Obama risks South-American style economic decline

September 8, 2009

richard-wellings- Richard Wellings is Deputy Editorial Director at the Institute of Economic Affairs. The opinions expressed are his own.-

Argentina should be an object lesson for the U.S.

A century ago, it was one of the richest countries in the world. Today, it has fallen far behind Europe and North America, after a hundred years marked by long periods of recession.

Faced with economic crisis, for example during World War I and the Great Depression, Argentina’s politicians turned to socialism. Lame-duck industries were subsidised and protected from competition, and policy was often driven by powerful vested interests such as the trade unions.

Profligate government spending was initially financed by borrowing, and then by printing money. The result was rampant inflation, which damaged investment and growth by making it almost impossible for businesses to plan ahead.

A new IEA study, Economic Contractions in the United States: A Failure of Government, suggests that President Obama’s current economic policies could be similarly ruinous – though, to be fair to Obama, the authors point out that these policies were started by George W. Bush.

Despite deep recession and an exploding budget deficit, Obama is embarking on ambitious and hugely expensive socialist reforms, including a subsidised healthcare programme, extra education spending, and a cap and trade policy to reduce carbon emissions. In the long run, these measures will heap yet more misery on taxpayers following the bailout of banks, insurance companies and the car industry. And they come after George W. Bush’s period in office, during which he was one of the most profligate presidents in US history.

For the time being, Obama is relying on lenders to fund his spending spree. The Federal Government’s budget deficit is likely to reach $1.6 trillion this year. Shockingly, this means around half the money it spends will be borrowed.

The long-term economic impact is likely to be devastating. Such high levels of borrowing hamper recovery by crowding out investment and will almost certainly lead to much higher taxes and interest rates. Expectations of a less dynamic US economy as a result of greater state intervention and more burdensome taxation also act as a deterrent to business expansion.

Perhaps more worrying still, Obama’s policies will increase the share of the US population directly dependent on government largesse. This will make it far more difficult to cut Federal expenditure if borrowing levels prove unsustainable. The temptation to monetize debt on the grounds of political expediency will be much stronger, even if it risks high inflation.

The President is sowing the seeds of the kind of destructive special interest politics that helped consign many South American countries to a century of economic failure. And while the authors do not argue that the US is likely to become the next Argentina – years of stagnation are more likely – by expanding the role of government so rapidly, Bush and Obama have raised at least the possibility of long-term catastrophic decline

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