Crooks, Liars, Idiots, and Plutocrats: Again on the effects of the Debt Ceiling Limit

A modified and updated version of the previous post has been published in the last number of Dollars & Sense Magazine here. The main addition is a discussion of the 'solution' to the last crisis, and a very brief discussion of the brewing storm for early next year.

The Default Prevention Act of 2013, included in the continuing resolution, reinstated government funding at pre-shutdown levels through January 15, 2014, and authorized suspension of the debt limit through February 7, 2014, at which point we would be basically in the same situation we were in October. Under the agreement reached to end the shutdown and to avoid breaching the debt-ceiling limit, the House of Representatives and the Senate agreed to hold negotiations to reach an accord by December 13 on a plan for fiscal policy for the next ten years.

This is not very different from the previous debt-ceiling crisis in 2011, when the so-called “Super Committee” was charged with finding $1.5 trillion in savings over a ten-year period, but eventually failed to reach an agreement. That triggered, in early 2013, the infamous “sequestration,” cuts of discretionary spending totaling around $1.2 trillion over the same period. Note that, as for the Super Committee and the previous Bowles-Simpson National Commission on Fiscal Responsibility and Reform, the terms of any accord by the members of the Budget Panel led by Senator Patty Murray (D-WA) and Representative Paul Ryan (R-WI) (who were members of the Super Committee) would imply further “fiscal adjustment.” The main disagreements are that Democrats would like to see targeted spending cuts, and to increase revenue by closing tax loopholes for corporations and wealthy individuals, while Republicans would not want any tax increases, and demand cuts to entitlement spending. The attempt at bipartisanship did not go all that well last time, and chances are that it will fail again.

Note all of this is functional and is being used to maintain austerity policies in the US.

Did Inflation Bring Down the Allende Government?

Allende's glasses

Roberto Frenkel, the well-known Argentine economist, gave an interesting radio interview (transcribed, in Spanish, here) in which, as always, there is a lot to learn. In that interview he tells a touching story about his experience during the Allende government. Apparently he was told by the Finance Minister Carlos Matus to make a presentation on inflation, and warned of the dire consequences of not pursuing contractionary demand policies. After that he says (I keep his Spanish version and translate below):

"Yo había explicado cómo la inflación se iba a acelerar, la situación iba a empeorar rápidamente... y entonces se me acerca Allende con quien yo había tenido la oportunidad de estar en pocas oportunidades, y me dice '¿Por qué no me lo dijeron antes?' Y es una cosa que me pesó en el corazón... al poco tiempo el hombre se suicidó en La Moneda. Y eso se lo conté a algunos que estuvieron con el gobierno de Kirchner hasta hace poco y ahora salen preocupados y tratan de abandonar el barco y no hundirse con él, y les conté esta anécdota y los insté a hablar y a hacer explícita su alarma y preocupación por la situación (...)."

"I explained that inflation was going to accelerate, and things would worsen precipitously... and then Allende, with whom I had opportunity to meet in a few occasions, approaches me and says: 'Why didn't anybody tell me?' And that sunk my heart ...not long after that he committed suicide in La Moneda [presidential palace]. I told that story to some people that were members of the Kirchner's government until recently and now leaving the boat to avoid sinking with it and encourgaed them to speak up..."

So now we know. Inflation actually brought down Allende, and Frenkel almost saved the government, but was too late to avoid the military coup. And his concerns with Argentine inflation are similar now, since we are on the verge of total collapse.

All jokes asides, the notion that inflation brought the government down is silly to say the least. As noted here, if anything the nationalization of copper, that did hurt transnational corporations and local elites was certainly more important [note also that by 1973 inflation was not a Chilean problem, but a global one associated to the oil shocks and wage resistance]. So resistance to reforms by powerful groups within the country were at center stage. The connections of Pinochet with US corporations and security and intelligence apparatus are also well documented. Even if Frenkel had told Allende in time about inflation ... Oh well.

There are other nuggets in this interview, in particular the insistence that demand has to be curtailed even when it is admitted that inflation is essentially inertial, but I'll leave those for other posts. It seems that more and more authors at the Centro de Estudios de Estado y Sociedad (CEDES) are converging to mainstream positions, like the economists at the Catholic University in Rio (PUC-RJ) and sociologists like Fernando Henrique Cardoso in Brazil did back in the 1990s.

The Latin American left and its discontents

Since the election of Chávez, fifteen years ago, to the more recent re-election of Correa and the election of Maduro earlier this year, the left of center parties have been on the rise in Latin America. The list is long and includes the Kirchners in Argentina, Lula and Dilma in Brazil, Evo in Bolivia, Correa in Ecuador, Funes in El Salvador, the return of Ortega in Nicaragua, Tabaré and Mujica in Uruguay, and Chávez and Maduro in Venezuela. The Concertación (particularly the Socialists, Lagos and Bachelet), and Ollanta in Peru seem to be in a different category altogether. Lugo in Paraguay and Zelaya in Honduras were brought down by coups (yes they are still around), and López Obrador in Mexico was prevented from getting the job by fraud (these never vanish completely).

