On Milei's economic plans for Argentina

 

Sturzenegger thanks Milei for his support while he was at the BCRA

Javier Milei's victory in the primary election has set alarms in Argentina. Many suggest that this was unexpected, and in a sense, given the more recent polls, it was. Also, many have suggested that his strong showing represents a protest vote, since he is a complete outsider, and that this is a repeat of the 2001/2 protests that demanded that all established politicians were ousted (que se vayan todos). But these are at best half truths.

Sure enough the vote on Milei represents a protest, but he is not really an outsider, even if he does come from the lower middle class. He is ensconced within the Argentine establishment that nurtured him in more than one way. He is at best an eccentric outcome of that Argentine establishment.

Note that he studied at the Universidad de Belgrano, and Universidad Torcuato Di Tella, both private universities, that normally cater to the elites in the country. He worked in several financial sector institutions, including Estudio Broda, founded and managed by Miguel Ángel Broda, a Chicago economist that has been part of the Argentine financial establishment for more than five decades. He was invited and interviewed in all the main media outlets of the country for years, and always treated as an economic expert, even if often he was there for his more colorful ideas and behavior.

Also, many of his current advisors had key positions in previous administrations. Roque Fernández, for example, was both president of the central bank and finance minister during the Convertibility period in which the exchange rate of the peso and the dollar was fixed, in a similar way to dollarization.

Milei and his plans, the two relevant ones (forget some of the crazy stuff that won't happen, like stopping all trade with China), namely, dollarization and closing the central bank, are not alien to the Argentine elites that he has served over the years, and that has provided him with jobs and media space. At the end of the day, all neoliberal experiments (the Military one between 1976 and 1983, the Peronist one with Menem between 1989 and 1999 and a bit beyond, and the Macri one between 2015 and 2019) included people that share similar ideas to Milei and his advisors, and some of them were involved in the previous neoliberal turns.

Last year, at a Milei event, Federico Sturzenegger, who worked for Domingo Cavallo at the end of Convertibility and was the head of the Central Bank (BCRA) during the Macri government, while noting that dollarization was not the best solution, and suggesting that central bank independence is not enough, went on to defend a common currency (interestingly enough the same plan of Grabois, the lefty in the Peronist primary). Milei's victory, if it happens (which is still not a sure thing), and his plans would not be significantly different than the previous neoliberal plans, and the consequences would be as negative as before.*

I have written quite a bit on the negative effects of dollarization (old book on that here). I'll leave a more detailed discussion for a later post. The important thing I want to note at this point is that, if there is a way of obtaining the dollars necessary for dollarization, then that would also allow for holding the exchange rate stable, precluding a large devaluation, and even to bring down the difference with the parallel (blue) dollar. Of course, that would imply resolving not only the financial external constraint that Argentina faces now, but also dealing with the payments (in dollars) to the IMF, which, at least at this point, seem to be beyond the country's capacity to repay. Formal dollarization wouldn't solve those problems, and would generate many new ones.

* That's not the only connection with the other neoliberal experiments. In all of them there were direct violations of human rights, or explicit support for the violators of human rights, and that's true also in Milei's case.

Some brief thoughts on Bidenomics

 

There has been a lot of writing about Bidenomics (a name that might stick, like Reaganomics; nobody really thinks of Clintonomics as a thing) recently. It is fundamentally about the return of industrial policy, even if I personally think that this is less momentous than what people think. Don't get me wrong, both the rediscovery of fiscal policy after the 2007-9 recession (no fiscal packages after the 1990-91 or 2001 recessions, but packages after both 2007-9 and Pandemic in 2020), and the rediscovery of industrial policy, in part because of the rise of China, and in part because of the Pandemic/Chain supply shock, are important. And Bidenomics might stick because it announces a New Washington Consensus, that at least in theory abandons the neoliberal stances of the old one (see Jake Sullivan's speech).

