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Wednesday, October 21, 2009

Don’t Cry For Us, Argentina

U.S. Economic Policy Imitates Peronist Argentina

Economic news continues to be bad, and despite the government’s promises that the recession’s end is near, I don’t see it. Economic fundamentals are more skewed now than they were two years ago, which means a recovery is not near.

We hear today that the Canadian dollar is almost at parity with the U.S. dollar. A few years ago the Canadian dollar was worth 75 cents USD, but today the U.S. government is  on a money-printing binge—and pretending to be shocked — shocked — when the its dollar plummets.

I am no prognosticator, and I don’t run any doomsday websites, but the long-range forecast looks bad. While most Americans believe this country is invulnerable to the deep shocks that have taken down lesser nations, some of us know that the government’s policies of the past 15 years have been ruinous. Furthermore, there is a country to our south that provides the unhappy roadmap to the destination to which the U.S. government’s policies are leading: Argentina.

Today Argentina is classified by the World Bank as a “secondary emerging market.” That might sound impressive next to Latin American failures like Cuba and Venezuela, but from where Argentina was just 70 years ago, its modern classification is a step backward.

In the first half of the twentieth century Argentina was one of the ten wealthiest nations in the world. That’s right, the world. This was a rich country, relatively speaking, and its future seemed bright. Unlike the European nations, it had not been burdened with wartime destruction; its economy benefitted from being at peace and by exporting agricultural products to nations at war.

Unfortunately, the same populist pressures that gave the United States its New Deal and promoted communism around the world undermined Argentina’s political economy.  The policies of the 1940s and 1950s, under Juan Peron and his wife, Evita, would prove permanently fatal for the country’s economic well-being. First and most important, militant labor unions tied to the Peronists forced up wages well beyond productivity. Not surprisingly, Argentina’s goods soon became uncompetitive on world markets.

Second, to deal with this newly acquired uncompetitive status, the Peronists passed one protectionist measure after another. Inflation soon followed, and the Argentine peso, which once rivaled the U.S. dollar, turned into play money. Yet the 50 percent inflation of the early 1950s was a pittance compared to what Argentina would experience over the next 30 years, as the country spiraled into hyperinflation by 1980.

Economic chaos led to political chaos, with the country witnessing a series of elections of Peronist presidents and subsequent coups to remove them from office as their policies exacerbated the continuing economic crises. Leftist guerrilla groups clashed with national forces in the infamous “dirty war” of the late 1970s and early 1980s that left thousands tortured and dead and still affects the nation’s politics.

Even today, Argentina is synonymous with political instability, high inflation, and an economy that always shows great potential but never meets expectations. Americans believe that such a thing cannot happen here, but it can. Argentina’s problems began with simple government interventions into the economy aimed at artificially propping up wages. From those first interventions came further interventions to deal with the problems caused by the previous actions, and so on. In the end, all that was left was inflation, chaos, political violence, and poverty.

The United States is facing perhaps its second-greatest economic crisis ever, and so far the government has taken page after page from Juan Peron’s playbook. As a result of this economic and political foolishness, the economy continues to shed jobs and hope.

There is a way out, but it is much different from what we have been doing. When one is in a deep hole, the first thing to do is stop digging. That means dispensing with the artificial means to prop up the economy when serious medicine is needed, medicine that will be painful but ultimately will lead to economic recovery. If we don’t go that route, I guarantee that the Argentines will not cry for us.

  • Dr. William Anderson is Professor of Economics at Frostburg State University. He holds a Ph.D in Economics from Auburn University. He is a member of the FEE Faculty Network.