Monday, February 25, 2013

Is Today’s Argentina Tomorrow’s America?

Michael Tennant
Americans wondering what to expect as their government piles on more debt and refuses to cut spending need look no further than Argentina. A nation once among the most prosperous in the world, it is now deeply in debt and trying to inflate its way out of the mess. Inflation has caused prices to rise sharply, and so the government is doing what all governments do in such a situation: instituting price controls.
Argentina’s government claims the annual inflation rate is 10 percent; private economists believe it’s closer to 30 percent. The IMF has censured Argentina for exploiting the difference between the official and private inflation rates to make it appear as though the country had saved $6.8 billion since 2007.
Tighter controls were imposed on Argentina’s foreign exchange market, and currency controls were instituted. Now there is a two-month price freeze on every product in all of the nation’s largest supermarkets, which will ultimately result in shortages, higher prices and a thriving black market. 
Today’s Argentina could be tomorrow’s America. Once, Argentina was one of the most prosperous nations in the world. Then came the rise of demagogues such as Juan Peron, who nationalized industries, gave vast power to labor unions and spent lavishly. The country has never fully recovered, having suffered multiple rounds of inflation, price controls, and even debt default in the ensuing decades.
So, too, with the US. It was prosperous until President Roosevelt accelerated the process of centralizing power in Washington, cartelizing industries, boosting union leverage and spending enormous sums of money. Since then the US has had inexorable inflation, price controls (under Nixon), and ballooning debt. The US government spends over $1 trillion more than it takes in each year, is roughly $16 trillion in debt, and has many trillions more in unfunded liabilities. Decades of gargantuan government have taken their toll.
Instead of price controls, the Argentine government should reduce government spending, which is financing an expansion of the money supply. Unfortunately, slashing spending is about as likely to happen in Argentina as it is in Washington. Equally unfortunately, the results of such profligacy — debt, inflation, price controls, and national decline — are also about as likely in the US as in Argentina.

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