PEF Council member Prof. Stephany Griffiths-Jones is a member of Chilean President Gabriel Boric’s group of economic advisors. With Boric winning a resounding victory in the Chilean Presidential elections, we reproduce here a translation of Stephany’s recent interview for CTIX magazine Chile. Conducted before the second round of the election, Stephany discusses the left’s economic programme for the country, and the challenges a new President is likely to face.

Interview conducted by Andy Robinson. Original (in Spanish).

Stephany Griffith-Jones, one of the most eloquent promoters of the role of the state and public banks in the equitable development of South American economies, joined a group of advisers to Gabriel Boric, Chile’s presidential candidate, before the start of his second round campaign for the Presidency. The decision to appoint Griffith-Jones – a professor at the University of Sussex and collaborator with Nobel Laureate Joseph Stiglitz at Columbia University in New York – is proof that Boric build on not only ideas from the 2019 protest movement, but also experts close to Concertación and Nueva Mayoría, who led the centre-left governments of Chile’s slow transition from dictatorship.

It is also proof that, at the age of 35, Boric is aware of the importance of working with experienced economists such as Griffith Jones, Born in Prague in 1947, great-niece of Franz Kafka, and whose family emigrated to Chile the following year, we spoke about Boric’s dilemmas in needing to both respond to the demand for change in Chile, and to stabilise the economy.

It seems that Gabriel Boric is facing a problem. He is a candidate for change, a movement that has taken to the streets of Santiago to protest the neo-liberal model. But if he wins, he will come to power in a difficult budget situation that leaves little room for progressive budget policy…

Yes. At the moment the budgetary situation is very difficult. The fiscal deficit is already at 13% of GDP… Piñera went from one extreme to another in his response to the pandemic. He did nothing at first, and a lot of low-income people were in real trouble. This is where the first withdrawals from pension funds were introduced, to help low-income people in great difficulty. [Chile’s Congress authorised raids on the country’s privatised pension funds during covid, turning them into a “piggy-bank”, with about $50bn or 25% of their value withdrawn to date.] But then, in 2021, Piñera went to the other extreme. He gave generous support, perhaps too much, to many, even people who were not so poor. And consumption skyrocketed. Chilean GDP will grow this year between 11% and 12%. The economy is totally overheated.

What should be done?

Boric has committed himself to significantly reducing the budget deficit in one year and respecting the budget already approved by Parliament. It is a sign of his moderation. In the coming years, he wants to raise taxes gradually and increase the collection of existing taxes – higher direct taxes, and lower indirect taxes. Indirect taxes, such as value added tax, account for more than 50% of Chile’s total tax revenue, well above the OECD average. There is also a commitment to combat tax evasion, which in Chile is twice the OECD average, but this requires more tax inspectors.

The problem is more general. Latin America is experiencing a moment of polarization. It is necessary to break a model that was very unpopular, but the economic reality of countries like Brazil or Chile leaves very little space, and both Lula and Boric have moved closer to the centre.

Yes, at first many people thought that Boric would be too radical. But now perhaps the greatest fear is that he can not do enough.

Despite this, he is portrayed as radical in many media …

It’s true. The media talk about far right and far left. We must reject this false dichotomy, because Boric is a Social Democrat. [Right-wing candidate Jose Antonio] Kast is an extremist. In economics, he is quite radical; to reduce taxes when the deficit is 13% of GDP is downright daring. In politics, he is even more extreme. One of his deputies said that women should never have had the right to vote. Unbelievable. Kast proposed restricting the right to abortion, even for women who were raped, and forgiving Pinochet-era torturers.

But Boric is a European-style Social Democrat. I met him first at a conference to discuss the Scandinavian model of government. He has been more on the left, but he is aware of the current budget problems and is very open to discussions with all sides. That said, he is very committed to the need for redistribution.

Given the polarity and rejection of the system, do you think it can be a double-edged sword to enjoy the support of the main political figures from Concertación?

No. That’s very positive for Boric. Leftists will vote for him anyway. The problem is attracting the votes of most of those in the middle. Although the most important thing is to attract young people who demonstrate, but sometimes do not vote. Participation in the first round was very low. In the past, the center and the left always won when they merged. It can be expected to be the same this time. Boric acknowledged the contribution of the Christian Democrats (PDC) and it was a very good move. He met Ricardo Lagos [centre-left president from 2000 to 2006] and Michelle Bachelet [centre-left President from 2006 to 2010, and from 2014 to 2018]. They were wonderful to him. Much of the center and left have already joined the campaign. And the Christian Democrats support him even though they say they would not enter government with him. It is also true that the fact that Kast is percieved as disastrous made the reunion easier.

