Milei's Malaise

Argentina's new president is struggling to implement major economic reforms against powerfull opposition, while his choice to delay dollarization is under heavy criticism from free-market proponents.

Price inflation in Argentina recently hit a 254 percent annual rate, which is a three-decade high, with the central bank’s interest rate for the peso above 100 percent,  Financial Times  reports. That’s one inflation-prone country, you might well infer.

New Argentine Prime Minister Javier Milei has the right ideas about how to rescue the nation’s economy. Unfortunately, since taking office in December the former economics professor and free-market stalwart has had great difficulty in accomplishing the much-needed economic reforms he promised while on the campaign trail.

Milei recognizes that excessive government spending is behind Argentina’s economic problems, and he has called for freezing the budget at the 2023 level. That amount of spending, of course, resulted in those pesky annual inflation rates of more than 250 percent, so it’s obvious that much more remains to be done on that front.

In any case, the nation’s Congress rejected Milei’s reform plan earlier this month, throwing another wrench in the works. “The government was forced to withdraw a set of tax hikes and spending cuts from congress that were central to its goal of moving from a fiscal deficit of 2.9 per cent of GDP in 2023 to a surplus of 2 per cent of GDP this year,”  Financial Times  reports.

Milei has done the things he can do without congressional approval, such as implementing a 54 percent devaluation of the peso in mid-December and allowing the expiration of price controls imposed by the previous government. Though conventional wisdom (Keynesian and monetarist, that is) would have expected those measures to push the value of the peso down even farther, month-to-month inflation in January was 20.6 percent, 5 percentage points below the December number and well below the 25 percent monthly rate Milei had said would be “reason to celebrate,” according to  Financial Times.

Milei has also cut subsidies to regional governments, which should have a positive long-term effect by forcing them to pay a greater percentage of any reckless spending and corruption in which they may choose to indulge.

In the  New York Post,  anti-Marxist “public intellectual” Axel Kaiser argues that Milei has accomplished much in his two months in office:

Shortly after coming to power, Milei dramatically narrowed the gap between the official and the market exchange rates by devaluing the peso 54%.

He went on to shut down ministries and public offices and lay off swarms of useless bureaucrats. He also passed an emergency decree with 300 measures to deregulate the economy.

Among them are the privatization of all public companies, the elimination of rent controls, an open-sky policy, cutting subsidies to different sectors of the economy, ending import restrictions, deregulating satellite services and many others.

Importantly, Kaiser acknowledges the absolute need for spending cuts:

In addition, the reduction of fiscal deficit is moving forward.

During the first month of Milei’s administration, public spending decreased by 30% in real terms compared with the previous year and the previous month.

In other words, the government is already spending almost a third less than in the same period last year when adjusted for inflation.

Milei’s popularity remains at around 60 percent, Kaiser writes. All of that is good news indeed.

However, Argentina has much more work to do before it can have a reasonably functioning economy. In addition, there are numerous factors working against economic improvement and a necessarily major reduction in inflation, which the Financial Times  story summarizes well.

With that in mind, Forbes  chairman Steve Forbes publicly warned Milei that the Argentine president’s decision to delay implementation of dollarization of the economy will scuttle the reform program. “Your freedom revolution is on the way to failure unless you immediately carry out the biggest plank of your election platform: replacing the peso with the U.S. dollar,” Forbes said in a video on YouTube.

“Mr. President,” Forbes concludes, “if you don’t immediately dollarize the economy, you won’t succeed, and that failure will discredit the free-market philosophy so necessary for a better world.”

Writing at the American Institute for Economic Research website, University of Texas at El Paso economics professor Nicolás Cachanosky agrees with Forbes, arguing the postponement of dollarization in favor of other reforms is unwise:

Milei has postponed dollarization and is currently attempting to pass a comprehensive mega-law encompassing major reforms. These reforms include achieving a balanced budget by year-end, reducing public spending, overhauling the tax code, and privatizing state-owned enterprises. Nevertheless, he faces formidable opposition and resistance from Congress, unions, and provinces. Compromises, such as dropping some proposed tax increases, have already been made to secure votes for the remaining components of the mega-law. …

[E]arly dollarization would have created a different dynamic. The effects of dollarization would have been swifter and more apparent than those of fiscal and other reforms, which typically take at least a year to complete. The public would have experienced the positive impact sooner, fostering greater willingness to support the government’s reform agenda. Additionally, the government would have avoided the credibility cost associated with changing strategy and reneging on the promise of dollarization.

The reforms Milei is pursuing, as outlined by Cachanosky above, are exactly what Argentina needs—as does any country mired in economic doldrums. (That includes the United States at present.) Forbes, Cachanosky, and other champions of freedom who are calling on Milei to reconsider his decision to delay dollarization are right. Dollarization is a critical part of the solution to Argentina’s economic problems. It is vitally important, however, that fiscal reforms, privatization, and other government-reduction policies also proceed apace.

The solution to Argentina’s awful economic problems is not either dollarization or a major reduction in government spending. It is both.

Sources:  The Financial Times;  New York Post;  Forbes on YouTube;  American Institute for Economic Research