More Lessons from History: Argentina

Philip Jenkins over at the American Conservative magazine has more history lessons for BO-44, you and I. The lesson concerns Argentina, once an economic powerhouse:

...[a nation with] a strong infrastructure and an excellent system of free mass education. It had the largest and most prosperous middle class in Latin America. When World War I began, Argentina was the world’s tenth wealthiest nation.

So what happened? Certainly the country was hit hard by the depression of the 1930s, but so were other advanced nations that ultimately recovered, and Argentina profited from intense wartime demand for primary products.

The country was killed by political decisions, and the primary culprit was Juan Perón. He dominated political life through the 1940s and ruled officially as president from 1946 to 1955, returning briefly in the 1970s. Although he did not begin the process, he completed the transformation of Argentine government so that the state became both an object of plunder and an instrument for plunder.

Perón ...[with] his second wife Eva... aimed their rhetoric against the nation’s rich, a designation that was swiftly expanded to cover most of the propertied middle classes, who became an enemy to be defeated and humiliated. To equalize the supposed struggle between the rich and the dispossessed, the Peróns exalted the liberating role of the state. The bureaucracy swelled alarmingly as nationalization brought key sectors of the economy under official control. Government bought loyalty through a massive program of social spending while fostering the growth of labor unions, which became intimate allies of the governing party. Argentina came to be the most unionized nation in Latin America. Perón also ended any pretense of the independence of the judiciary, purging and intimidating judges about whom he had any doubts and replacing them with minions.

Since 1976, Argentine economic policies have lurched from catastrophe to catastrophe. The military junta borrowed enormously with no serious thought about consequences, and the structures of Argentine society made it impossible to tell how funds were being invested. Foreign debt exploded, the deficit boomed, and inflation approached 100 percent a year. ...Military defeat in the Falkland Islands destroyed the junta. By 1983, a civilian president was in power once more. But nothing could stop the nosedive. Inflation reached 672 percent by 1985 and 3,080 percent by 1989. The disaster provoked capital flight and the collapse of investor confidence, not to mention the annihilation of middle-class savings.

Another civilian president, Carlos Menem, took office in 1989, and despite his Peronist loyalties he initially tried to restore sanity through a program of privatization and deregulation. But events soon proved that Menem was only following a familiar pattern whereby a new regime would speak the language of reform and moderation for a couple of years before facing a showdown with the underlying realities of Argentine society. Menem could not overcome the overwhelming inertia within the country, the juggernaut pressures toward the growth of the state, to bureaucratization and regulation, and the destruction of private initiative and free enterprise. Between 1991 and 1999, Argentine public debt burgeoned from 34 percent of GDP to 52 percent. During the same decade, government public debt more than doubled as a percentage of GDP. These burdens stifled private investment so that productive sectors of the economy languished. ...It is trivial to list the many other allegations of corruption and embezzlement surrounding Menem: what else is politics for, if not to enrich yourself and your clients? ...At the end of 2001, the country defaulted on its foreign debt of $142 billion, the largest such failure in history. With the economy in ruins, almost 60 percent of Argentines were living below the poverty line. Street violence became so intense that the president was forced to flee his palace by helicopter.

Since 2002, yet another new government has presided over an illusory economic boom before being manhandled by the ugly ghosts of Juan and Evita. Those specters were on hand to whisper their excellent advice to a new generation: if you face a crisis caused by excessive government spending, borrowing, and regulation, what else do you do except push even harder to spend, borrow, and regulate? Over the past two years, new taxes and price freezes have again crippled the economy, bringing power blackouts and forced cuts in production. Public debt stands at 56 percent of GDP, and inflation runs 20 percent. Last October, the government seized $29 billion in private pension funds, hammering the final nail in the coffin of the old middle classes. Judging by credit default swap spreads on government debt, the smart money is now betting heavily on another official default before mid-year. The Argentine economy may not actually be dead yet, but it has plenty of ill-wishers trying hard to finish it off.

Could it happen here? The U.S. certainly has very different political traditions from Argentina and more barriers to a populist-driven rape of the economy. On the other hand, events in some regions would make Juan Perón smile wistfully. California runs on particularly high taxes, uncontrollable deficits, and overregulation with a vastly swollen bureaucracy while the hegemonic power of organized labor prevents any reform. Thankfully, the state has no power to devalue its currency, still less to freeze bank accounts or seize pension funds, and businesses can still relocate elsewhere. But in its social values and progressive assumptions, California is close to the Democratic mainstream, which now intends to impose its ideas on the nation as a whole. And at over 60 percent of GDP, U.S. public debt is already higher than Argentina’s. When honest money perishes, the society goes with it. We can’t say we weren’t warned.

Could the United States of America ignore these lessons and 'spend, borrow, and regulate' ourselves into, at best, a much lower standard of living? The tell-tale signs of its start are unmistakable, rhetoric against the nation’s rich, bureaucracy swelling as nationalization brought key sectors of the economy (think Health Care) under gov control, and a government buying loyalty through a massive program of social spending. This brought a series of economic disasters. Sound familiar?