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

Comments

President Obama’s current economic policies could be similarly ruinous
Just noticed? Where were you last year, when it was already clearly visible to anyone willing to look? Preferred to close your eyes and enjoy the constant mantra of “change”? Change you’ve got, but is that change to better?
The way things are now, Dems can’t win any upcoming election, unless Republicans themselves manage to snatch defeat from the jaws of victory. Like fielding candidates in the mold of Bob Dole who could not even sell Viagra to ED sufferers, let alone himself to the electorate.

Posted by Anonymous | Report as abusive
 

Dear,Mr.Richard,
Frankly speaking, i have listened a good article on Argentina!s recent economic turmoil.
I have written lot of comments on America!s banking crisis,recession,jobless among workers,on bail out short gap measures to this great news website.
Thanks for publishing it.
Please understand that, I am honors graduate,with sales and marketing qualifications and with very solid experiences to these fields.
After briefing of my some sound knowledges on this subject, i want to say some points by way of writing to you and to Reuters commerce website editors.
You are all aware,all existing economic,social,banking,and political systems are already in shaking positions in many known developed countries.
America,England,France and Germany are in this bad economic map zones.
To specifically to point on south american countries like Argentina,Peru,Chile,and Brazil for future reviews by world known economists,business tycoons,business journalists and by concerned governments with main political parties manifesto for appreciations or critical observations and finally addressing the vital aspects for their economic back to at least normal and latter to strong levels.
Yes,Heavy labor,less international literacy, sub divisions on their societal ways of life,life and living style,some drug lords influences,penetration to youngsters and more slum living conditions are contributed with much political pressures from their internal sides made and compulsory laws for socialistic patterns of governing.
Near by countries,and serious America!s recession ,more social well being of Argentina!s poor people also contributed her more expenses to keep her people from unwanted violence and social,economic frustrations from them.
In these detailed scenes,Socialism had created more day today troubles on their financial systems,spending and day today governance.Policies and actions were diverted to socialism.This results on low production,absent from their productive works, and trade unions on day today fear creating,threatening by mass protests had added their agonies and these made her government weak in changing to real,and favorable climate for more capital based industries and economic generations,and for fine,real outputs from their working forces.
As per my knowledge still strong going,America will not be trapped into Socialist and to Argentina!s so called socialist system under any circumustances.
Mr.Obama may try to reduce some imbalances between salaried and less salaried workers by taxing more on corporate houses and to high tax payers.
That things will not happen.
Major American!s fear on Mr.Obama!s new socialistic thoughts on certain fields may get some supporting results,but later on Americans will not accept it.
Minimum 4-four years or Maximum 8-years by Democratic Party!s role in American economy and in social set up.
America is a great country with capitalistic mode of life from A to Z with very much clear,shining democratic set up.

 

We have reached a stage in capitalism that no other nation in the world (including our own) has ever really reached before; since this is the case, there is literally no legitimate precedent for our current economic problems. As a result, there is no history of which tactics succeed and which tactics fail when attempting to stimulate a downed economy. If this is accepted to be the case, then I propose the following: that a spending moratorium be instituted on all new projects, and that a general slowdown in funding (2%-5%, initially) be introduced to all non-essential (our massive military is probably hands down the most non-essential component of our budget) programs already in place. Following this, each state should have its senators and representatives work together to propose how to raise money without spending any money on anything except infrastructure and R&D. Each team of two senators from each state would then forward that state’s reccomendations to the Senate on a given date one month after the assignment. If they were honest, competent, and intelligent senators, they would probably present the following proposal: Raise taxes on the wealthy. Raise taxes on large businesses, but provide tax credits and other incentives for R&D or domestic build-up of operations. Raise taxes by a flat rate of $20 for every family in the United States that earns less than $150,000. Raise taxes by a very small percentage for every family earning over this amount. Introduce tariffs on imported products based on the amount of C02 released in that product’s construction (“greener” factories would pay nothing).

