Will the U.S. go the way of Ar­gentina?

The Washington Times Weekly - - Commentary -

Acen­tury ago, if you had told typ­i­cal cit­i­zens of Ar­gentina (which at that time was en­joy­ing the fourth-high­est per capita in­come in the world) that it would de­cline to be­come just the 76th rich­est nation on a per capita ba­sis in 2010, they prob­a­bly would not have found it be­liev­able. They might have re­sponded, “This could not hap­pen; we are a nation rich in nat­u­ral re­sources, with a great cli­mate for agri­cul­ture. Our peo­ple are well ed­u­cated and largely de­scended from Euro­pean stock. We have prop­erty rights, the rule of law and an open free-mar­ket econ­omy.”

But the fact is, Ar­gentina has been go­ing down­hill for eight decades, and it has the sec­ond­worst credit rank­ing in the en­tire world — only Venezuela has a lower rank­ing. Ar­gentina, de­spite its nat­u­ral re­sources and hu­man cap­i­tal, has man­aged to throw it all away. Ar­gentina did not be­come rel­a­tively poor be­cause of hav­ing been in­volved in de­struc­tive con­flicts. It be­came poor be­cause it has had a se­ries of both demo­crat­i­cally elected lead­ers and non-elected dic­ta­tors who never missed an op­por­tu­nity to make the wrong eco­nomic de­ci­sions. It is, once again, try­ing to re­nege on pay­ing the prin­ci­pal and in­ter­est on Ar­gen­tine govern­ment bonds to for­eign bond­hold­ers, and hence New York state (where many of the bonds are ser­viced) may take fur­ther ac­tion against Ar­gentina, in­clud­ing fines and as­set seizures.

In the 1930s, the Ar­gen­tine govern­ment in­creased its in­ter­ven­tions in the pri­vate econ­omy. Juan Peron took over in 1946 and ended up na­tion­al­iz­ing the rail­roads, the mer­chant ma­rine, pub­lic util­i­ties, pub­lic trans­port and other parts of the pri­vate econ­omy. For much of the past half-cen­tury, Ar­gentina has en­gaged in a se­ries of er­ratic mon­e­tary poli­cies, of­ten re­sult­ing in pe­ri­ods of very high in­fla­tion and eco­nomic stag­na­tion. Be­cause of their po­lit­i­cal power, the unions have been cod­dled, re­sult­ing in un­sus­tain­able wage-and-ben­e­fit pro­grams. Ex­ces­sive govern­ment spend­ing has caused re­cur­rent fis­cal melt­downs, where both for­eign and do­mes­tic debt-hold­ers have lost many of their in­vest­ments.

Ac­cord­ing to the Eco­nomic Free­dom of the World An­nual Re­port (pub­lished by the Fraser In­sti­tute in co­op­er­a­tion with the Cato In­sti­tute and oth­ers), Ar­gentina ranks 105 out of 141 coun­tries sur­veyed. Sim­i­larly, the 2010 In­dex of Eco­nomic Free­dom (pub­lished by the Her­itage Foun­da­tion and the Wall Street Jour­nal) ranks Ar­gentina 135 out of the 179 coun­tries sur­veyed. (The U.S. is No. 8 and fall­ing.)

The U.S. has a per capita in­come of about $47,000 per year, while Ar­gentina’s is just $14,000 on a pur­chas­ing-power par­ity (PPP) ba­sis. A hun­dred years ago, Ar­gentina’s per capita in­come was about 80 per­cent of that in the U.S. If Ar­gentina had done as well rel­a­tively as the United States, it would have a per capita in­come of about $38,000 to­day. Coun­tries can be­come wealthy in a few decades, as have South Korea, Tai­wan, Hong Kong, Singapore and Fin­land, by fol­low­ing the cor­rect eco­nomic poli­cies. They also can be­come rel­a­tively poor, as have Ar­gentina, Cuba and Venezuela, by do­ing the wrong things.

Ar­gentina has ex­ten­sive im­port bans and con­trols. The Obama ad­min­is­tra­tion has been ad­vo­cat­ing pro­tec­tion­ist trade poli­cies and has op­posed the rat­i­fi­ca­tion of pre­vi­ously ne­go­ti­ated trade agree­ments.

Ar­gentina has con­tin­ued to run in­fla­tion­ary mon­e­tary poli­cies while at the same time at­tempt­ing to treat the symp­toms through price con­trols. The U.S. Fed­eral Re­serve has greatly in­creased the money sup­ply, which is likely to pro­duce fu­ture in­fla­tion. Of­fi­cials of the Obama ad­min­is­tra­tion, at times, have ad­vo­cated price con­trols of in­surance com­pa­nies, med­i­cal sup­pli­ers, fi­nan­cial in­sti­tu­tions and even fees for carry-on lug­gage on air­planes.

Ar­gentina’s largest bank is state-owned, as are a num­ber of its other banks. The Obama ad­min­is­tra­tion forced a num­ber of large Amer­i­can banks to be­come par­tially gov­ern­men­towned. The two largest mort­gage in­sti­tu­tions in the United States — Fan­nie Mae and Fred­die Mac — are now largely govern­ment-owned-and-con­trolled.

Ar­gen­tine courts are slow and cor­rupt. Prop­erty rights are not se­cure, and the govern­ment has will­fully un­der­stated in­fla­tion statis­tics, caus­ing for­eign and do­mes­tic bond­hold­ers to lose much of their in­vest­ments. The Obama ad­min­is­tra­tion uni­lat­er­ally took away bond­hold­ers’ rights in the GM and Chrysler cases and, in essence, took their as­sets and turned them over to the unions that had sup­ported Mr. Obama.

Ar­gentina has ex­ten­sive la­bor reg­u­la­tions to fa­vor unions, which greatly in­crease the cost of hir­ing. The Obama ad­min­is­tra­tion has sup­ported costly la­bor reg­u­la­tions that the unions fa­vor, which even­tu­ally will drive up the cost of hir­ing work­ers and re­sult in higher un­em­ploy­ment.

Ar­gentina has a long his­tory of deficit spend­ing, which, in turn, has made govern­ment debt bur­dens so high that the govern­ment re­fuses to pay the debt to the pri­vate do­mes­tic and in­ter­na­tional debt hold­ers. Over the next 30 years, econ­o­mists as­so­ci­ated with the Bank for In­ter­na­tional Set­tle­ments in Basel, Switzer­land, es­ti­mate (as have many U.S. econ­o­mists) that the U.S. pub­lic debt will rise to be­tween 200 per­cent and 500 per­cent of GDP. (It is now about 60 per­cent.) Debt lev­els of 200 per­cent to 500 per­cent can­not be sup­ported; hence, the debt hold­ers will face ero­sion of their cap­i­tal through ei­ther in­fla­tion or non­pay­ment.

The U.S. is not yet Ar­gentina, but, if many of the poli­cies of the Obama ad­min­is­tra­tion are not re­versed, Amer­ica will only get poorer and, in as lit­tle as 30 years, be­come a mid­dle-in­come coun­try, while dozens of other coun­tries will en­joy a higher stan­dard of liv­ing.

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