Argentina and the latest failure of heterodox economics

luiz

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As is known, a lot of people have been arguing since the 2008 crisis for an adoption of "heterodox" economic policies to fight unemployment and deflation. The high-priest of this crowd, among the mainstream economists anyway (this thread is about discussions in the mainstream, lunatic views will not be entertained) is Paul Krugman. He textually argued, on several occasions, that the Fed should pledge to be irresponsible, that not only it shouldn't be vigilant on inflation, it should promise and deliver higher inflation. The "orthodox" view of course is that the credibility of the Central Bank is hard to earn and easy to lose, and that once lost any attempt at disinflation will have a tremendous cost in terms of decrease in output and employment, and so pretty much nothing is worth losing it. And Krugman & co. didn't stop their prescriptions at monetary policy, they have been constantly whining about the need at greater and greater deficit spending, that under certain circumstances (which apparently last forever) austerity actually increases relative debt and deficit spending decreases it.

And what is their model? Which country pursued policies to their agreement? Well, as late as mid 2012, and probably later, Krugman et al. had nothing but praise for the economic policies of Argentina, which was a "model" that should be followed by the likes of Greece, Portugal and Ireland. Here's Krugman, quoting Matt Yglesias in May 2012, another acolyte of heterodox economics:

Matt Yglesias, who just spent time in Argentina, writes about the lessons of that country’s recovery following its exit from the one-peso-one-dollar “convertibility law”. As he says, it’s a remarkable success story, one that arguably holds lessons for the euro zone.
I’d just add something else: press coverage of Argentina is another one of those examples of how conventional wisdom can apparently make it impossible to get basic facts right. We keep getting stories about Ireland’s recovery when there is, in fact, no recovery — but there should be, darn it, because they’ve done the “right” thing, so that’s what we’ll report.
And conversely, articles about Argentina are almost always very negative in tone — they’re irresponsible, they’re renationalizing some industries, they talk populist, so they must be going very badly, never mind this:
[Graphic showing Argentinian economic growth in 2007-2012 was higher than Brazil's]
Just to be clear, I think Brazil is going pretty well, and has had good leadership. But why exactly is Brazil an impressive “BRIC” while Argentina is always disparaged? Actually, we know why — but it doesn’t speak well for the state of economics reporting.

Now Brazil, which also adopted heterodox policies but not to the same extent as Argentina, also looks pretty bleak. Inflation is high, growth is pathetic (expected to be 1.1% this year).

But what about Argentina, Krugman's and Yglesias' model country, the place that followed the heterodox recipe to the letter (devaluation, "irresponsible" Central Bank pledging future inflation to stimulate private spending, deficit spending to boost economic performance, etc)? Well, sure enough, they had high economic growth for some years. Large part of it was due to the commodity boom of the 00's that dramatically increased growth in all countries with similar exporting profiles, and part of it was indeed due to heterodox policies. No "orthodox" economist denies that in the first years heterodox policies will indeed lead to higher growth. What they say is that this growth is not sustainable, that once in a path of "irresponsibility" it's very hard and costly to go back to normalcy, that higher inflation tends to fuel itself and spiral out of control, that deficit spending is easy to start and very hard to stop, and so on and so forth. So on the not-so-long run countries that adopt heterodox policies will actually fare worse than those who adopt orthodox ones.

Anyway, what happened to Argentina (why have I started this thread)? Just this week they are yet again threatening with default. Inflation is totally out of control, probably running close to 25% a year for several years now (the government blatantly manipulates inflation data, which is trusted by nobody internally or externally). 12 years after the end of the crisis which in theory justified deficit spending, Argentina's public sector deficit is still 2.5% of GDP (but remember, Krugman, Yglesias and co. were praising Argentina as late as 2012!!!). The country is totally dry of hard currency and imposes draconian restrictions on its citizens who travel abroad or import anything (they can only buy a ridiculous amount of dollars, which is totally below the minimum needed to travel anywhere, and have to pay a huge tax even on that pathetic amount). And the economy has stalled; GDP is expected to either growth nothing or decrease in 2014, and the years ahead look increasingly dark. Strikes, riots, absence of public utilities and basic public services have all become the "new normal" of Argentinian life.

