“The day after the pandemic, who will lend the country money if it goes into default?”

La Nación – Nicolás Cachanosky has lived in the United States since 2009, when he traveled to study for a doctorate in Economics at Suffolk University. His areas of expertise are finance, business cycles, and monetary policy. He is currently a research professor at the Metropolitan State University of Denver. He is also the nephew of the economist Roberto Cachanosky.

-What analysis do you make of the debt swap proposal presented by the Government?

-I see an offer, without surprising me, which is somewhat petty. Not only because of the grace period and the removal that is requested, but because the Government does not want to assume any cost of the debt swap. By not offering a reduction in spending, the country refuses to share the cost of default with those who lent it money. That the Government, with an oversized State, says that it cannot pay anything in the coming years may not sit well with investors. I think there was and there is a diagnostic error, both from this government and from the previous one. The fear is that a drop in spending will lead to a drop in economic activity, which would be very costly for the country. But that doesn’t have to be the case. There are cases of a sharp drop in public spending without a drop in economic activity. The United States, for example, after World War II, reduced public spending and that did not produce a drop in GDP or an increase in unemployment. Public spending went from 45% to 10% in just four years, and yet there is no mention of the 1945 economic crisis. The reason is not a complicated formula of economic policy. It was a matter of political will. As spending was reduced, all regulations imposed during the war were removed. It is important not to confuse the causal relationship between income (production) and expenditure (consumption). An increase in economic activity allows consumption to grow (whether private or public). It is not an increase in spending that leads to higher production and income.

– Could there be a new offer, less harsh, later?

-It’s possible, I don’t know. I estimate that it will depend on the reaction of the creditors, especially if the government achieves sufficient acceptance of the swap to avoid a default. Unfortunately, Kirchnerism has given us complete evidence that it prioritizes political discourse over economic rationality. We have seen it in cases such as the conflict of resolution 125 or in the judgment with the holders in the court of Judge Thomas Griesa. Therefore, we cannot rule out higher economic costs championed in a nationalist epic discourse. It also seems to me that the Government makes a partial calculation of the cost and benefit of the debt swap. The relevant calculation is not just how much money the Treasury saves by deductions and grace periods; The present value of the cost of treating creditors aggressively (greater mistrust in the country) and the costs of going into default should also be included. The day after the pandemic, who is going to lend money to Argentina if it falls into default?

– How does the coronavirus impact in this context?

– This seized Argentina very badly, with no margin for fiscal or monetary policy, in the midst of a difficult renegotiation and, now, with very closed markets.

-What could happen if Argentina goes into default for not reaching an agreement?

-It is dangerous. We are in the middle of the storm and the activity is collapsing. When the pandemic ends, what will the rebound be like? How will it be financed? If it cannot be financed with internal savings because we live in inflation and in deficits, we will have to depend on external savings and investments. I do not know if Argentina is taking measures that will invite investors the day after. He asks for more taxes, more restrictions, more regulations and he is miserable. The world is going to need investments. Why go to Argentina if we are not friendly and do not treat them well? On the other hand, we have been in stagflation for 11 years. Are we going out of the crisis to return to stagflation, or are we going to find a way out that will lead to longer-term sustainable growth? If we do not review what Argentina is doing with taxes, regulations, trade opening, then we will return to the same thing: to another dying state. And I don’t see much concern either, given that we are in this storm, about what reforms we are making to get out, instead of going back to where we were, which is not a good place.

-Why can’t Argentina get out of stagflation?

– It is an eternal subject, but I see two problems, to synthesize. One is political and institutional. Argentina formally has the roles of a republic, with a division of powers, but in practice it is very presidential, it does not have strong republican institutions. The president in Argentina appears to be the leader of the country, rather than the head of one of the three branches of the state. So much dependence on a person leads to no incentives to make changes; there is no protection against the State. The other problem is cultural, due to the image they have of entrepreneurs, even small merchants, who are the bad guys and those who raise prices. All that rhetoric and that anti-entrepreneur semantics is a manifestation of culture in Argentina. Who is an idol in Argentina? He is not a Steve Jobs or a Jeff Bezos, a successful businessman. Is a soccer player. Está muy bien, pero no hay por qué demonizar al otro. Since the 2001 crisis – and it’s not that this started in that year – we already have families with three generations that have never worked. It is not understood what the work culture is.

