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Eye on the News

Jay Hallen
The Argentina Scenario
The Obama administration’s familiar economic mistakes
2 November 2012

The opening decade of the twenty-first century has seen a slow but distinct decline in American capitalism. Economic policy has become increasingly overrun by central planning, redistribution, and government picking of industrial winners and losers. Beginning about half a century ago, those elements helped sink another free-market powerhouse—Argentina. While Barack Obama is no Juan Perón, the president’s misguided policies threaten to squander our economic advantages, just as Perón’s did in Argentina.

Government intervention in the housing market, caused by low interest rates; direct subsidies, such as the home-mortgage interest-tax deduction; and the market distortion caused by Fannie Mae and Freddie Mac—the two state-backed entities that make virtually all home loans now—has helped throw the American economy into a tailspin. A rerun threatens to occur in the student loan market and perhaps also health care, two areas where the government now plays an outsize role in financing and subsidies. Subsidies and bailouts to favored sectors have come at substantial cost to the taxpayer. The notion of “too big to fail” removes banks’ incentives for responsible risk-taking, while the Fed’s continued “quantitative easing” plays to the American consumer’s worst instincts: the over-leveraging that brought about the current crisis in the first place. Meanwhile, the U.S. Treasury retains a 27 percent stake in General Motors and refuses to sell its shares lest it realize a multibillion-dollar loss. But with government-subsidized Chevy Volts losing $49,000 per car, any increase in GM’s share price seems a long way off.

President Obama’s response to the Great Recession and then a pallid recovery has been guided more by “fairness,” a thinly veiled code for redistribution, than by free-market principles. As it stands now, the top 1 percent of Americans generate 16 percent of the nation’s income but pay 40 percent of the income tax. This isn’t enough for Obama: he’s pushing for still-higher taxes on those who create jobs while increasing transfer payments and entitlement spending for everyone else. Recent publication of a 1998 video in which Obama declares, “I actually believe in redistribution,” helps reveal the philosophical underpinnings of his economic agenda.

To see the long-term consequences of these policies, Americans can look to Argentina, a country that was once strikingly similar to the United States. As outposts of the “New World,” both were settled by frontiersmen who tamed a wild landscape, setting the foundation for valuable agricultural and livestock industries. The frontier spirit contributed to strong federalist traditions, which in Argentina’s case drove the outlying regions to take up arms against the dominance of Buenos Aires throughout the nineteenth century. Free trade with Europe powered both nations’ economies, attracting foreign investment and millions of European immigrants between 1880 and 1930. By 1930, Argentina’s GDP and per-capita income rivaled those of Germany, Canada, and Australia. This period was Argentina’s golden age, and the country remained a free-market bastion through the 1940s. Buenos Aires was the “Paris of the South,” with a trove of cultural and architectural treasures that reflected the country’s wealth.

Then everything changed. As soon as Perón assumed the presidency in 1946, he sought to appease his political base in the labor unions with dictates of full employment and wealth redistribution. He incited massive strikes in order to coerce the private sector into accepting increasingly pro-labor legislation. In a similar vein, the National Labor Relations Board’s 2011 filing of a lawsuit against Boeing, which built a plant in South Carolina to avoid strikes and delays to its Dreamliner, revealed the Obama administration’s willingness to insert itself into private industrial disputes on labor’s behalf.

Deciding that Argentina needed industrial “self-sufficiency” more than it needed its productive agricultural sector, Perón advanced government subsidies to inefficient manufacturers, protecting them with high tariffs. Predictably, these actions crowded out agricultural investment, weakened the country’s profitable export base, and drove unemployed workers to Buenos Aires and into the arms of state-subsidized factories and their associated unions. Such preferential treatment recalls the Obama administration’s fascination with green energy and the $527 million that it squandered in the Solyndra scandal, along with the federal stimulus bill’s funding of costly boondoggles like California High Speed Rail. The California rail project is almost guaranteed to lose between $50 and $100 billion, though it’s difficult to say exactly how much, because the price tag keeps rising. Labor unions, corporate railroad interests, and environmental extremists—all part of Obama’s political base—continue their lobbying efforts for the project. Note, too, that when Perón nationalized banks, railways, shipping, and utilities, he poured revenues into social-welfare projects, among them the revitalization of a National Mortgage Bank to fuel housing loans. Sound familiar?

Perónism’s effects were soon clear. Between 1945 and 1948, Argentina’s $1.3 billion trade surplus was eviscerated. Argentina borrowed heavily from the United States, forcing the nation’s central bank to print money to service the debt, devaluing the peso by 70 percent between 1948 and 1950. Political leaders made some genuine attempts at reform, but Perón’s overhaul of economic institutions and tradition of central planning proved hard to undo. After decades of high inflation and continued stumbling from one crisis to the next, the country defaulted on its debt in 2001 and had to be bailed out by the IMF and other international lenders.

Argentina’s fall from grace remains unprecedented in modern history. It was driven by the hubris of a government that took its country’s affluence for granted and thought it could manage the economy better than the private sector could. And it shows what America could look like in 30 years. The size of the U.S. government has accelerated measurably under the Bush and Obama administrations. From 1980 to 2000, government spending held steady between 30 percent and 35 percent of GDP, but it jumped to 37 percent after Bush’s second term and is now at 41 percent as Obama’s current term comes to a close. As government grows, so do annual budget deficits, themselves a brash assumption that economic growth will continue indefinitely. Interest rates today are at rock bottom, penalizing those who would save or invest conservatively. The Fed’s current expansionary policies may devalue the dollar by as much as 33 percent over the next 20 years.

America’s 2008 recession, aided as it was by government intervention, has pushed the country closer to becoming a handout nation in which those relying on government for sustenance and services may soon outnumber those earning the money that funds these goods. Argentina became such a nation when the government seized control of the economy, rendering much of the population de facto state employees, dependent on some form of federal largesse. The recent news that one-third of American households now receive Medicaid and food stamps complements a report that nearly half of Americans don’t pay income taxes. Mitt Romney’s infamous “47 percent” comment, while technically inaccurate—many who don’t pay income tax do pay payroll tax, and seniors receiving Medicare and Social Security shouldn’t be described as “victims”—was nonetheless correct in spirit. These trends suggest that the United States is becoming a nation of “makers” and “takers,” which may someday lead to a dangerous electoral tipping point. Politicians would be forced to pander to a vast constituency with even higher taxes and spending, while the political discourse becomes even further divided between social and business interests.

The Argentine case study shows that even wealthy New World countries, blessed with natural resources and a diligent immigrant workforce, can bring ruin on themselves through economic mismanagement. To restore growth and escape economic stagnation, the United States must return to its free-market roots, rather than travel farther down the path of intervention, dependency, and decline.

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