Present Argentina is, in sum, the logic conclusion of the heterodox recipe. It is what Krugman et al. would have the Eurozone (and the US!!) turn into.
 
Heterodox economics is a relative term, given that Austrian economics would also be considered Heterodox, though more in the direction of tight currencies.

Nevertheless, Argentina in general is plagued by populism. Juan Peron is probably more important than Jesus Christ in Argentine national myths.
 
Heterodox economics is a relative term, given that Austrian economics would also be considered Heterodox, though more in the direction of tight currencies.

Nevertheless, Argentina in general is plagued by populism. Juan Peron is probably more important than Jesus Christ in Argentine national myths.

Yes, Austrian economics is also quite heterodox. But in the context of the OP I meant Krugman-esque Keynesianism.

And yes, populism is the great plague of Argentina. But Krugman et al. have been arguing exactly that populism was good for Argentina and should be emulated by other countries.

I wonder who wants to look like Argentina now.
 
I wonder who wants to look like Argentina now.

The question is perhaps more like whom Argentina wants to look like. Peronism aside, Argentina is following a general trend in Latin American politics.
 
Meanwhile, neighboring Chile avoids this idiocy altogether. Are you still there, luiz? Also, how do you say "there's a sucker born every minute" in Spanish? I want to know if that's what the Argentines print on their debt certificates.

Yeah Chile is a bright light in Latin America. The case for economic orthodoxy can't be clearer than a simple comparison of Chile and its neighbors.
I left Chile a little less than two years ago, spent sometime in the UK (Scotland) and now I have been living in Houston since last September. But I came back to Brazil for the WC, so I'm here now.

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Kaisergard, it's not entirely true that trend in Latin America is towards populism. In South America you have a clear divide between the "Atlantic" populist countries (Venezuela, Argentina, Brazil) and the "Pacific" orthodox ones (Chile, Colombia, Peru and even Ecuador, despite their silly rhetoric). It's very clear that the "Pacific" ones are outperforming the others, and that their future looks far brighter.
 
But in the context of the OP I meant Krugman-esque Keynesianism.

Which isn't very Keynesian in the first place, it deserves to be mentioned.

At any rate, Keynesian economics has been mainstream for the last 60 years, so considering it to be "heterodox" is some pretty creative naming.
 
Which isn't very Keynesian in the first place, it deserves to be mentioned.

At any rate, Keynesian economics has been mainstream for the last 60 years, so considering it to be "heterodox" is some pretty creative naming.

I think Krugman comes closer to true "Keynesianism" than most others on the mainstream. Galbraith Jr. is more Keynesian, but I probably wouldn't call him mainstream.

Note that Krugman himself refers to his policy prescriptions as heterodox. Keynesianism as it existed in the immediate post-war era would be regarded as extremely heterodox today, and even Krugman's watered-down version is definitely distinct from the "conventional wisdom" in economics.

And Argentina has shown once more the triumph of conventional wisdom! Prolonged deficits = bad, printing money = bad, "irresponsible" Central Bank = very bad, "economic nationalism" = disastrous.
 
You'll get no argument from me that Argentina has no clue what it's doing. Ask our resident Argentinian. But that's my point: what passes as "Keynesian" today isn't very Keynesian, it's a rude caricature of Keynesian principles, which is the primary reason it doesn't work like it used to.

Well, that, and the fact that capitalism as a system is crumbling, which is why not much of anything will work any more.
 
Yes, I'll give you that Keynes himself would be appalled at Argentina's continued deficits, tolerance for high inflation, manipulation of statistics, etc. No question there.

But Keynesianism didn't die with Keynes, and unfortunately Argentina has found support for its folly in the "Keynesian" community.
 
