Regarding Debt: some ideas to prevent history from repeating itself

Member of the Academic Council of Libertad y Progreso.
PhD in Administration from the Catholic University of La Plata and Professor of Economics at the Faculty of Law and Social Sciences of the UBA. His research has been collected internationally and he has published books and scientific and outreach articles. He has served as Rector of ESEADE and as a consultant for the University of Manchester, Konrad Adenauer Stiftung, OAS, IDB and G7Group, Inc. He has received awards and scholarships, including the Eisenhower Exchange Fellowship and the Freedom Project of the John Templeton Foundation.

INFOBAE – We are about to experience one of those events that few are capable of like this country. It will surely be a success. This will be seen by the Government, whether it arranges with the bondholders or falls into default. If it is the first case, the success of prudence and the opportunities that are now opening up for this country will be presented; if it is for the second, it will be the epic fight against financial capital and vultures.

In one way or another, repeated history, and no sign that anything changes so that situations like these will not be reached in the future. Since this process began, the debate has been limited to the success or failure of the negotiation process, to the “academic” strategy that the government is supporting, supported by Nobels and economists, whether it is more difficult or more negotiating, etc. But nothing further.

And most likely there will be no other references other than the comment on the result achieved and its short-term impact on the Argentine economy. Okay, not that that is not important, but it would not be wrong for once to look a little beyond the next months or the next election.

In this regard, what could be done to avoid falling into this again? The ideal would, of course, be for both politicians and voters to have a rapture of lucidity that would impose a rejection of high public spending, the fiscal deficit and indebtedness as now observed, for example, regarding the possibilities of having a military government. Imagine if there were as widespread a repudiation of debt as there is a violation of human rights. That lesson is learned, but that of spending, deficit and debt is not.

Of course, if that were part of people’s deep convictions, it would carry over to the electoral results and it wouldn’t take much more, just be alert so that voters are not distracted by political attempts to hide expenses and debts in special accounts, outside budget, etc., something that usually happens.

To make that control more firm, such a consensus could be expressed in an institutional framework that imposes hard limits on state indebtedness. These limits can be of two types. As in the case of the Maastricht Treaty, a ceiling can be established for total indebtedness, in this case 60% of GDP. The other may be like the one that exists in the United States, where Congress sets a limit on the total amount of debt allowed —this is an amount of dollars, not a percentage of GDP—, a ceiling that, when reached, it cannot be overcome: the Government cannot issue more debt, unless it is modified by Congress.

However, the following image is quite clear regarding the capacity of this mechanism to impose some type of limit, when the political will and the control of the voters do not exist:

Another way to restrict indebtedness refers to its approval process, for example, which demands that all debt issues be approved by voters in a referendum or by special parliamentary majorities, until reaching an absolute constitutional prohibition. Another alternative, applied by some regional governments in Spain, is to limit the term of the indebtedness in such a way that only the short term is allowed, which means that the debt must be paid within the budget year itself. In the United States, 21 states demand approval by referendum and 12 by special majorities, which may be made up of three fifths or four fifths of the representatives.

However, governments seek, and often find, various ways to circumvent these restrictions, such as channeling debt through special state agencies that are not subject to this type of control. Would a limit be effective through the popular vote cast in a referendum? It can be argued that voters would be predisposed to approve borrowing, because they would enjoy spending now and end up paying it to future voters. However, empirical evidence shows that they do not act in this way and tend to reject debt.

States that have more than one control show lower levels of indebtedness, with the popular referendum by vote being the most successful, along with a total ban.

In the Argentine case, it seems that all kinds of controls should be accumulated. Not only limits to indebtedness, but also to the increase in public spending, the increase in taxes, the existence of a fiscal deficit. In this field we are like Anthony Hopkins acting as Hannibal Lecter in The Silence of the Innocents, every lock or cage is little.

Curiously, what has an effect to stop dry borrowing is default. There the de facto taps are closed. Of course, at a high cost. The mentioned controls are not free, but the expectations they generate are exactly opposite to those of default. It is the difference between costs that sink you and costs that you could gladly pay to get in and out of the well.