My concern is that on both counts, the macroeconomic or fiscal front, and on the microeconomics, or industrial policy front, rhetoric is stronger than action. Or that it will be, at any rate. I'm not trying to blame Biden (or his team) for not breaking (or not enough) with conventional views. I mean I might have my views on how lefty or progressive (or even pro labor) Biden is (he did sign vote for every Free Trade Agreement possible, but he is allowed to change his mind). My concern is how much the common sense within the Democratic Party has changed. And while the the 2007-9 recession had moved many Dems and their advisors to rethinking about the macroeconomic consensus (not long ago Larry Summers was saying posties were right, and the economy had no tendency to full employment), the Pandemic inflation has done the opposite, as I noted here.

If the lesson was that Summers had been wrong (and Christina Romer right) on the size of the fiscal package needed for a fast recovery back then, now it seems that most economists (in the mainstream) agree with the notion that excess demand (particularly the last fiscal package early in 2021, and less the Pandemic ones, but that's another story) caused inflation, and the Fed fell behind and was correct in raising rates substantially. Note that the mechanism by which the Fed would reduce inflation is the conventional one, higher unemployment, less demand, lower prices (Summers, ironically, is one of the few actually that brings up the issue of bargaining power of workers with lower unemployment). And this diagnosis remains even though the level of unemployment didn't go down (after the recovery) at the same time that inflation came significantly down.

Of course, there's room still to discuss whether the Fed (together with the freezing of fiscal spending growth for next year by Congress) will end up throwing the economy into a recession or not. But either way, part of the legacy of the last crisis will be to reinforce the conventional new consensus model. Note, however, that the political risk is huge. Because Biden is forced to defend the notion that the economy (that recovered fast from the pandemic, no doubt) is doing great. And of course, the pre-Pandemic situation was far from ideal, and there's a reason why over the last decades a right-wing, blue collar movement has emerged. On that, trade policies were central, and the new industrial policy should play a role.

On the industrial policy front, it is worth remembering the existence of what Fred Block called the hidden developmental state, which suggests that the US always did industrial policy. But I doubt that the main effect of the New Washington Consensus will be to bring back many manufacturing jobs. Most of the ones that the establishment wants to move away from China (or at least part of the establishment, Adam Posen's views suggest that some are in doubt, about the movement away from the old one) will move to other Asian countries, like Vietnam and India.

At any rate, there are some reasons to be mildly skeptical about Bidenomics from a progressive perspective. Of course, I do think this is a huge improvement on Clintonomics, which was just Reaganomics, but more fiscally conservative.

On Milei's victory in Argentina for Portuguese TV (in Portuguese)

I'll post more on this soon. A few things, his economic ideas show a complete lack of understanding of basic principles. That he is taken seriously by a good chunk of the Argentina media (which is responsible for his rise) is appalling. I also don't think that it is certain that he will win, but in truth the mere possibility is frightening.

Inflation Paranoia and the Return of the New Consensus in Macroeconomics

 

 

And inflation will remain high, very high

This was published a while ago. I forgot to link it here. Their summary:

Economists have proposed two main theories to explain the recent spike in prices. Progressives have attributed the rise in inflation to corporate greed and have suggested price controls in response. Other economists have turned back to the New Consensus in Macroeconomics that arose in the 1970s in response to steep inflation blamed on the large Keynesian fiscal expansion of the preceding decades. Matías Vernengo writes that neither camp has correctly diagnosed the problems with current inflation. Proponents of Greedflation overlook the price stability of the last few decades even as market concentration increased. On the other hand, advocates of the New Consensus similarly forget their history and the commodity shocks and price-wage spiral that were the real culprit for inflation in the 1970s. 

From my conclusion:

The inflation acceleration of the 1970s did not show that Keynesian policies were inefficient or had caused the acceleration of prices. As noted by James Tobin back then, inflation resulted from the oil shocks and the price-wage spiral. But inflation reinforced the social problems that led to the collapse of the old New Deal coalition and the Keynesian Consensus, ushering the Conservative Revolution and the New Consensus in Macroeconomics. The Pandemic inflation acceleration has undermined the revival of Keynesian ideas, and the revision of the New Consensus model that was under course. Instead of the concern with secular stagnation, we are back to inflation paranoia.