Argentina, the land stretching down the east side of South America and conjuring images of cosmopolitan cities, grass fed beef, Malbecs, the flat Pampas, and the mountainous Andes. It is a country full of abundant resources yet for the last century Argentina has been an interesting case economically because it could be argued that they have lost their way.
In this final part, we talk about some particularly bad policy choices Argentina made over the years and some parallels that we see in the world today.
C Thomas: As I write this, the Argentina inflation rate is hovering at 100% so they haven’t figured it out yet so while we are looking at the historical roots of their decline, it is important to note just how difficult it can be to stem the tide of runaway currencies.
I again want to reference the paper Introduction to Argentine Exceptionalism and give credit to the authors Edward Glaeser, Rafael Tella, and Lucas Llach. The authors do a good job of walking us through the different administrations’ policies that contributed to the decline.
Austerity: Okay, I am curious about these examples of bad government policies. In my experience, I find that most government policies are for the good of the people and make their lives better as the government is there to help them (!).
C Thomas: Let’s start with 1916, with the election of the radical government President Trigoyen was elected as president and he enacted policies like minimum wage laws that aren’t overly competitive in a free market setting with true price discovery. These were just the baby steps in comparison of what was to come.
Then, In 1930, with the changing of power by coup, the strong arming of the government increased a little more. Public works were started and that is always the code for government spending, and with that came industrial jobs which caused rural workers to migrate to the cities for jobs. These workers were organized, and labor organizations grew which added to the uncompetitiveness of Argentina. It was in the late 40s and 50s under Peron that these policies became too much for the country and currency to bear. As the secretary of Labor, he galvanized those labor union workers into voters and voted themselves a better situation through labor legislation at the expense of productivity. Almost half of the country workers became union workers while Peron nationalized railways and banks and furthered isolationist policies and it would be 40 years before Argentina would swing back toward free trade and privatization.
The granular details of some of the ridiculous price controls were almost funny if not so sad. Restaurants were unable to change their menu prices because raising prices was outlawed. Government controls are always meddlesome at best and bad at worst, but this level of involvement could only lead to revolt and the Argentine black market for dollars which still manage to trade under fair value, and basically a disregard for the law was founded due to these types of policies. Keep in mind that this had taken 40 years so there were almost two generations that had been dealing with the gradual creep of government further and further into their lives while their standard of living had gotten worse and worse. Does this sound familiar? Of course, it should, because governments around the world are seizing power under the guise of something every chance they get. Terrorism, pandemics, climate change are all just useful tools for government control.
Remember in the United States that in 2001, the debt to GDP was only 33%, and then 9/11 happened. Well meaning but short-sighted politicians passed the Patriot act and now we have had 20 years of the TSA uncomfortably touching us and additional regulations that make the TSA look like an eager teenager in the backseat of jalopy. The government debt and government spending increased across both red and blue waves until the pandemic hit which was on the Republican watch and we watched the shutdown and spend debacle that will be mocked for generations. The government debts and spending exploded as governments took a beer bong and forced money down the throats of US consumers and then gave them a coach’s patt on the butt and said go out there to buy a peloton, which is a $3k stationary bicycle. The Democrats, not to be outdone by Trump, upped the ante with more spending of their own and have pivoted to their green agenda of spending to combat climate change. This marks the first time in history that any population has willingly gone from a more baseload and cheaper energy source to a more variable and less efficient source at scale. California famously went from outlawing gas guzzling cars one week to telling people that they didn’t have the electricity to plug in their Teslas. I don’t know if this is the equivalent of not raising your menu prices in 1950s Argentina, but in terms of ridiculousness I feel like we are going for the gold.
It is important to note that Argentina didn’t see huge currency issues right away when their government started intervening in their economy with spending and policy either. It took a long time for this to take a prosperous country to one with a decimated currency with no way out. This wasn’t an FTX overnight collapse, this was a slow burn like a fuse that built up to an explosion that decimated everything. As we saw it wasn’t until the 70s and 80s that inflation went above 100% a year and then the government tried to fix things in the 90s by swerving back toward privatization and free trade, but that only led to hyper-inflation and then the deepest crisis of them all in the 98-2002 depression. Since then growth has been fighting to outpace inflation as once again they are seeing 100% inflation, but the one constant through it all is a government trying to appease its citizens. Argentina has some of the most heavily subsidized electricity in the world. Who doesn’t like cheap energy, right? Bitcoin miners in 2019 were moving to Argentina to take advantage of this miracle of the modern economy. The one constant through it all has been the government doing this, government doing that, and no one can see it. Well, plenty of people see it, but it hasn’t changed, let’s say.
America in the late 70s was on the same track with the government spending during the 60s with JFK and LBJ offering us moon landings and a great society all while fighting an overseas war. America was forced to go off the gold standard and for the better part of a decade America fought with low double-digit inflation. Argentina must have been laughing saying “That isn’t inflation, you don’t even know what inflation is eh gringos!” Fortunately, before that genie got too far out of the bottle, Paul Volcker and Ronald Reagan took charge and drove the economy into not one but two painful recessions caused by high fed funds rates and tax cuts when necessary. This was when government debt to GDP was just 30% versus the current 120% which is why it is so damn important to look at what countries like Argentina can teach us. Yes, we have the world’s reserve currency, but as we have talked that can slip away just as it did to the UK and if it does and America has to stand on its own two feet and use its production capacity as a measure of its foreign borrowing capabilities, we would rank not much better than Argentina in capability.
The biggest obstacle might be with the people themselves. Argentines are indoctrinated into this after 5 generations of inflation and have structured their lives around hourly bouts of inflation and black market US dollars and understanding how to survive in this environment learned from the passing down of wisdom from people whose government has not done them any favors in a very long time. I fear the American people aren’t nearly as tough. The toughest generation that could pass on lessons from the Great Depression are largely dying out and without that wisdom we are left with a nation reared by parents who think soccer participation trophies are important and a new generation raised on nap pods, safe spaces, and gender outrage while their government is spending them into their own potential 5 generation inflation fight, but believe they can identify as a cat. Well let me tell you something my cat-identifying fellow Americans, cat food is gonna get expensive.
Sincerely Yours,
C Thomas Printer
Paper mentioned: Introduction to Argentine exceptionalism (hbs.edu)