Pinochet approves of the bailout

Teacher, pupil, kid at the back of the room napping.

In an airport in Tulsa yesterday with nothing to read, I picked up a copy of Naomi Klein’s The Shock Doctrine — I had already finished my copy of Steve Martin’s Born Standing Up. Little did I know that last year’s bestseller would prove more informative than the morning’s newspapers.  The thesis of the book is that certain economic policies can only be imposed in the wake of a shocking event, such as a flood or a coup or a bombing, and that, if these events do not occur on their own, they must be created by the people who wish to impose said policies.

The following I found on pp 105-106:

[For those coming in late, the Chicago school of economics was devised by Nobel economist Milton Friedman. Friedman’s idea, simply put, is that a perfect economic state will be realized when a government cuts absolutely all social programs, reduces taxes to a bare minimum, pays only for military spending and the police, puts all government programs (education, infrastructure, etc) into private hands and eliminates all corporate regulations. The only problem with Friedman’s economic utopia is that, since people don’t like to see social programs disappear, it can only be implemented by a ruthless dictator. In 1973, Pinochet took over Chile in a bloody coup, killed all his political enemies, terrorized the population and imposed a Friedman-style economic plan on the nation.]
"…In 1982, despite its strict adherence to the Chicago doctrine, Chile’s economy crashed: its debt exploded, it faced hyperinflation once again and unemployment hit 30 percent — ten times higher than it was under Allende. The main cause was that the pirahnas, the Enron-style financial houses that the Chicago Boys [the Friedman-trained Chilean economists who imposed Pinochet’s economic policy] had freed from all regulation, had bought up the country’s assets on borrowed money and run up an enormous debt of $14 billion."

"The situation was so unstable that Pinochet was forced to do exactly what Allende had done: he nationalized many of these companies.

"It’s clear that Chile was never the laboratory of ‘pure’ free markets that its cheerleaders had claimed. Instead, it was a country where a small elite leapt from wealthy to super-rich in extremely short order — a highly profitable formula bankrolled by debt and heavily subsidized (then bailed out) with public funds. When the hype and salesmanship behind the miracle are stripped away, Chile under Pinochet and the Chicago Boys was not a capitalist state featuring a liberated market but a corporatist one…a mutually supporting alliance between a police state and large corporations, joining forces to wage an all-out war on the third power sector — the workers — thereby drastically increasing the alliance’s share of the national stats

"That war — what many Chileans understandably see as a war of the rich against the poor and middle class — is the real story of Chile’s economic ‘miracle.’ By 1988, when the economy had stabilized and was growing rapidly, 45 percent of the population had fallen below the poverty line. The richest 10 percent of Chileans, however, had seen their incomes increase by 83 percent…if that track record qualifies Chile as a miracle for Chicago school economists, perhaps shock treatment [Friedman’s term for his theory] was never really about jolting the the economy into health. Perhaps it was meant to do exactly what it did — hoover wealth up to the top and shock much of the middle class out of existence."

Any questions?



35 Responses to “Pinochet approves of the bailout”
  1. draike says:

    Well I can certainly see why it’s called the shock treatment. I’m so shocked, it’s going to take me weeks to realize my jaw has fallen to the floor and rolled away.

    When you’re faced with this kind of realization, it’s awfully numbing. I don’t even know what else to say about it.

  2. quitwriting says:

    Sounds like a pretty astute telling. Sounds familiar, too.

  3. Anonymous says:


    I do agree with your assessment about the current administration, but honestly, it doesn’t matter what item it is, they’ve been madly grabbing whatever power they could manage since they got into office.

    As far as Klein goes. Blargh. She’s been misrepresenting and misquoting Friedman for some time now.

    Those crazy kids over at Reason state it more thoroughly than I could.

    • Todd says:

      Re: Ugh.

      I’m sure a website subtitled “Free Minds and Free Markets” would present a clear-headed, unbiased view on the subject of Milton Friedman, but thanks for playing.

  4. ndgmtlcd says:

    Have you heard of something called Rogernomics? Or its little sister Ruthanasia? Do you know what the New Zealanders did to themselves in the 1980s and 1990s?

    Or perhaps, I should say, do you know what the Chicago school and Milton Friedman and big companies did to incredibly naive New Zealand citizens?

