Tuesday, August 11, 2020

OPINION AND ANALYSIS | 10-03-2018 11:58

It takes a monster to fight a monster

As this column has stated umpteen times, the correction of relative prices via updating public service charges must be completed before there can be any real hope of single-digit inflation.

Tomorrow is the bicentenary of the publication of Mary Wollstonecraft Shelley’s Frankenstein (written on the banks of Lake Geneva in the summer of 1816). It might be an exaggeration to say that everybody creates their own personal Frankenstein but I have certainly created mine – Dr Hale, who bombards me incessantly with his obsessive questions about Argentina’s various economic paradoxes (indeed I’m quite sure he would pursue me all the way to the Arctic if necessary, as in Mary Shelley’s Gothic masterpiece). But coming from the same region as Nantucket, Dr Hale might be more inclined to relate his quest to Moby Dick (published in the year of Mary Shelley’s death, 1851) – everybody is looking for a great white whale and they had better not find it or it will destroy them.

Anyway no such literary anniversaries or musing in Dr Hale’s latest email. He writes:

“The other day I was talking to a very bright and very right (in the sense of wrong-headed extremist, not correct) student of mine and trying to convince him of the error of his ways, to which he replied: “I know that what we stand for will seem Nazi and indeed nasty to most people but the politically correct has reached such obscene extremes in our country that it takes a monster to fight a monster.” I cannot accept that logic for his argument but when I started applying it to my pet obsession of the Argentine economy, it made some sense. Argentina’s biggest urgency is state reform because gradualism is useless against the bloated monster squashing the productive sector – brutal action will be needed and I don’t see any coming from the Mauricio Macri administration. This question is very much at the top of my mind because I really haven’t seen anything new or worthy of comment since Macri’s state-ofthe-nation speech – did you spot anything in the past week or is the economic news literally drying up?”

My reply:

“Cannot help you much with state reform. A state accounting for some 45 percent of gross domestic product could certainly be described as monstrous and it also makes it almost impossible to aspire to much more than three percent growth if all the growth has to come from little over half the economy – the ‘Chinese’ growth rates early this century (often the product of confusing real growth with nominal by denying inflation) thus could not be repeated even if the bumper global commodity prices then prevailing were to return. And you do not have to be a monetarist to see that if you keep expanding the money supply at an annual 37 percent, you’d be lucky to get away with 20 percent inflation.

“But, as in almost every country, health, education and welfare account for around two-thirds of the budget so that if you peer inside the monster of public spending, you will generally see the very human faces of old-age pensioners and schoolchildren – with the possible exceptions of some rogue cops and the teacher unionist Roberto Baradel, nobody could be easily typecast as Frankenstein. Over two years of a pro-market administration and oceans of criticism belittling its feeble efforts have not come up with any specific blueprints for state reform beyond subsidy reduction and streamlining Macri’s 21-ministry Cabinet. That task is certainly beyond me.

“There is also an argument for saying that the real fetter on the economy is not so much the level of public spending as double-digit inflation because then everything is indexlinked. With current levels of inflation there can be no other guide to collective bargaining than prices while in normal economies wage increases are based on productivity gains (almost irrelevant here). Of course, it could always be argued quite validly that it is impossible to reduce inflation without public spending cuts but it is really the index-linking which so restricts flexibility. And, as this column has stated umpteen times, the correction of relative prices via updating public service charges must be completed before there can be any real hope of single-digit inflation.

“You are right in not seeing any ambitious economic legislative agenda as emerging from Macri’s speech. Capital market reform is perhaps the priority here, among other aims to keep the mortgage boom rolling. Labour reform has been minimised to the inclusion of the informally employed with no real attack on payroll surcharges. Telecommunications legislation is to be liberalised to allow more scope for ‘quadruple play’ (landline and mobile telephones, satellite television and Internet). ‘Buy Argentine’ requirements are to be imposed on state purveyance (it is not quite clear how this ties in with the drive to attract foreign investment) – these have already cleared the Lower House, as has a ‘defence of competition’ bill against monopolies and cartels. Finally, Macri’s megadecree to cut red tape (sneaked in early this year while Congress was in recess) will need parliamentary endorsement. At least some of this legislation is aimed at lending substance to Argentina’s application to join the Organisation for Economic Cooperation and Development (OECD).

“Yet one cannot just look at Argentine news in isolation before deciding if anything is going on. As you must surely be aware, we have had some ‘heavy metal’ from your Donald Trump in recent days – the import duties he has slapped on steel (25 percent) and aluminium (10 percent). This might make sense to Trump if the United States imports a third of its steel with almost 30 percent idle capacity in the Rust Belt and countries like Brazil and China might be far more affected directly but the threat to world trade is also bad news here (Aluar is very big in Puerto Madryn). Then there are the interest rate increases expected from Jerome Powell’s Federal Reserve, which will complicate funding the deficit via debt, while last month’s Black Monday on the Wall Street has already set a volatile note for the year.

“Otherwise, nothing really worth bringing to your attention. There was a tempest in a teapot around Production Minister Francisco Cabrera telling businessmen to stop whining and start investing but there is nothing new to these ‘red circle’ tensions between Macri (a poacher turned gamekeeper) and the business community – this time round it looked like posturing to counter the image of a CEO-laden administration and chime in with the progressive tone of the state-of-the-nation speech. The dollar was also a focus with the fluctuations of a floating exchange rate briefly addressed by some extremely minor Central Bank intervention but no real change. Still some days of summer left, it seems, with the year yet to begin in earnest.”

Michael Soltys

Michael Soltys

Michael Soltys, who first entered the Buenos Aires Herald in 1983, held various editorial posts at the newspaper from 1990 and was the lead writer of the publication’s editorials from 1987 until 2017.

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