It is strange to compare the victory of the left in the Constituent Assembly with the results of November in the parliamentary elections. How did this happen?

Yes, 78% of voters voted [on 25 October 2020] in favor of a new constitution. Voting in the Constituent Assembly [over 15 and 16 May 2021] was a great victory for the left. But then, just a year after the referendum, the same voters voted for a parliament that was divided between left and right. There is therefore a lack of consistency. If Boric wins, he will have problems with Congress, which will likely try to block proposals such as the budget and tax reform.

Will there be more leeway afterwards?

I think so, after the first year. Boric and his supporters are very committed to the ecological transition. Chile is lucky because it has lithium, which is essential for batteries, and copper, which is essential for the energy transition. In addition, there is great potential for further development of solar and wind energy. It is necessary to give priority to certain sectors for that transition, supporting their development, and Kast does not understand this. Development banks must be mobilized for the green transition. And financial regulation can be used to incentivize commercial bank loans to companies with low-carbon investments.

Public investment is key. For example, Boric wants to invest heavily in building an extensive rail network. Then there is hydrogen. Hydrogen can be produced sustainably in Chile because there are many ways to generate renewable energy. We can use green hydrogen in mining to have green copper.

Is there not a risk that the energy transition will create demand for metals and lead to more extraction and dependence on the export of raw materials?

The idea would be to move up the value chain. Manufacture batteries, incorporate more technology and knowledge. Scandinavian economies, which in the past were like Chile, dependent on exports of raw materials such as wood, managed to move up the value chain and develop rapidly. So it is necessary, for example, to produced more refined copper, to manufacture higher value-added cables.

Why would the left do it better than the right?

Because public investment and the development bank are essential for the green transition, and then catalyzing private investment in this sector is key. Kast doesn’t understand this. He caricatures the state as a dark and negative force, but those are the ideas of the past.

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Robert Skidelsky

Will Hutton

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And what extraordinary fruit it has produced. Lockdowns both collapsed economic activity, leading to a sharp fall in the tax take, and, through the demands of furlough expenditure, other benefits increases, and increased health spending, saw government spending increase hugely. Over the last year, the British government spent an additional £280bn last year because of the coronavirus. The deficit (the gap between government spending and taxes) has risen to a peacetime record, and the government debt (the total amount it has borrowed throughout history) has shot up to almost 100% of GDP. Yet the sky has not fallen in: despite a brief wobble in March last year, interest rates on government borrowing have remained very close to the lowest they have been in human history.

There are three reasons the government has been able to fund all of its expenditure. The first is that as a simple technical fact, if a government with its own currency (like Britain with the pound sterling, or the US with the dollar) wants to spend more money, it can do so by issuing currency  – the complications emerge after the spending has taken place, not before. As economist Jo Michell has explained, the challenge is that whilst a government with its own currency can ultimately always produce more of the currency as it wishes, and therefore in theory spend whatever amount it wants to, the ability of government to offer (in the UK case) unlimited pounds sterling in payment doesn’t necessarily guarantee the goods and services are available to be paid for. This could result in price rises, as supplier push up prices to meet demand. Or those receiving the new money may decide to use it to buy assets, inflating their prices, or sell the pounds to buy different currencies, pushing the value of the pound down relative to other currencies. In most circumstances, then, governments will find they need to not only decide what spending they wish to make, but also show how the economy’s real resources will be directed towards meeting them.

Borrowing is very cheap

For most governments in the developed world over the decades since the Second World War, making good the gap between what the government spends and what resources it can call on has involved raising taxes, and raising borrowing through government bonds – effectively today a certificate sold to those in financial markets to raise funds, with a promise to repay (usually with interest) later on. A government that can sell these bonds quickly will be in a better position than one which struggles to do so, since a struggling government may well have to offer higher interest rates to lure potential bond-buyers in to the market. Governments that are seen as “safe” by bond traders (that is to say, committed to the interests of bond traders) are likely to face lower interest rates. But since 2008, with some crisis-ridden exceptions like Greece, interest rates demanded by bond traders across the developed world have been exceptionally low. The great fear of the 1990s, of “bond vigilantes” poised to swoop and attack governments not obeying their wishes, does not hold.

This is the second reason funding has not been a problem: if the British government chooses to borrow, it can do so very cheaply. The graph below is from the House of Commons Library, and shows how much the government has been paying in debt interest, relative to GDP, since 1970. Low interest rates mean that even with exceptional levels of borrowing, the government is paying much less (relative to the size of the economy) in interest than it used to.