  5. steam_doll says:

    I think one of the messages of this is that we need to stop laboring under the delusion that the right wing is stupid. Yes, the candidates they choose for office may stumble over their words and get foreign leaders’ names wrong on high-profile TV interviews. Yes, the average Republican voter may not see or understand the damage that voting for these candidates can cause to their own civil liberties and their community. Liberals do this a lot – assume that the choice of a Democratic candidate is “clear” or “obvious” and wonder why anyone would be dumb enough to think otherwise.

    We do this so we don’t scare ourselves into police state nightmares like this article projects. We do it to protect ourselves so we can get up and function every day. We do it because we need a good laugh at the expense of that which we might otherwise fear (remember “Bush or Chimp?”).

    It’s a bone-chilling prospect that the right might not actually be stupid, and that the most fumbling monkey-face or Barbie doll of a candidate is backed by a power-hungry think tank as “not-stupid” as they come.

    • clayfoot says:

      Indeed. Several years ago, a Bush biographer remarked that many mistakenly believe that Bush is a) stupid, and b) nice. He’s neither, though I suspect that no one who reaches the office of, say, state governor, US Senator, or the Presidency is either of those.

      • Todd says:

        No, I’m really quite convinced that Bush really is actually very, very stupid. And Sarah Palin is the proof — she’s Bush in a skirt.

        The fact that Bush is president has nothing to do with his intelligence, or even his ambition, and everything to do with Karl Rove selecting him and grooming him for a role, then creating the circumstances where Bush could seize power. Do you remember the 2000 election? I do.

        • clayfoot says:

          I sure do! I just don’t mistake Bush for being actually dumb. I regard him as obstinate. Willfully ignorant, even. I live and work with people who make me understand it was more than Karl Rove. Bush was (and still is) hugely popular in certain loyal demographics, who contribute and vote, and he knows it. He plays on it. There’s no way he could have won a second term without it.

          • Todd says:

            Um, except, of course, he didn’t actually win a second term — he stole that election too.

            • clayfoot says:

              Enh. 2004 was down around #15 overall –Nowhere near as close as 2000. If Gore had won, doubtless the Republicans would be saying that he stole the election. I vote in a state that has voted reliably Republican for 40 years, except when a southern Democrat was on the ballot (Clinton and Carter) (And yes, I remember Gore was from the South, too), so the presidential election has an air of inevitability around here.

              • Todd says:

                “If Gore had won, doubtless the Republicans would be saying that he stole the election.”

                In this we are in agreement. But then, the Rove masterstroke is to accuse your opponent of the things you are guilty of.

          • Anonymous says:

            It was more than Karl Rove. Apparently Pres. Bush interviewed for the job. James Baker held at least one meeting at his home where other Reagan/Bush advisors and prominent Republicans tried to select a candidate to back in the 2000 primaries. For whatever reason, they liked what they saw from Bush and gave him their support.

            Of course, Baker was legal counsel to the campaign and participated in the Florida situation. And the new white house staff and cabined was partly a reshuffled lineup of Reagan/Bush people.

            I don’t think he’s a drooling simpleton. Perhaps he’s even smart in certain ways, but when your words are fed to you through an earpiece and your underlings are telling you what to do, it’s easy to look dumb.

            The guy is certainly stubborn as well. James Baker himself has become a sometime critic. I wonder if the president has taken a is defiant attitude towards his minders since re-election.

          • malsperanza says:

            A debate on Bush’s intelligence can easily descend into a battle over how to define “stupid.” A C average at Yale may not be an indicator. The failure of his business enterprises may not be an indicator. Inarticulateness may not be an indicator. (The clustering of all three may have some aggregate meaning, I suppose.)

            But one way of measuring stupidity that is persuasive to me is blind, stubborn commitment to one’s personal opinions and decisions in the face of contrary facts. There’s stubbornness; and then there’s an inability to understand the difference between opinion and fact. This is the stupidity of kings and dictators: It shall be so because I say it is so.

            Three sound, fairly objective indicators of low intelligence are:


            ~Unwillingness to change one’s views when the facts change

            ~Commitment to received truths rather than to reasoned ones

            IMO, Bush was a convenient candidate for the Rove presidency because he was not smart and not ambitious. He was a useful front man for the people who have been running Washington for 8 years: Cheney, Addington, Wolfowitz, Rumsfeld (until they got sacrificed to quell popular criticism), the supply-siders Gramm & co., and god knows what other faceless, unelected backroom boys.

