Tuesday, December 29, 2015

The neoliberal Long Run in Argentina and elsewhere

Paul Krugman takes on a couple of favorite neoliberal sacred cows in this post, Destructive Long-Termism 12/28/2015:

One of my long-running gripes about much discussion of current economic issues is about what I consider the long-run dodge. By this I mean the attempt to change the subject away from unemployment and inadequate demand toward supposedly more fundamental issues of education and structural reform. Such efforts to change the subject seem to me to be both wrong and, to some extent, cowardly. After all, if the clear and present problem is inadequate demand, then we should have policies to deal with that problem — I don’t care how important you think the long run is, we should deal with the crisis at hand. [my emphasis]
He quotes Tim Taylor, who he criticizes for offering dismissing the importance of fiscal and monetary policy in the present moment in favor of an even longer catalogue of neoliberal perennial platitudes, which Taylor lists as follows: "Thus, I’d argue that the growth-based agenda should focus on a different list of issues: expanding education and training; expanding research and development spending; tax and regulatory reform; expanding international trade; and investments in energy and infrastructure."

And Krugman gets a little snarky on one of the favorite neoliberal buzz-phrases:

Again, I have nothing against structural reform; some of my best friends are structural reforms. But if you have a persistent problem of inadequate demand — which is the secular stagnation argument — then find things that will boost demand. Don’t throw up your hands and whine that you can’t, and/or use demand-side problems to argue for other stuff that has no obvious relevance to the problem. You may think you’re being wise and judicious, but you’re actually engaged in an act of evasion. [my emphasis in bold]

Allianz' Mohamed El-Erian provides his own list of neoliberal prescriptions, but not to criticize them. Instead, he's celebrating the fact that the new government in Argentina intends to implement them (Argentina’s Economic Big Bang Project Syndicate 12/21/2015):

  • Run down the financial reserves and wealth that were accumulated when the economy was doing better.
  • Borrow from foreign and domestic lenders.
  • Cut public-sector spending directly, while creating incentives to induce lower private-sector expenditure.
  • Generate revenues through higher taxes and fees, and earn more from abroad.
  • Use the price mechanism to accelerate adjustments throughout the economy, as well as in trade and financial interactions with other countries.
El-Erian argues that such measures "can contain the spread of economic hardship among the population, protect the most vulnerable segments, and put future generations on a better footing."

But he criticizes Argentine President Mauricio Macri, whose neoliberal policies he supports, for implementing them in the wrong sequence. El-Erian writes:

Macri took over the presidency with a bang, launching an audacious – and highly risky – strategy that places aggressive price liberalization and the removal of quantitative controls front and center, ahead of the five measures relating to demand management and financial assistance. Already, most export taxes and currency controls have been scrapped, income taxes have been cut, and the exchange rate has been freed up, allowing for an immediate 30% depreciation of the peso.

Historically, few governments have pursued this type of sequencing, much less with such fervor; indeed, most governments have hesitated, especially when it comes to full currency liberalization. When governments have taken similar steps, they usually have done so after – or at least alongside – the provision of financial injections and efforts to restrain demand.

The reason is clear: by taking time to set the stage for liberalization, governments hoped to limit the initial spike in price inflation, thereby avoiding a wage-price spiral and curbing capital flight. They worried that, if these problems emerged, they would derail reform measures and erode the public support needed to press on. [my emphasis]
El-Erian's argument doesn't seem to be entirely coherent. He seems to be upset that Macri's particular approach of drastic immediate devaluation without corresponding adjustments in wages and salaries will too quickly alienate the voters against the neoliberal program.

It's notable that El-Erian prefaces his list of options by claiming vaguely that Argentina's economy has been ailing for many years. Which, to put the most generously possible, is wildly misleading. The government of Carlos Menem gave the country a heavy dose of the neoliberal medicine in the 1990s, leading to the financial crisis of 2001. But since 2001, especially since President Néstor Kirchner came to power in 2003, the economy has grown at a healthy pace with rising real incomes and higher levels of employment.

Yes, Néstor's government and the successor government of Cristina Fernández de Kirchner committed various sins against the neoliberal Gospel: capital controls, wage and salary increases, price controls, fiscal stimulus, expansion of government services, restoring public ownership of the previously privatized Aerolineas Argentina and the YPF energy company, successfully defying the vulture funds, thumbing their noses as the auterity measures demanded by the IMF.

As Krugman notes, the true believers in the neoliberal Washington Consensus and its variants like Angela Merkel's Herbert Hoover/Heinrich Brüning "ordoliberalism" are happy to ignore the immediate needs of ordinary workers and the middle class in favor of their preferred One Percenter policies, using the promise of the benefits of the Long Run to justify economic damage in a short run that may never end.

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