The third reason is that this government has continued to rely on the ability of its central bank, the Bank of England, to issue new money as it wishes. This is what “Quantitative Easing” amounts to: for Britain, it is a slightly peculiar process whereby the Bank of England creates new money to buy British government bonds from their current owners – typically major financial institutions like pension funds and banks. But by buying the bonds, and using new money to do so, the Bank is making it far easier for the government to issue bonds now and in the future. The process is a bit more roundabout, since the Bank is buying bonds that are already in circulation, but the effect of the process is to finance government borrowing with new Bank of England money. Over the last year, this has been exceptionally important in keeping government going: government borrowing is £340bn higher than expected in March last year, but the Bank of England had issued £350bn of new money through QE. In other words, the entire cost of government borrowing has been (in effect) financed by QE. The Bank is, as some City investors also believe, very close to “monetising” the government’s debt.

This isn’t a cost-free process: the effects of all that new QE money sloshing around has been to increase asset prices, which in the US has primarily meant rising stock market prices, and in the UK has meant largely rising property prices. This happens because those holding the QE money look for other assets to invest it in, driving up their prices: but the overall impact on inequality is bad, and the effect on the whole economy is to steer more resources into asset ownership, rather than useful spending in the real economy.

But we are simply nowhere near the point at which we should be worrying about the debt, despite its increase. If we were, we might find (for example) that the government was finding selling its bonds difficult. But that isn’t happening. There is a consensus in the economics profession on this point, marking a distinction with the period after 2008 when some prominent economists favoured austerity, but too often we find some politicians and, worse, some senior political journalists repeating nonsense about the government running out of money, or about how concerned we must now be about the debt.

The truth is that we had an exceptional public health emergency to deal with and, like other national emergencies, such as the Second World War, we simply had to spend the money to deal with it. Just as we didn’t panic about repaying the debt as fast as possible after WW2, instead building the NHS and the welfare state, so today we shouldn’t be panicking about it, either. And, looking ahead, it seems likely that much higher public spending will be needed to cope with coronavirus – and meet the demands for improved public services that we are crying out for after a decade of austerity. A sensible balance between some increased taxes on the wealthy – many of whom have done incredibly well financially out of the crisis- and higher government borrowing would take care of this. What we cannot risk, and should give no credence to those calling for it, is another lost decade of spending cuts and austerity.

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Edited by PEF Chair Patrick Allen and council members Suzanne Konzelmann and Jan Toporowski

Publication Date 29th April 2021. Agenda Publishing

40 years of neoliberalism has failed to provide prosperity or stability to the UK economy. Instead it has led to low growth, turbulence, grotesque inequality , poverty and ill health for millions . This is the outcome of damaging economic polices driven by free market dogma, rentier capitalism and ideology. It’s time for a change.

This book contains 18 essays by PEF council members and academics who outline the essential features of a progressive economy dealing with the five massive challenges of our times to the economy – Covid-19, austerity, Brexit , inequality and climate change.

PEF calls for bold public intervention. Shrinking the state and weakening our public institutions has undermined social and community resilience and promoted an out-of-control, value-sapping and high-inequality model of capitalism. 

The authors say the resources of the state must build a fairer and more dynamic post-Covid society, using a mix of regional and industrial policy and investment to revolutionise our public health, housing and social services. A progressive new society should construct a new income floor and new measures to spread wealth and give everyone an equal stake in the economy. 

The financial crash of 2008 proved that only the state can rescue the economy when all else fails including the biggest banks. Covid has shown how only the state can rescue us from death and the collapse of the economy during a devastating pandemic. Only the state can steer the economy and deliver the investment needed to cope with climate change

The 2008 crash showed the breathtaking incompetence of the private financial sector. Now Covid has once again laid bare the myth than private is best – outsourcing to companies the job of track and trace at a cost of £37bn has so far failed to show any discernible benefit say the Public Accounts Committee.

By contrast, the selfless work of millions of NHS workers and volunteers has delivered one of the most outstanding vaccination programmes which has been the envy of the world. This has been done at modest cost and was only possible with a national health service drawing on the vocational drive of its workers for the common good.

The Biden adminstration is today showing the mighty power of the US State with Biden’s Covid and infrastructure bills. The results are expected to cut child poverty in half. The UK government should follow this lead and bring in new models of public intervention to deliver a pandemic-resistant, green economy which works for all citizens.

For an outline , list of chapters and authors and to order a copy go to this webpage

You can obtain a 25% discount on the cover price by entering code AGENDA25 on the Agenda page here

Launch event on Zoom – Wednesday 19th May 2021 at 11am . Joining details to follow.

The launch will be chaired Miatta Fahnbulleh , CEO of NEF and attended by Ed Miliband, Shadow Secretary of State for Business, Energy and Industrial Strategy . Martin Sandbu of the FT will attend as commentator.

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