Chile, the United States, and Income Inequality

Politicians in the US often point to Chile as an example of a country whose governance should be emulated. For example, they have a privatized pension system which might be described as a national 401k program. They also provide no state-run schools. Private entities run the schools and universities and the government provides students with vouchers. Privatized social security and voucher programs are two dreams of the right wingers in the US.

Chile has been viewed as a successful experiment because it has had a growing economy and political stability. An article in The Economist describes a growing dissatisfaction with the status quo.

"In the two decades since General Augusto Pinochet’s dictatorship gave way to democracy, Chile has stood out in Latin America for its rapid growth, social progress, political stability and relatively robust institutions. Now Chile’s political leaders are wondering if they are seeing a popular rebellion against "the model", as some call the free-market policies bequeathed by Pinochet and left largely intact by his successors."

Not surprisingly, its "free-market" policies have made Chile the country with the highest income inequality in the OECD.

This chart provides a fascinating way to examine inequality. It provides the Gini coefficient, a measure of the distribution between the top and bottom incomes, based on raw income, and compares it with a Gini coefficient calculated after taxes and government transfers have taken place. Two significant features emerge. The first is the fact that the raw Gini is rather similar in all developed countries with the exception of South Korea. The second notable observation is that the various countries respond quite differently to this inequality. Taxes and transfers erase much of the effective inequality in European countries such as Spain, France, and Finland. Chile manages to be the most unequal country in raw incomes and is the country that does the least to correct for it. The US is somewhere in the middle.

Given these numbers it is not too surprising that there are a growing number of unhappy people in Chile. Who are the unhappiest? Students! The voucher system with its privately run schools has produced the results that many in the US could have predicted.

"The education system has locked in social inequality rather than breaking it down."

The voucher system has formed a spending cap on the poor and subsidized personal expenditures by the wealthy.

"Pinochet left a voucher system in which the government runs no schools itself, but instead pays a fixed fee per pupil. But while private schools ask parents for top-up fees, most municipal schools do not."

"....by the time they are ten years old, pupils’ performance already varies sharply with household income. That is partly because less than half of Chilean children receive any pre-school education. But it is also because the poor go to worse schools."

The students making the most noise are those who are college age. University students find themselves in positions that would be familiar to students in the US. Upper-level education is increasingly expensive and the return on investment is diminishing for many. Chile’s economy is not producing enough high-paying jobs to satisfy the number of students enrolling in school in search of them.

"Many poorer families find that they can achieve their dream of educating their children only by taking on large debts."

"....a CEP paper by Sergio Urzúa, an economist at the University of Maryland. Mr Urzúa estimates that 39% of those who do graduate will find that their salaries do not compensate for the cost of their courses. As Andrés Velasco, a former finance minister, puts it, ‘the combination of lower-than-expected income and higher-than-expected debt is explosive’."

"’In Chile there are good universities for the rich and bad universities for the poor,’ complains Camilo Ballesteros, president of the students’ union at the University of Santiago last year...."

Over the past year these students have been organizing and demonstrating, and they have been gathering public support.

"....having devoted last year to occupying classrooms and taking to the streets in their tens and hundreds of thousands, in sometimes violent demonstrations to demand free and better higher education. This mass popular protest, and the huge public sympathy it aroused, took the centre-right government of Sebastián Piñera by surprise, leaving it floundering."

"What makes this collapse of public confidence in the system odder is that in many ways Chile continues to thrive. The economy is growing by 6% a year, and with virtually full employment, wages are rising equally fast."

Is it possible that an outwardly healthy economy with growth and low unemployment can reach a point where income inequality renders it unstable? The article suggests that this may be the case.

"In opinion polls the students’ demands enjoy the support of 70% of respondents, even if their sometimes disorderly methods attract the disapproval of a narrow majority. The student movement has struck a chord in a society that is increasingly middle-class but remains highly unequal."

Does the situation in Chile provide any lessons that the United States should benefit from? Indeed!

While Chile saw a past year of focused demonstrations generated by the feeling that the government was not doing enough to guarantee a fairer society, the US endured its "Occupy" movements. The Chilean demonstrators had valid complaints and clearly identified goals. Occupy had a muddled message, if any at all, and seemed to be avoiding defined goals. Could it be that the US response to inequality, weak though it is, is just sufficient to keep unrest in check? Or could it be that we no longer remember how to organize political movements?

It is interesting to compare the status of university students in the two countries. Both groups are going farther into debt to acquire an education that only pays off for a fraction of those who have made the investment. Underemployment is a growing concern in both populations. In each country the wealthy have the greatest access to the best schools.

Could a similar movement in the US be sparked by student unrest? Unfortunately, it is not likely. Let us turn to Tony Judt for some observations on the state of politics and political will in this country. From his book Ill Fares the Land:

"And in the classroom, the enthusiasm of an earlier generation for radical politics has given way to blank mystification. In 1971 almost everyone was, or wanted to be thought, some sort of a ‘Marxist". By the year 2000, few undergraduates had any idea what that even meant, much less why that was once so appealing.’

"We no longer have political movements. While thousands of us may come together for a rally or a march, we are bound together on such occasions by a single shared interest. Any effort to convert such interests into collective goals is usually undermined by the fragmented individualism of our concerns. Laudable goals—fighting climate change, opposing war, advocating public healthcare or penalizing bankers—are united by nothing more than the expression of emotion. In our political, as in our economic lives, we have become consumers: choosing from a broad gamut of competing objectives, we find it hard to imagine ways or reasons to combine these into a coherent whole. We must do better than this."

That can serve as a rather concise explanation of the "Occupy" movement.

Margaret Thatcher once famously said:

"There is no such thing as society, there are only individuals and families."

It was not true in the US when she said it, but perhaps a few decades of living as if it were, has allowed it to come to pass.