's too cynical; but seriously, couldn’t you cut everything except police, fire, and emergency services by enough to balance the budget now without affecting the most important matters for citizens? The Puerto Rico Department of Education has close to 30,000 teachers and nearly 20,000 non-teaching employees, including support personnel and principals. These non-teaching employees also recently joined teachers on a two-day strike over pension reform. One wonders if all of those employees are really needed? Cutting half of those non-teaching employees (about 9,000) would represent a 20 percent reduction in salary, benefits, and retirement expenses over time. With a cut like that, the department would actually be able to raise salaries for remaining teachers without changing anything else in education. I operate under the assumption that similar cuts could be made across the board in nearly all government agencies until R=E. Sustainability and Unfunded Liabilities The next equation Puerto Rico should look at is FR-FE: future revenues minus future expenditures. If a minor reform to teachers retirement caused a strike, get ready for wide spread unrest when you address this issue. Future revenues can’t always be estimated with the same accuracy as future expenditures. Expenditures are authorized by law and appropriated by the government, which means that, outside of disasters and other variables, the government has a relatively clear picture of how much they will need down the road. Like the United States, with its ridiculous $205 trillion in unfunded liabilities, Puerto Rico’s debt and future liabilities exceed what revenue could be generated by even a one-off 100 percent tax (confiscation) on all incomes and profits — especially since such a tax rate of that proportion would shut down all economic activity and thus result in zero revenue the following year. So the legislature will have to address directly the causes of those future liabilities, while at the same time ensuring the payment of outstanding debt. Those changes will hurt and may require even more layoffs and more pension reforms. However, some of it could actually be helpful. Cutting regulations and eliminating or combining entire departments, privatizing (no, I mean really privatizing) public education, public utilities, and even workers compensation could save billions both in the short and long terms. All of this, however, will require confronting and standing up to public sector unions. Fixing Puerto Rico’s fiscal problems will take discipline and courage. Two elements that are not in great supply in local politics. I’ll take on discipline, in a future article.