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Leaders
The Economist July 9th 2022
epitomised by the junkbond king Michael Milken, crashed. To day there are few large, cheaply valued companies that are ripe for this kind of shocktherapy. Private equity recovered rapidly after the global fi nancial crisis; by early 2011, business was back. But the most signifi cant factor was central banks pushing inter est rates to zero. Now some privateequity tycoons may hope to compensate by improving fi rms’ operating performance. Yet it is an open secret that many are speculators, not managers. Who will suff er most? The fi rst losses will be incurred by in vestment bankers who underwrote buyout debt at frothy pric es. But that will be bonuscrushing, not systemshaking. Disclo sure is patchy but, by our crude estimates, the fi ve biggest Amer ican investment banks have up to $90bn of corporate loans held for shortterm purposes. Even if they were worth nothing this
would knock only about 12% off the banks’ total core capital. The ultimate investors face a bigger headache: they are betting on high returns from private equity to fulfi l the promises they have made to retirees and other benefi ciaries. You stole my heart and that’s what really hurts Best positioned of all are the privateequity fi rms themselves. Since the 1980s they have diversifi ed. They often have property, credit and infrastructure businesses that are comparable in size to their buyout activities. These areas may do well during infl a tionary periods. The industry’s pioneers have largely retired. One who has stayed the course, Mr Schwarzman, today manages a vastly diff erent fi rm, with diversifi ed assets under manage ment of $915bn. For some people, the party never ends. n
Chile
Magna mistake Chile’s draft constitution is a fiscally irresponsible left-wing wish list. Voters should reject it
W
hen angry and occasionally violent protesters took to the streets of Santiago, Chile’s capital, in 2019 and 2020, their grievances were manifold. Students marched against costly tuition; others demonstrated against the country’s private pen sion system and threadbare health care. Many blamed Chile’s ills on one document: the constitution adopted in 1980 under Augusto Pinochet, the dictator who ruled from 1973 to 1990. To quell the protests, in which at least 30 people died, the centreright government of the day agreed to have a new consti tution drafted. A constituent assembly of 155 people was elected, many of them from social movements rather than established parties. The fi nal result of their haggling was released on July 4th (see Americas section). It is absurdly long, with 388 articles. It is also fi scally irresponsible and sometimes dotty. To be fair, it omits some of the worst ideas aired in the assem bly, which was dominated by leftists. These in cluded nationalising all natural resources (mining generates 12% of gdp) and scrapping the upper house. The central bank retains its in dependence, though its remit has been expand ed to include “employment protection, care for the environment and the natural heritage”. A few ideas are laudable. The document would require the devolution of some powers to regions, and would give indigenous people the right to be taught in their own languages in schools. It seems to require laws to be passed to legalise abortion and assisted suicide. But overall the draft is a confusing mess, full of woolly lan guage that more or less guarantees decades of squabbling about what it actually means. “Nature” would be given rights. The draft mentions “gender” 39 times. Court rulings, the police and a national health system will have to operate with a “gender per spective”, which it does not defi ne. The document is far less business or growthfriendly than the current constitution. It gives trade unions the sole right to represent workers, guarantees them a say in corporate decision making and allows them to strike for any reason, not just those relating to work. It says that everyone has the “right to work” and that “all forms of job insecurity are prohibited”. That could make
it rather hard to fi re anyone. Landowners, such as farmers, could potentially lose the property rights to water on their land. Com pensation for expropriated land would not be at a market price but at whatever Congress deems a “just” one. The draft creates a portfolio of socioeconomic rights that could blow up the budget. It requires the establishment of sever al new bodies, such as an integrated national health system, and cradletograve care, without giving much thought to how they would be funded. The state would oversee the provision of hous ing, to which it says every person has a right. Property specula tion would be banned. So would forprofi t education. Legal checks and balances on the government would be wa tered down. A new council would have power over all judicial nominations; previously the Supreme Court, the president, the court of appeals and the Senate all had a role. The draft upends the budget process by giving Congress new powers to propose spending bills, although the president can veto them. The document is ridiculously broad. It says the state should “promote the culinary and gas tronomic heritage” of Chile and recognise “spirituality as an essential element of the hu man being”. Everyone has a “right to sports”. Nonhumans get a look in, too: the state will promote “education based on empathy and respect for animals”. Chile’s old constitution was hardly perfect. Indeed, it has been amended nearly 60 times. But compared with its proposed replacement, it is a paragon of clarity. More importantly, the old blueprint for governing works. Since democracy was restored, Chile has been a Latin American success. gdp per person has tri pled since 1990 and poverty has fallen. Rather than scrapping the old constitution, Chileans should scrap the new one. When the draft is put to a referendum in Sep tember, they should reject it. Congress should then make a de termined eff ort to reform the existing constitution to salve Chile’s discontent, for example by making it easier to build a strong welfare state. That may sound uninspiring to those who took to the streets in 2019 and 2020. But in the long run it is far more likely to make Chile prosperous—and governable. n
