Article by Nicolás Cachanosky published in Perfil on April 15, 2021
With each new peak in inflation, we ask ourselves what should the government do once more. The answer remains the same: it should attack the underlying problem instead of hiding behind the discourse of multi-causality.
The inflation rate in March was high at 4.8%, which is 75.5% if annualized. It is the highest rate since September 2019. An acceleration in inflation was to be expected, however, since the expansion of the monetary base reached 83% in September of last year.
As we know, monetary expansion affects prices laggardly rather than immediately. The answer to this problem is, as it has always been, to correct the underlining cause.
First, you need to have a genuine interest in lowering inflation. Since 2007, Argentine inflation has trended upwards. Average yearly inflation was 15.3% during Néstor Kirchner’s administration, only to increase to 25,6% during Cristina Kirchner’s and 42,1% during Mauricio Macri’s.
This means we had one of the highest inflation rates in the world without any serious proposal to stop it from either the government or the opposition. Macri was the exception, establishing a regime of inflation goals. This scheme did not work, however, and Juntos por el Cambio has had no alternative plan since then. As with most economic problems, the solution requires political will.
Secondly, it is necessary for the Central Bank to end monetary expansion. To achieve this, it is essential to limit the Treasury’s need for finance. In other words, it is necessary to reduce the fiscal deficit. This can be done in only two ways: lowering spending or increasing taxes.
Unfortunately, there’s no margin to raise taxes. Argentina already has a record tax pressure. Nor can it be expected to increase tax collection based on economic growth; the real economy has been stagnant since 2011. Beyond a post-pandemic rebound, there is no reason to expect growth in the medium and long term.
There is no other way than to carry out a fiscal reform that reduces public spending. Political leadership has the responsibility of arriving to this point. Ignoring this problem for years has eliminated the possibility of other options. Kirchnerism has expanded public spending to the point that by the time Cambiemos came to power, it was too late for its timid gradualism.
However, there’s room to lower public spending. Currently, spending at a consolidated level is around 45% of Argentine GDP. This means that, on average, 45% of the income generated in the country goes to public spending. Security problems, high poverty, and a poor handling of the pandemic show that the Argentine State has a sad record regarding efficiency.
Not only is there room for improvement in its efficiency, there is room for cuts. In the 1990s, consolidated spending was around 30% of GDP. There are, in principle, 15 points of GDP of public spending that can be eliminated. Unfortunately, neither Kirchnerism nor Juntos por el Cambio show any serious interest in reducing the burden of an unsustainable state.
Most of this public spending goes to social programs, but the failure of the welfare state is clear. Successful social programs are those that disappear because they are no longer necessary. Successful social programs are those that eliminate poverty through job creation, not those who continue growing because poverty increases.
How to lower public spending then, given that social assistance cannot be eliminated overnight? The solution is no secret. It can be found in economics books from Adam Smith to today. It does, however, require two ingredients that exasperate most politicians. The first is pro-market reforms, in order for jobs to be created by the market rather than the state. The second is patience. Pro-market reforms generate positive results even if this is not seen immediately.
The time lapse between reforms and results means that reforms cannot be postponed indefinitely. Access to international credit should be used to finance the period between reform and result, not to perpetuate an unsustainable state. Sooner or later international credit runs out. I end this article by repeating my first point. Lowering inflation does not require creativity or the economic alchemy of policies such as price controls. It requires something even more elusive: political will.