Obama Policies Risk Economic Peril

Wednesday, 21 Apr 2010 10:48 AM

By Richard Rahn Moneynews

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A century ago, if you had told typical citizens of Argentina that it would plummet from having the fourth-highest per-capita income in the world to become just 76th 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 second-worst 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 involvement in destructive conflicts. It became poor because it has had a series of both democratically elected leaders and unelected dictators who never missed an opportunity to make the wrong economic decisions.

The country is trying, once again, 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. Unions have been coddled because of their political power, resulting in unsustainable wage-and-benefit programs. Excessive government spending has caused recurrent fiscal meltdowns in which both foreign and domestic debt-holders have lost many of their investments.

Argentina ranks 105 out of 141 countries surveyed for the Economic Freedom of the World Annual Report, which the Fraser Institute publishes in cooperation with the Cato Institute and others. Similarly, the 2010 Index of Economic Freedom ranks Argentina 135 out of the 179 countries surveyed for that report, which the Heritage Foundation and The Wall Street Journal publish. (The United States is No. 8 and falling.)

The United States has a per-capita income of about $47,000 per year, while Argentina's is just $14,000 on a purchasing-power parity basis. A hundred years ago, Argentina's per-capita income was about 80 percent of that in the United States. 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 income tax rates roughly equivalent to those in the United States but also has a value-added tax (VAT) and a wealth tax. Officials of the Obama administration and some members of Congress are flirting with a VAT.

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 government-owned. 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.

The U.S. public debt could rise from its current 60 percent of GDP to between 200 percent and 500 percent of GDP, according to estimates of economists associated with the Bank for International Settlements in Basel, Switzerland, (and many U.S. economists). 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 United States is not yet Argentina, but, if many of the policies of the Obama administration are not reversed, America will only get poorer and become a middle-income country in as little as 30 years, while dozens of other countries will enjoy a higher standard of living.

Richard W. Rahn is a senior fellow at the Cato Institute and chairman of the Institute for Global Economic Growth.


© Copyright 2014 The Washington Times, LLC

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