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Debate: On the so-called 'Austrian Dilemma'

A reader replies to Agustino Fontevecchia's latest column, giving his take on the so-called 'Austrian dilemma' highlighted by the Times' executive director in his most recent piece.

Friday 20 July, 2018
President Mauricio Macri, pictured in San Carlos de Bariloche earlier this week.
President Mauricio Macri, pictured in San Carlos de Bariloche earlier this week. Foto:NA

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Last Saturday, Mr. Fontevecchia wrote in his regular column for the Times that President Mauricio Macri faced a so-called "Austrian dilemma," by which the government would have to decide whether to continue with (or put a stop to) the strategy of using both austerity and devaluation to get Argentina out of the current financial crisis. Doubling down on Austrian economics, he warned, would be “devastating” for Argentina and would cause Macri to be defeated at the polls next year.

Such an analysis can, however, be misleading. Both conclusions might be right in a way, meaning that Argentina might suffer even more than she does now if the government stays on course with its strategy, and that Macri might lose in 2019  – the premises, however, are wrong. The Macri administration has been really quite far from believing in Austrian economics, let alone implementing policies based on them.

Ever since taking office, President Macri has repeatedly warned the public about the need to rapidly reduce the deficit in order to curb inflation. Furthermore, he has not called for new taxes and regulations to achieve such a goal – on the contrary, he has consistently spoken in favour of lowering taxes and deregulating the economy, so as not to increase debt. He even likes to repeat that ‘no podemos vivir de prestado,’ which means that we simply cannot live off of loans. These positions are, indeed, compatible with the ideas of Austrian economists like Ludwig von Mises and Friedrich von Hayek, as well as those of the locals José Luis Espert and Javier Milei.

However, where President Macri stands on these issues has had very little to do with the actual policies implemented by his government. Since 2015 – and even though the primary fiscal deficit has been declining slowly – debt interest payments have steadily surpassed whatever sums could be saved in the first place. Furthermore, the tax burden has remained among the highest of the world, without showing any signs of retreat. Finally, the task of determining the exchange rate was consciously never left to the market, and its artificial manipulation was likely the main reason why inflation was somewhat brought down for a while before making a dramatic comeback last month. 

With a few notable exceptions, which include the lowering of some export and import tariffs, most of Macri’s policies contradict those recommended by Austrian economists and those he himself has claimed to support. Granted, back in 2015 he needed to buy time to make reforms to reduce the deficit, and signs were extremely important in order to show the markets where the country was headed. However, one does not have to be a genius to know that if words are not quickly followed by actions, credibility is lost, and such losses, in a country that hopes to recover by attracting foreign loans and investments, can be devastating. 

Austrian economics, moreover, can hardly be linked to the devaluation of the peso, as Mr. Fontevecchia seemed to suggest. Indeed, Austrian economists support free markets to determine the price of goods and services, something that also applies to money itself. For them, the exchange rate should never be determined (neither totally nor partially) by a government, which is what the Macri administration has done by sticking to the ‘dirty float’ strategy that the Central Bank has followed since 2015.

Mr. Fontevecchia wrote that “what President Mauricio Macri needs is not more neoliberalism.” What that means is in fact unknown, given that there are hardly any politicians or academics who call themselves ‘neoliberals,’ but he seems to imply that the Macri administration has somehow been consistenly implementing Austrian-recommended policies, something that simply has not happened. The fact that the markets, the International Monetary Fund, and, more generally, reality itself are currently pressuring the government into making actual reforms does not mean that the Macri administration has kept its promises in this regard so far, nor that it is willing to do so in the future. In the meantime, lower spending and taxes, less regulations, and a floating currency are policies yet to be implemented by the government – and so Austrian economics remain in the dark.

* Mr Falcone's column is a response to Agustino Fontevecchia's latest column for the Buenos Aires Times. Read the original piece here: http://www.batimes.com.ar/news/opinion-and-analysis/chairman-macri-and-the-austrian-dilemma.phtml

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