            • Todd says:

              “He was a useful front man for the people who have been running Washington for 40 years: Cheney, Addington, Wolfowitz, Rumsfeld (until they got sacrificed to quell popular criticism), the supply-siders Gramm & co., and god knows what other faceless, unelected backroom boys.


  6. teamwak says:

    Maggie Thatchers unconditional support for Pinochet still leaves a nasty taste in the mouth for the UK. He was an excellent ally during the Falklands Crisis, but look what sort of man he turned out to be. Disappeared disadents all over the place.

    Strange Bedfellows indeed. But we did put him under house arrest when he came here, so maybe we started to atone!

  7. cucumberseed says:

    Get me the time machine.

  8. clayfoot says:

    I’ve read mixed explanations of what happened to Chile. Pinochet was able to come to power in the first place because of inflation rates were around 150% at the time, in part due to covert pressure from –you guessed it– the US government. Friedman personally opposed Pinochet’s oppressive regime, and publicly argued that Chile’s free market reforms eventually led to the downfall of the military junta and the creation of a democratic society.

    • Todd says:

      I’m sure that’s why Friedman personally went to Chile to meet with Pinochet in 1975 — in order to express his personal opposition to Pinochet’s oppressive regime.

      No, wait, that’s not right — instead he told Pinochet that he was “off to a good start, but needed to embrace the free market with greater abandon,” and said: “Shock treatment is the only medicine. Absolutely. There is no other. There is no other long-term solution.” And when a reporter mentioned that even Richard Nixon supported economic regulations, Friedman said “I don’t approve of them. I believe we should not apply them. I am against economic intervention by the government in my own country, as well as Chile.”

      He may not have gone on record as approving of an oppressive dictatorship — what economist would — but he loved loved loved the “opportunity” Chile presented to “prove” his theories, no matter who had to be tortured and killed to make them look good.

      • clayfoot says:

        On that visit, Pinochet asked Friedman to advise him. According to Pinochet, Friedman said very little in person, but this is the letter that Friedman wrote to Pinochet afterwards:

        The key economic problems of Chile are clearly twofold: inflation, and the promotion of a healthy social market economy. The two problems are related –the more effectively you can invigorate the free private market, the lower will be the transitional costs of ending inflation–. But they are also distinct: strengthening the free market will not end inflation; ending inflation will not automatically produce a vigorous, innovative free market.

        The source of inflation in Chile is crystal clear: government spending is roughly 40 per cent of the national income; roughly one-quarter of this spending is not matched by explicit taxes; it must therefore be financed by creating new money, which is to say, by the hidden tax of inflation. The inflation tax which is currently called on to raise an amount equal to 10 per cent of the national income is therefore extremely heavy –a tax rate of 300 to 400 per cent (i.e., the rate of inflation)– levied on a narrow tax base –3 to 4 per cent of the national income (i.e., the value of the quantity of money in Chile in the form of currency and demand deposits)–.

        This inflation tax does enormous harm by inducing people to devote great effort to hold down their cash. That is why the base is so narrow. In most countries, developed and underdeveloped, the quantity of money is more like 30 per cent of the national income than 3 to 4 per cent. In terms of total spending, which is a multiple of income, the money in Chile amounts to only about three days’ spending, which forces hand-to-mouth operation on the business system and strangles the capital market.

        At the time, Chilean inflation was “10 to 20 per cent a month“, and Friedman recommended drastic action to avoid economic collapse. Friedman’s final recommendation to Pinochet:

        8. Provide for the relief of any cases of real hardship and severe distress among the poorest classes.

        Friedman gets a bad rap regarding Chile. He favored an open, democratic society and a free market economy. Chile got parts of that right, but (obviously) huge parts of it wrong.

        • Todd says:

          Hey, and look! We’ve got an open, democratic society and a free market economy too, and look how well we’re doing!

          Teh Awsum Republican economic theory FTW!

          • clayfoot says:

            Well, except for the Federal Reserve (Wilson-D). And the government-chartered Fannie Mae (Roosevelt-D) and Freddie Mac (Johnson-D). And the mortgage interest deduction on income tax (Reagan-R). From the news, it seems clear these government policies and programs created the economic environment we now face. And the Democrats are just as much to blame as the Republicans.

