Make Argentina Crash Again

 

My article for The American Prospect on the Argentina situation was just published online. Argentina is far from being out of the woods. The expectation that the country will stabilize prices, float its currency, and build up reserves, and restart economic growth is a chimera. Despite market support for Milei’s program, the crisis remains unresolved. In my article, I explain why the challenges persist, an why this will end like the previous three neoliberal experiments, with a crash. While an immediate crash may not be on the horizon, it is somewhat inevitable. It's a matter of when, not if. And it may very well be with the next president, if the U.S. continues to financially prop Milei's government.

Note that contrary to the IMF, or Barry Eichengreen, who actually provided the IMF justification for floating rates more generally (as he explains there), I don't think to abandon the dirty float (band in this case) would be a good idea.* On that I think Milei's administration is correct. I even think that some degree, even more I think, of a reintroduction of exchange rate controls (the government reintroduced some controls on individuals, I must add) is necessary. Something that supposedly the IMF also favors. Capital controls as a macro-prudential measure in times of crises.

I also want to make clear that this is mostly about the current macroeconomic circumstances. The point is not to return to a world of Bretton Woods, with fixed exchange rates, and capital controls. It is clear that Brazil, for example, did much better than Argentina, with a dirty float and no capital controls. But, as noted by Fabian Amico, in a talk at Universidad Nacional de Moreno, recently, Brazil accumulated reserves in a different macroeconomic scenario.

Brazil accumulated foreign reserves (see graph), maintaining a positive interest rate differential (the domestic interest rate minus the foreign reference rate, the U.S. one, the expected depreciation, and a measure of country risk). We discussed that with Amico and Serrano a few years back (in Spanish). Note that as capital inflows allowed Brazil's central bank to accumulate dollars, the real appreciated in nominal terms. In Argentina where both left and right of center governments have 'appreciation fear' (and their fear is about the real rate, let alone the nominal one), that would be politically difficult.

Exchange rate depreciation at this point would lead to accelerated inflation, and to contractionary pressures. Of course, there might be a situation (they had more than a few over the years) in which, with low country risk, and high interest rates at home, leading to a higher differential that allows for the profitability of holding peso denominated assets to be higher than holding dollars, we might finally get on the road to stability. That would be orderly macroeconomic policy, and not draconian fiscal adjustment. At any rate, that doesn't seem to be the case right now.

Over the long-term, it is very clear that all the previous experiments with this kind of policy (fiscal austerity, financial deregulation, and trade liberalization) ended up in a crash. There is also little reason to believe that this time it will be different. 

* It goes without saying that I would also be against dollarization, something that Milei promised in his campaign in 2023, and that has been recently floated by Laurence Kotlikoff in the Financial Times. This suggests that the old bipolar consensus has not been completely abandoned in more mainstream circles.

Labor numbers (or lack of) and the Trump economy

 

The elephant in the room? 

The long-delayed September employment numbers are finally out, and the news is mixed, much as expected. The economy added 119,000 jobs, while the unemployment rate ticked up slightly from 4.3% to 4.4%, still close to what the profession calls the natural rate, or what most people would simply call full employment. That's obviously not the best picture of the labor market. As always, the broader U6 measure gives a clearer picture of labor market slack (in my understanding), and it stands at 8%. We still don’t have the official October numbers, but private-sector estimates suggest a much weaker figure, around 40,000 jobs, driven partly by continued losses in manufacturing and in federal employment. The only clearly expanding sector remains health services.

This labor-market softness, that led to the earlier firing of the head of the BLS (will Trump fire someone else?), reinforces something I’ve said for a while here in the blog. The economy is slowing, but we are not yet in a recession.

Meanwhile, inflation continues subdued rather than accelerating. The September CPI report shows year-over-year inflation at 3%. Importantly, the largest price increases, electricity and utilities, used cars, and medical care services, other than shelter (more on that below), have nothing to do with tariffs. Studies suggesting tariffs added roughly 0.7 percentage points to inflation seem plausible, but that is far from the stagflation many predicted. If there is a remaining inflationary concern, it is shelter costs, driven not by tariffs, but by structural housing shortages and, in the short run, the Fed’s high interest-rate policy, which keeps mortgage rates, and rents, elevated.

Paradoxically, the Fed is now sustaining inflation by keeping rates high, and by bringing them down too slowly (perhaps the only thing I would agree with Trump*), while also risking a recession by tightening consumer credit and depressing construction. Consumption has already flattened (from last CEA report). At the same time, government spending, which continues at a healthy pace, and bubbles in crypto and AI continue to prop up activity.

