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Monday, September 2, 2019

Argentina's Austerity Crisis: Another U.S. Red Flag

With the federal government borrowing 24 cents of every dollar it spends, Congress is pushing us toward a debt crisis. Others have had that experience, but for some reason we refuse to learn. I, on the other hand, refuse to stop sharing the experiences of those countries. Like Argentina.


Last year I published a two-part white paper on the Greek austerity crisis and how it is a harbinger for the United States:

Since then, Congress has put the spending accelerator to the floor and returned to trillion-dollar deficits. The U.S. government is expected to borrow more than 24 cents for every dollar it spends in 2019. 

This is an entirely unsustainable situation. Despite the desire of individual members of Congress, our legislature as a whole has decided that the budget deficit doesn't matter, but if it mattered it would not be their responsibility to deal with it. Therefore, the Federal Reserve is gearing up for another Quantitative Easing, and this one is going to be massive. 

The entire economic-policy establishment in our nation's capital seems to have decided that our country is impervious to the kind of debt crises that happen elsewhere in the world. This is, of course, a boatload of nonsense. The macroeconomic mechanics that can take down Greece or Sweden can also take down America. It just takes more time; we have, so to speak, a thicker macroeconomic buffer against debt crises.

Part of our buffer is a strong, global currency. We have been wise in the past not to use it for deficit funding purposes, but that changed after the 9/11 attacks. While understandable at the time, the monetary policy to keep interest rates at very low levels made for an easy segway into Quantitative Easing. With Ben Bernanke's QE strategy, Congress and the Bush and Obama administrations got a blank check to continue to spend even as taxpayers had reached the cap of their ability to fund government. 

We may have formally left QE behind us, but Jerome Powell, the current Fed chairman, has allowed our central bank to start signaling a return to bond-buying heydays. 

Powell is not to be blamed here. He knows that if he said "absolutely no QE, Mr. President!" he would be looking for a job. This is no reflection on Trump; if Bernanke had resisted Obama's first-term spending binge he, too, would have been fired. The problem is, fundamentally, that Congress - our legislative body - insists that it can spend whatever it wants, whenever it wants to, and that if today's taxpayers can't pay for today's spending, then tomorrow's taxpayers will.

This will not end well, and there are plenty of ways to show this. One of them is to continue to review debt crises as they happen around the world. I covered Denmark and Sweden in my book Industrial Poverty, and the Greek crises in the papers linked above. Today, let us take a look at Argentina.

I can already hear the deriders laughingly dismiss any comparison between the United States and a moronically poorly run country at the bottom of the Heritage Foundation's Index of Economic Freedom study. Argentina, they will say, is the pinnacle of lousy fiscal policies, currency collapse and even government corruption.

For sure, corruption is a problem in Argentina, and I am in no way suggesting that corruption exists within the U.S. government. However, it is important to keep in mind that corrupt politicians and bureaucrats may do damage to the long-term credibility of a government, but they do not destroy a country's entire economy. That is done by reckless spending, exorbitant taxation and out-of-control money printing. 

Which is exactly what Argentina has been plagued by since at least the partial government-debt default 18 years ago. 

Since then, Argentina has been on the verge of a fiscal, macroeconomic and even monetary collapse. At times, only an infusion of cash from the IMF has allowed the country to stay afloat. Today, the country is at a point where its debt is so toxic that, says Peronist presidential candidate Alberto Fernandez, "there is no one taking Argentine debt, or anyone who can pay it" (Wall Street Journal Aug 31, Weekend print edition, p. A8). 

The immediate reason for this was the Argentine Treasury's failure last week to roll over maturing bonds. Fernandez bluntly stated what this means in practice. But the inability of debt rollover is only the symptom - the underlying problem is that the Argentine government has created more spending programs, with more entitlements, than it could possibly pay for. 

Running to the IMF to ask for help is only the last, one-step-from-the-abyss response from a government that is up to its armpits in debt. Before they get there, they have pulled all sorts of tricks to try to make the light in that tunnel be a magic-wand solution to their problems - and not an oncoming freight train. 

There is only one way to permanently solve a debt problem, and that is to eliminate budget deficits. That, in turn, takes one and only one kind of solution, namely a package of spending reforms that do away with the welfare state. Tax-funded economic redistribution - which is what the welfare state is all about - is inherently sustainable.

After the debt disaster in 2001, Argentina did not reform away its welfare state. The country pressed on, thinking that it could somehow find a way to fund their egalitarian system of entitlements. As a result, they ended up right back where they started.

In 2012, the country was forced into an austerity program the size and impact of which were not at Greek levels, but not far behind. Since the English literature on it is scant, we are going to have to rely on a Wikipedia article based on Spanish references.* It gives an example of the conflict between government promises in the form of entitlements and the inevitable impact of austerity, following a long period of government over-spending:
The administration of Nestor Kirchner and his wife and successor, Cristina Fernandez de Kirchner, has imposed price controls on utilities and public services, at levels cheaper than needed by service providers, since 2003. The state had provided subsidies to the service providers, compensating their losses. Fiscal austerity policies enacted early in 2012 removed many of these subsidies, however, leading to huge rate and fare increases. ... [They were] removed for wealthy neighborhoods, and while rates were maintained in lower income districts, the increases were eventually extended to most people. 
Although just one instance, the cuts to this entitlement exemplifies well how austerity works in practice. The government of Argentina promised people within certain income brackets that taxpayers would take responsibility for some of their expenses; when taxpayers ran out of money, that promise was rolled back. Families who had adjusted their personal finances to the subsidies from government, were left fending for themselves.