            • Todd says:

              Yes, and eight years of aggressive deregulation, incompetence and cronyism had nothing to do with it. That’s certainly how Bush likes to promote it, these emergencies come along and he looks all startled and confused — huh? What have I got to do with it?

              • clayfoot says:

                Oh, Bush and his appointees did their part, no mistake. The current SEC Chair, Christopher Cox, seems to have been appointed on the condition that he never lift a finger to enforce regulations. I’m saying that Bush and company couldn’t and didn’t create this mess alone. They didn’t have time. It took Congress and the Presidency 40+ years to arrive here, and I don’t believe a Gore or Kerry administration could have saved us from it, anymore than I believe that an Obama or a McCain administration will rescue us from it. I suspect the Iraq war and this financial crisis will doom the next president to a single term, no matter who it is. A final party gift from Bush, you might say.

            • malsperanza says:

              Wait, what?

              Are you saying that having a Federal Reserve and large-scale government-backed incentives for home ownership are the source of the current financial collapse?

              Or are you just saying that they’re obstacles to a truly free market?

              From an earlier comment:
              I can’t believe the Republicans still tolerate him hanging around. Perhaps this DoJ OPR report today will banish Rove for good.

              Tolerate? Hanging around? Rove is the GOP’s biggest asset. They have no intention of getting rid of him.

  9. brendan831 says:

    The meat of it

    The problem with the “free market” espoused by the Chicago school is that it’s only “free” because they say it is – in all the wrong ways. His call to the government to “manage” the monetary supply REQUIRES an authoritarian state, which is the anti-thesis of a free market. Cutting public school funding is insignificant compared to dropping Monopoly money from helicopters and telling people it’s real.

    • clayfoot says:

      Re: The meat of it

      Well, somebody or something does have to supply money of some kind, whether public or private. Right now in the US, it’s the Federal Reserve, which either borrows to supply money, or simply creates it out of thin air, at the sole discretion of the Fed board. Friedman proposed dissolving the Fed (and its potentially disastrous subjective management) with a formula that increases the money supply at a small, fixed rate each year. Effectively, this gets the government out of the business of managing (really, tampering with) the money supply. That’s what Friedman proposed that Chili do, too: Let the exchange rate float against other currencies, drastically cut government spending, and stop printing money to pay for it all.

      • brendan831 says:

        Re: The meat of it

        Which sounds good, in theory. In practice, in order for the government to “increase the supply” at a manageable rate, there must be centralized control and what that centralized control does is devalue the currency – a little bit – every year. Add in fractional reserve banking, and the nature of government, and let crisis and leviathan go to work. I don’t think Milty was a bad guy, but I think he was naive. Murry Rothbard had his number, in my opinion.

  10. jdigital says:

    I’m no economist, but the idea that unregulated markets lead to economic utopia seems like a cult belief for the rich. As espoused by my nutty libertarian friend, it has three tenets:

    1. The free market has all the answers
    2. If the economy fails, regulation is to blame
    3. Money is the only measure of value or success

    Of course, blind faith in this system ignores a lot of details:

    1. We take what we have for granted, and what we have is based on a regulated market
    2. De-regulation encourages evil: exploiting the poor, price-gouging, vendor lock-in, deceptive business practices
    3. Free market works a lot better in your imagination, since imaginary solutions are quick, simple and easy.
    4. A disenfranchised, disgruntled working class is what led to the Communist revolution
    5. When healthcare and basic living expenses cost too much, people become sick, homeless, and dead – that’s only a utopia if you’re rich and utterly immoral

    • clayfoot says:

      Unregulated markets don’t lead to economic utopia; they’re just better than regulated markets. The problem with regulations is that they never occur in a vacuum. As soon as the government taxes this or creates a deduction for that, people evaluate the impact and adjust their behavior accordingly. That’s exactly how we got the housing/finance crisis. People across the economic spectrum reacted to government regulations (like “managed growth” and “urban planning”), tax incentives (like home-sale capital gains and mortgage interest deductions), and government-chartered corporations (Fannie Mae and Freddie Mac) specifically created to provide mortgages to less and less qualified buyers.

  11. Ever notice that the economic practices of the current regime are rather similar to those of Oceania as detailed by Orwell in NINETENN EIGHTY-FOUR?