-In 2020, the economy will take three consecutive years of decline, when will it grow again?

-It is a matter of political will. It is not a big secret if you look at countries that do well and have high levels of income. One of Adam Smith’s lessons is that a country’s level of wealth, at the end of the day, depends on the institutions we have. There are market friendly institutions, with trading with the world, with protecting property rights. And there are institutions that attempt against it. How are these reforms carried out? There are two ways. Countries that are rich or poor have some historical event that for them is good or bad luck (it can be a war or a natural crisis, for example). The other reason is to have a political leader capable of moving public opinion, instead of following it through polls. In Argentina we have more followers of surveys; then, political projects are built on existing culture. Argentina is in that trap, where it has to wait for someone who can change that culture to assume it.

– How is the situation in the United States, in relation to “poll followers”?

-I see the United States entering a populist process, not at the levels of Latin America, obviously. This starts more with Barack Obama than with Donald Trump. Obama is the one who said he was going to do health reform, right or wrong, and the argument he made was a lot of one against the other, of social division. And he said that if they did not approve the law, he had “pen and paper”, meaning that he would bypass Congress, which was a very anti-republican attitude. In a republic, politics is decided by Congress and the president executes it.

-How does the coronavirus crisis affect Trump’s reelection chances?

– I am not clear what can happen to him. On the one hand, part of his opponents are already going down, like Bernie Sanders and Elizabeth Warren. Much of his political capital depends on what happens to the economy, but – and this is what I have to see how it affects him – the pandemic is seen as an external shock, something that happened to everyone; it’s not Trump’s fault. When the pandemic starts to go, you have to see how it stops. It will be necessary to see then if people think that it was a crisis that came from outside and that they navigated it well, beyond the mistakes made, or if the public image of Trump is bad. In Argentina, President Alberto Fernández’s reaction to the pandemic increased his political image. I imagine there may be a similar effect with Trump.

-The number of people who asked for unemployment insurance in the United States grew a lot. Do you think these figures are going to rethink labor laws or, on the contrary, this easing will help a greater economic recovery?

-The United States has in the labor market the employment-at-will [empleo eventual o temporario] It’s like in the movies: you are fired [estás despedido]. The employer can fire the worker whenever he wants for whatever reason, he does not have to ask permission or make excuses. This is not why we see such a strong jump in unemployment in the United States. If employers couldn’t fire, I imagine more unemployment insurance orders because we would see more companies going bankrupt. If I have a business where there are 100 employees and to survive I have to fire 20, these 20 will go to ask for unemployment insurance. But if I can’t fire them, I have to close and fire the 100. It is not clear to me that this labor flexibility is worse today and it does not seem worse to me the day after. Because once the crisis is over, there will be uncertainty and fear, and the more expensive it is to hire someone, the less people will be hired. If Argentina wants to get out fast from the crisis, you have to have a flexible market; otherwise, recovery will be slower. That brings me to the comparisons I’m starting to see with the Great Depression of 1930. The analysis of this crisis must be divided into at least two parts: how long the economy fell and how long it lasted. It was a very long way out of the crisis, which lasted until World War II. It did not come out quickly, because when the economy fell, the United States did everything it tries to do in Argentina: price control, minimum wages, prohibition to fire. Furthermore, the Executive Branch created the norms, interpreted them and imposed sanctions; that is to say, the three powers of the State were claimed. The pandemic crisis may cause the economy to fall a lot, but it is a transitory effect, it will go away and it will not explain why it will be a long recession. It will be long because, once the shock is gone, the state puts one foot on the head of the economy, it will not let it grow. With the crisis we cannot do anything about it, but we can give the market flexibility to get out fast.