Argentina: Entitlement Spending Causes Runaway Inflation

Another welfare state is in trouble. Argentina, a notorious Latin American hotbed for reckless government spending and out-of-control inflation, is at it again. From France24.com:

Argentina’s President Cristina Kirchner hit back at the IMF on Tuesday for warning her country about bad data, saying her nation would not be subjected to threats of any kind. International Monetary Fund chief Christine Lagarde warned Monday that Argentina faces a “red card” if it does not produce acceptable data on growth and inflation by December. An animated Kirchner, speaking to the UN General Assembly, said: “My country is not a football pitch. It is a sovereign nation which makes sovereign decisions. “As such it is not going to be submitted to any pressure, and much less to any threat,” she said to cheers.

Aside the fact that the United Nations has been reduced to little more than a playground for third-world dictators and truncated intellects with white guilt, the Argentine president’s outburst is a clear sign of political desperation. Her country’s economy is spinning out of control, and it is all driven by the same old leftist agenda to use government spending to eradicate “income inequality”. This statist agenda has led to endless problems with government debt.

For almost 15 years now these problems have been chronic. In 2005-2006 the IMF basically made a fire-and-rescue emergency run to Buenos Aires to initiate a debt restructuring process and prevent a complete meltdown of the Argentine economy. That restructuring process was basically complete in 2010 and you would have assumed that the country’s political leaders had learned their lesson.

Not so. As the Wall Street Journal explained back in 2008:

After seven straight years of driving up government spending and hammering every capitalist in sight, the Argentine government, which went bust in 2001, is running out of money — again. No surprise there. For more than a few years, analysts have warned that inflation, trade protectionism, disregard for contracts and confiscatory tax rates were having a deleterious effect on capital flows. Suboptimal investment rates, the same analysts warned, would mean economic trouble when global growth began to slow and the commodity boom came to an end. But former President Nestór Kirchner (2003-2007) and his wife, current President Cristina Kirchner, had promised to bring change to Argentina and didn’t want to hear it. They thought they saw better returns to their own bottom lines by stoking class warfare while increasing government spending.

Later that year, the Argentine government seized all 401(k)-style private pension plans and thus dealt yet another serious blow to private property rights and contract enforcement. No wonder Argentina ranks 158th in the world in terms of economic freedom.

So what does inflation have to do with this? Well, when government has run out of taxpayers’ money, and seized as much of private property as it possibly could get its hands on without returning Argentina to a full-blown dictatorship, then the only thing left to keep government spending going is the printing press at the central bank.

It takes a while before money printing causes inflation. The money has to find its way into the real sector of the economy, which it does when government uses it to pay people not to work. That practice is also known as entitlements. The more money people can spend without working, the less they will work to make money. As people reduce their workforce participation, less is being produced and more is being consumed. Add to this the stiff regulatory labyrinth that the Argentine government has put in place for its private enterprises to navigate through, and you have a recipe for consumer product shortages – and inflation.

Work-free, government-provided income – entitlements – actually consume a third of GDP in Argentina. The following analysis from MercoPress, a South Atlantic news agency, is a serious reminder of what happens when a government puts enough of its population on work-free, taxpayer-provided income:

Argentina currently consumes more than it produces and only with strong growth can it avoid another default situation since liabilities continue to increase, warns economist Diana Mondino. “Argentina has already consumed its assets in energy, agriculture, pension funds, central bank and expenditure continues to expand” points out Mondino adding that government spending has ballooned in the last decade but particularly in the last two years, “well above the production and growth capacity of the economy”. Social Security, Anses, already consumes almost a third of GDP, leaving aside law and order, education, health, which means the fiscal load must be particularly burdensome to meet those expenditures, 40% tax pressure, one of the highest in the world, except for Scandinavian countries.

And the Anses, of course, is an entitlement system that provides work-free income to people.

MercoPress again:

“And in spite of the taxing pressure the government had to appeal to some of the ‘jewels of the crown’, such as energy, agriculture, pension funds, Central bank reserves, and yes what we managed was a consumers’ boom”. Mondino added that Argentina no longer enjoys a genuine fiscal surplus since the budget includes such cosmetics as the Central bank and other government companies’ profits. “Stats are very limited; we know the outlays but not the level of debts, delayed payments, subsidies, or how much government enterprises owe. What we know is that there is an effort to rearrange expenditure even with non discretional items. During the last quarter of 2011, social security expenditure was up 40%; government salaries, 26%, but only 2% in capital expenditure and 1.3% in transfers to the provinces”.

Since Argentina has a history of “solving” its government revenue problems with freshly minted money, it is perhaps understandable that the IMF keeps a close eye on what president Kirchner is doing. But that only makes it even more stupid of her and her government to try to conceal inflation by manipulating its data.

The situation with inflation data reporting in Argentina has gone so bad, in fact, that in February The Economist explained:

Since 2007 Argentina’s government has published inflation figures that almost nobody believes. These show prices as having risen by between 5% and 11% a year. Independent economists, provincial statistical offices and surveys of inflation expectations have all put the rate at more than double the official number … . What seems to have started as a desire to avoid bad headlines in a country with a history of hyperinflation has led to the debasement of INDEC, once one of Latin America’s best statistical offices. Its premises are now plastered with posters supporting the president, Cristina Fernández de Kirchner. Independent-minded staff were replaced by self-described “Cristinistas”. In an extraordinary abuse of power by a democratic government, independent economists have been forced to stop publishing their own estimates of inflation by fines and threats of prosecution. Misreported prices have cheated holders of inflation-linked bonds out of billions of dollars.

This is nothing short of economic Orwellianism, obviously with devastating consequences for anyone who needs to spend money, make a living and invest for his and his family’s future. The Economist concurs, though in a more polished way:

In 2010 we added a precautionary footnote to our statistical tables. From this week, we have decided to drop INDEC’s figures entirely. We are tired of being an unwilling party to what appears to be a deliberate attempt to deceive voters and swindle investors. For Argentine consumer-price data we will look instead to PriceStats, an inflation specialist, which produces figures for 19 countries that are published by State Street, a financial services firm. Had we switched to one of the provincial statistical offices still generating reliable figures, we fear it would have come under government pressure.

Academic research provides yet more evidence of the inflation deception. In a recent research paper on Latin American inflation, Alberto Cavallo, assistant professor of applied economics at MIT, explains:

This paper uses online prices to evaluate the widespread claim that the Argentine government has been manipulating official inflation indexes since 2007. Online indexes are first shown to be able to approximate both the level and dynamic behavior in inflation trends in four Latin American countries: Brazil, Chile, Colombia, and Venezuela. In Argentina, by contrast, there are huge differences in the level of online and official inflation rates that have persisted for over 3.5 years. A series of robustness tests show that there is no simple data or methodological explanation that can account for this large discrepancy between online and official data.

Since Cavallo’s paper is academic, it does not speculate as to the policy motives of the Argentine government, let alone accuses them of deliberate manipulation. But within the realms of what is common in academic research, Cavallo does provide strong evidence that the Argentine government is cooking the inflation books.

All, of course, for the purpose of hiding the inevitable consequence of a runaway welfare state. Rather than acknowledging that government spending is destroying the economy, Argentina’s political leaders continue to enforce “income equality” by means of idiotic taxes and by vilifying entrepreneurs and other productive, financially successful citizens.

A lesson to learn, and not just for Europeans…