Well, I don't mind deficits, even continual deficits. Below a certain threshold, they're basically sustainable forever. What's interesting is that 25% inflation rate. That seems to be an insane number.

Now, Canada's had a 2% target for inflation for a long, long time. So, when we talk about 'high' inflation, I begin to think in terms of 6-8%. 25% seems outright crazy to me.
 
So, the moral of the story is that poorly run economies do poorly?
Somehow, not the groundbreaking revelation I was expecting from the thread title.
 
So, the moral of the story is that poorly run economies do poorly?
Somehow, not the groundbreaking revelation I was expecting from the thread title.

Eh, the moral is that the model country of Paul Krugman, Matt Yglesias and a good part of the "liberal intelligentsia" is a catastrophe. That using inflation to boost demand is a very dangerous game. That to suggest the Central Bank should pledge to be irresponsible borders on the criminal. That the orthodox economists and economic publications were right all along to criticize Argetina, while Krugman et al. were wrong to praise it and extra wrong for criticizing the critics.

Krugman likes to claim all his predictions come true and his intellectual adversaries are a bunch of quacks. I think his praise of Argentina as late as mid 2012 speaks volumes.
 
Eh, the moral is that the model country of Paul Krugman, Matt Yglesias and a good part of the "liberal intelligentsia" is a catastrophe.
Eh, I'm still siding with the moral of "poorly run economy does poorly". Given the rather unconventional ways the Argentine government handles the money supply and outstanding debt it seems questionable to interpret their current situation as a clear demonstration of the failures of Keynesianism. At best, it indicates that given the fundamentals of the Argentine economy, their poorly run pseudo-Keynesian program might have done more harm that good long term.

Krugman likes to claim all his predictions come true and his intellectual adversaries are a bunch of quacks. I think his praise of Argentina as late as mid 2012 speaks volumes.
Eh, I tend to ignore Krugman's blog and instead read the scholarly articles he writes. He didn't win the Nobel Prize for his blog-writing skills after all.
 
Krugman is a good economist when he wants to be. He's also a political hack with a surprisingly clouded judgement.

There's also a larger point here. Krugman, and many others even in prestigious publications such as the Financial Times, have lambasted the ECB and European policy-makers for the imposed austerity on the debt-ridden and depressed peripheral economies. They were actively arguing for an Argentine solution: devaluation, default, inflation, fiscal profligacy. It's clear now that while the European response was perhaps faulty, it was still orders of magnitude better than what Krugman et al. prescribed. Give me Ireland 100 times before Argentina!
 
Eh, I'm still going with the view that the underlying issues in the Argentine economy would have played havoc with any set of policies implemented - Keynesian or not.

That a set of policies didn't deliver the desired outcome in one economy does not indicate they would deliver the same poor outcomes in a radically different economy.
 
Eh, I'm still going with the view that the underlying issues in the Argentine economy would have played havoc with any set of policies implemented - Keynesian or not.

That a set of policies didn't deliver the desired outcome in one economy does not indicate they would deliver the same poor outcomes in a radically different economy.

Argentina actually has far more potential than say Greece or Portugal. It's a huge country with a very low population density and an enormous amount of precious natural resources that are in huge demand in emerging Asia. There's no reason whatsoever to suppose that better (read sane) economic policies wouldn't have delivered excellent results on the medium-term (which has already arrived many years ago, considering when the crisis happened well over a decade ago).

Edit: Another thing. What happened in Argentina was exactly what conventional wisdom said would happen. Default? Sure, but creditors will shun you and demand usury rates next time you need them, and you will need them at some point. Devaluation? Sure, but watch as your currency loses credibility and inflation is fueled. Deficit spending to kickstart the economy? Sure, but good luck getting the budget under control later (and also, more inflation). Higher tolerance with inflation to stimulate growth? Sure, it can work for a couple years, and after that you will have higher inflation and absolutely no more growth (probably less), and to get inflation down again you will have to incur in huge losses in terms of output and employment.
 
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