The practical result was twofold: 

1) Entitlees had to cut down on other spending just to be able to pay their utility bills, leading to a decline in consumer spending;
2) Since taxes remained unchanged, the economy as a whole was not more able to produce new, better paying jobs after austerity as it was before.

Neither of these two observations is a moral statement of any sort. They just pronounce macroeconomic mechanisms that go to work as a result of certain changes in fiscal policy. I have had many discussions with fellow libertarians who claim either of two things:

a) Austrian theory says that neither of the two mechanisms work, therefore we don't have to worry about them; or
b) Yeah, but in the long run it all works out, and if you were dumb enough to become dependent on government for your personal finances, too bad for ya.

The first argument is false. The multiplier, as explained by Kahn and Keynes in the 1930s, is one of the most established facts you can find in economics. To deny it because it does not fit your theory is to deny that the Earth is round because your theory says it is flat. Besides, Austrian and Keynesian theory have some promising common ground that both Austrians and Keynesians should explore.

The second argument falls on empirical grounds. If austerity really did what some libertarians suggest it will, then Greece would be a thriving economy today. No other country in the industrialized world has undergone a tougher, harsher and more unforgiving program of spending cuts and tax hikes than Greece. It does not help to suggest that if it were all spending cuts and there were no tax hikes, the effect would have been unequivocally positive; given the mix between spending cuts and tax hikes in Greece, if this argument were correct the Greek economy should have been largely unaffected by austerity.

It has not been. In fact, it is about 25 percent smaller now than before austerity began ten years ago.

Once austerity goes to work, it does permanent harm to a country. Argentina, again, is a case in point. As with Greece, one austerity program did not fix the deficit problem. A crucial reason was the refusal of Argentina's politicians to abandon the idea of egalitarian economic redistribution. In 2017, President Macri proposed spending cuts on pensions and aid to poor families with children. A year later, on September 2018, the BBC reported:
Argentina has been plagued by economic issues for years, and [President] Macri ... pledged to reverse years of protectionism under [his predecessor Cristina] Fernandez. Her government, which was in power from 2007 until 2015, nationalised companies and heavily subsidised many everyday goods and services, ranging from utilities to football [soccer] transmissions on television. 
They also reported on new austerity measures, a news story shared in some detail by the Guardian. Yet as President Macri has pressed on with more austerity measures, his competitors in the upcoming presidential election - Alberto Fernandez included - want to return the country to its history of unsustainable spending. The center-left ticket with Mr, Fernandez and former president Cristina Kirchner promises "access to free medicines for retirees and better wages for workers, among other benefits." 

These promises are, again, made just as the country has run out of lenders. Just like in Greece, there is a complete void of understanding in Argentina of what causes these repeated fiscal crises: the welfare state. On the contrary, the very promise of some kind of restoration of the welfare state's benefits is now becoming a central tenet in the presidential election. 

In other words, large parts of the country's political leadership is unable and, more importantly, unwilling to understand the economic crisis in the country. Just as they flat-out refused to learn anything from the debt crisis in 2001, and Greek politicians refused to learn from their own partial debt default in 2012, the Argentinian political leadership is back in its old habits of unsustainable spending. The grasp on power and the egalitarian ideology are more important than the country's economic future. 

Would a debt crisis play out in a similar fashion here in the United States? No, not exactly, of course. But we would share the same political ineptitude - in fact, with Democrat candidates doubling down on catastrophic delusions like Mad Monetary Theory (MMT), we would very likely be hurled fast and deep into a very ugly crisis. Once there, short-sightedness and a chronic inability among the left, and large swaths of the right, to take responsibility for problems could very well trap us at that bottom for a long time.

In fact, our political problem would be in large part similar to what Greece and Argentina have wrestled with for a long time now. Imagine us at the bottom of a fiscal crisis, with unforgiving spending cuts to Medicaid, food stamps, welfare, SSI, the EITC and other programs. Imagine tax hikes having whipped more blood from both high-income and low-and-middle income taxpayers. Imagine businesses massively refusing to hire because there is no market out there. The Federal Reserve has provoked 50-100 percent inflation with reckless money printing, MMT or no MMT. 

Imagine the Republicans control Congress and an election is just around the corner. What would the Democrat party do at this point? They would promise more spending, a restoration of all entitlements and to compensate everyone's wages for inflation. 

What would Republicans do? The fiscal conservative flank would be left in isolation while the Romneycrats within the GOP, eager to get re-elected, would make a deal with the Democrats on more spending - and therefore more money printing.

Until our political leaders are willing to learn from countries like Sweden, Denmark, Spain, Portugal, Greece, Argentina, or even Puerto Rico; until they stand up and say "it's the welfare state stupid"; until they are willing to do away with it before we hit that rock-bottom trough of a hyper-inflation austerity crisis; we will steam on straight ahead, like that infamous ocean liner, right into the iceberg.

*) Normally I would not touch anything written on Wikipedia, but having checked out the references as best I can given my somewhat rusty Spanish, I can accept this article in lieu of other sources. The reader is kindly asked to keep this in mind.

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