Overall the period was one of relatively fast growth for the region as a whole, particularly since 2003. And the recovery from the 2008-9 global crisis was relatively fast in most countries. Further, income inequality and poverty tended to decrease, with the expansion of social spending. Yet, even though growth was more or less general, some countries did better than others, and not all can be simply attributed to the external conditions.

As noted by UNCTAD (2012, p. 58): "the income gap has narrowed in Latin America since the early 2000s, in parallel with a significant economic recovery. Between 2002 and 2010, the average regional Gini coefficient declined by 4 percentage points, and by even more in several countries in South America (Argentina, the Bolivarian Republic of Venezuela, Bolivia, Brazil, Paraguay and Peru). Together with significant improvements in external conditions, the general policy reorientation played a central role in achieving growth with better income distribution. On the macroeconomic side, many of the successful countries followed countercyclical fiscal policies, achieving fiscal balances through an increase in public revenues (including commodity rents) rather than by expenditure cuts." Note that the improvement in income inequality in the 2000s is not a global phenomenon (see figure below from UNCTAD, 2012, p. 56).

There are, obviously, problems, and not everything is perfect. The strategy of development is over-dependent on commodity exports in South America, and the export of people (directly through migration, and indirectly through maquilas; both cases of cheap labor) in Central America and Mexico (see more here or here for the full paper). And that implies that Import Substitution has not gone too far in this last decade. A risk of integrating once again as an exporter of commodities and cheap labor into world markets, this time around with the Asian periphery (i.e. China) rather than Europe and the US, is dangerous. Risks are associated to the instability of terms of trade, remittances and demand for consumption goods in developed countries.

But note that the opposition to the left of center governments has not changed its discourse from the Washington Consensus period. The alternative offered is basically the extension of bilateral Free Trade Agreements (FTAs) and Bilateral Investment Agreements (BITs), like the one recently signed by Colombia, that ossify a peripheral integration into world markets, in the case of Colombia as an exporter of commodities, increasingly oil to the US (see here), which favors mostly transnational corporations and the powerful few in the region (for the Colombian FTA go here).  And ultimately, it is important not to forget that the US geopolitical project for the region is fundamentally one that expands 'free trade' in region (see here). Note that on the Pacific coast, with the exception of Ecuador, the US does indeed already have a FTA.*

MERCOSUR (or MERCOSUL in Portuguese) is the only alternative in town. And yes, it was originally thought as a regular FTA in the 1990s, but the current problems between Argentina and Brazil are a good starting point for a return to the old ECLAC idea that integration was necessary for productive reasons. That is, to increase the size of markets and the returns to scale associated to larger production levels. Development banks like the Bank of the South and the Brazilian BNDES could play a role in that, including pushing infrastructure integration, which is desperately needed. And for now MERCOSUR is there to preclude the expansion of more FTAs, which is in of itself a good thing.

Protesters in the region, the Brazilian ones being the more recent, are welcome and show a thriving civil society willing to demand more and better public spending on services (from transportation to education), less environmental degradation, and accountability from their representatives, and more. But note that while most protests are punctual and associated to specific problems within their respective communities, there are also in Latin America several groups that resemble the Tea Party in the US, in Latin America associated to middle class groups for the most part. They want the reversal of the policies of the last decade that have been good for the majority (including for them too). And like the Tea Party in the case of the US, if governments actually followed their demands they would actually hurt the poor. The cries against the 'populism' of the left of center governments is a thinly disguised demand for the return of the failed neoliberal policies of the 1990s.

* Ecuador, the exception, is interestingly enough dollarized, as are El Salvador and Panama, the only cases of dollarization with FTA. Mind you, while the US does not officially push for dollarization, informally the use of the dollar is always encouraged, and loans from multilaterals guarantee that a sizable amount of debt is in dollars. In a sense, dollarization cum FTA is the US project for integration with Latin America, which makes the European project, hijacked by neoliberals with the euro and Free Trade look good in comparison. Of course, go ask the Greeks, Irish, Italians, Spaniards, and Portuguese what are their views on the euro and the European neoliberal project of integration these days.

Ronald Reagan, the Tea Party, and the Reasons for Recurrent Crises

A follow up on the last post. If FDR and his promise of the Economic Bill of Rights would have implied a completion of the New Deal, it is quite obvious that Reagan was the undoing of it. But that's often not recognized. Bill Maher's new rules last Friday got it right.

Yes Reagan was the original tea bagger, and income inequality, lower growth and more financial instability are the result of his administration. Dean Baker has said that, in a more technical way if you will, in his book The United States Since 1980.