Affordability concerns (see Mamdani's election and Trump's decision to reduce tariffs) remain real, but they have less to do with inflation per se, which has fallen sharply since late 2022, and more to do with the fact that real wages at the bottom, although rising (above CPI for non-supervisory employees), start from very low levels. People feel squeezed because they are squeezed.

That won't change any time soon. Trump is bound become very unpopular (in many ways, he already is), and his policies will not help people at the bottom. Dems don't need to do much, actually. Perhaps avoid self-inflicting wounds. [Unpopular view here: the shutdown was a mistake they should have avoided, since there was no way of winning; Trump wanted to shutdown the government, because Republicans do NOT care if it doesn't work. Cut medicare? No problem. Cut SNAP? Go ahead. But these callous policies will make them very unpopular].

Let me conclude in a more cheerful mood. For me that is. So here’s a small victory lap. The dire predictions that high tariffs would produce stagflation were wrong. Tariffs are now at their highest average level since the 1930s, around 17%, up from 2%, according to Yale's Budget Lab, yet they did not trigger either runaway inflation or a recession on their own. Stagflation is NOT the elephant in the room. Slowdown of the economy, which was already under way, and subdued inflation, close to the target. If we want to avoid a recession, and if we are serious about affordability, for both reasons, contrary to conventional wisdom, the Fed should begin cutting rates sooner rather than later.

* Obviously that doesn't mean I'd agree with his intervention at the Fed (we will know more on that once the SCOTUS rules on that next year). 

Chapter on the history of monetary policy for the Elgar Companion to the Economies of Latin America and the Caribbean

My paper with Esteban Pérez has been published and is available now here. From the abstract of our chapter:

Monetary policy in Latin America has evolved in five different phases. The first one is characterized by the establishment of the first central banks adhering to a gold standard. The second phase is marked by the abandonment of the gold standard and the adoption of discretionary over rules based monetary policy. The third phase consists in the generalized adoption of developmental and inward industrialization goals by central banks. The fourth phase places price stability as the key overriding objective of monetary policy. The last phase focusses on the adoption of inflation targeting within an open economy context. The evolution of monetary policy in the region is closely related to the developments in the external sector and with the needs associated with the integration with the global economy. The chapter will emphasize the relative difficulties of insulating the region from external monetary and financial volatility and the limitations faced by monetary institutions to promote economic development with price stability.

An earlier version can be read here. 

The 6th Palgrave-Macmillan Lecture: On Decolonizing Economics and the New Palgrave Dictionary

 

The project of the new edition of The New Palgrave Dictionary of Economics is an effort to build an economics "without gaps," challenging the historical tendency of the profession to neglect certain topics, perspectives, and geographies. In my talk, I note that the original 1894 edition and 1987 revival, while monumental achievements, inevitably reflected their respective historical moments, the consolidation of the Neoclassical school, the rise of free-market ideas, and an inherent Eurocentric view of the profession. 

This historical narrowing, where the breadth of perspectives often diminished over time, resulted in "blank spaces," particularly concerning the Global South, non-traditional lines of inquiry, and scholars outside of the established European and North American academic centers. The modern project seeks to address these omissions, ensuring the Dictionary remains a pillar of the field while reflecting a more complete record of economic thought.

The term decolonizing the Dictionary translates into several concrete actions that embody a pluralism with purpose. This includes commissioning entries on the Global South and by scholars based there (like Krishna Bharadwaj and Víctor Urquidi), recovering neglected histories of thought (such as the School of Salamanca and figures like Ibn Khaldun), and introducing newly salient topics like "neoliberalism" or ones about which there is renewed interest like "imperialism."

The goal is not to replace the profession's core but to broaden and re-balance the map, maintaining analytical rigor while highlighting lines of inquiry that standard narratives often overlook. This re-balancing is deemed necessary after 2008-9 global financial crises exposed the profession’s analytical blind spots, ensuring that future economists, regardless of their background or focus, find their work and history represented.

 

Policy-Constrained Growth: Government spending and economic recovery in Brazil during Lula's third term

By Ricardo Summa, Guilherme Haluska and Franklin Serrano

Despite headwinds from higher interest rates in the US and at home, the Brazilian economy is nevertheless emerging from a period of prolonged stagnation. After growing an average of 0.2 percent a year between 2015 and 2022, national growth averaged 3.3 percent annually during 2023–2024, the first two years of President Lula’s third term. Though quite modest in comparison to the massive social needs of a developing country, this is still better than expected.1 Part of Brazil’s recent positive performance has been due to growing exports, to be sure. But the bulk of Brazil’s current economic growth stems from a cause the government itself has been reluctant to recognize: expansionary fiscal policy, which has generated sufficient demand to counteract these forces of contraction.

Read rest here.