Although this sounds painful (it is), there is no “easy” way out of this recession. Many politicians appear to be spinning their wheels in the mud of the past because they refuse to see that there is no way out of this recession without going against the grain and asking something of the American people. Sadly, many republicans (and democrats) seem to think we can wish our way out of the recession, magically freeing ourselves from the mire we are in by willpower alone. This is not and has never been the case–money does not grow on trees, it comes from the hardwork of companies and citizens. At one time, long ago, this was not how the United States operated. It is now, and we all need to wake up and realize this if our country is to survive.

Posted by ISUer1 | Report as abusive
 

ISUer1 if we U.S. did as you suggest unemployment would go even higher, and more jobs would go overseas. Higher taxes on the rich transfer to fewer jobs. Higher taxes on corporations equals less jobs in the U.S.. And less money for the military means lower national defense.
How about we control spending on the socialist programs. Encourage the people who make jobs to keep them here and pay well. And have all bill that go through congress/house that use money for pet projects of congressmen/women be approved by the populist. Just to name a few things. Painful, yes.

Posted by John | Report as abusive
 

Wake up and smell the coffee everyone. A new system must emerge from the mess that U.S./British capitalism has made. One that excludes the temptation of empire building. Whether military or hegemonic, the grab for power eventually becomes cost ineffective. It is similar to building an economy that relies on exports for growth. In time the importing countries can no longer sustain consumption because of inflation trade imbalances causes them. The exporting economies then recede.

Self sufficiency and balance of trade are what is needed for all nations. Fixing currency exchange rates would also be helpful. Breton Woods worked fine. The U.S. penchant for war caused Fort Knox to hemorrhage gold in the 1960s to balance international currency exchange. Nixon responded by canceling the agreement. This and the repeal of Depression Era regulation has brought the world economy to a precipice above the abyss.

It is time to face the real challenges to human survival. Global warming, drought, famine, shelter, education and pollution are choking the planet. War and the industrial age are the catalyst of these scourges.

Posted by Anubis | Report as abusive
 

Anubis – A drive towards self-sufficiency and fixed exchange rates would make the economic situation worse. A more specialised division of labour is a key driver of economic growth and a policy of self-sufficiency (i.e. protectionism) would damage this process. Exchange rates are better left to the market, as attempts by governments to manipulate them create distortions (as shown by the recent global imbalances between the US and China).

 

Wake up and smell the coffee, Anubis.

Recessions are a natural cycle of capitalism. From the collapse, new opportunity for growth arises. One man’s bankruptcy becomes another man’s bargain. It is what you would call a self-perpetuating system.

Look around you. Do you see a system in collapse? No. A recession and a system collapse are two different things. A collapse indicates destruction. A recession is a period of renewal.

Even now the recovery looms, and capitalism once again rises from the grave to feast on the living.

If you hate capitalism, good for you. But if you think that you will see something better coming around, you are in for another decade of disappointment. There were people crowing the death of capitalism back in 1929. And 1952. And 1997. And yet by magic, the system rebuilt itself every time.

And you know what? Economic theory figured this out centuries ago.

Posted by Anon | Report as abusive
 

Anonymous,
Taxes will be through the roof democrat or republican. The Federal Reserve will run the printing press out of ink under a D or a R. NAFTA will continue under both, recessions happened under Obama/Bush/Reagan/Carter.

Political party is completely inconsequential.

47% of money earned in this country goes back to government one way or another, voting for either mainstream party won’t get us anywhere.

Posted by Michael Ham | Report as abusive
 

Well, looks like Argentina was good enough for the republican governor of SC. This article floats a lot of bunk as do the above comments.

Economic activity that determines national infrastructure policy, or has a significant time delay between purchase and delivery or a significant time delay between an economic activity and an undesired effect are all best handled through a monitored administrative organization ( also known as “government”).

An efficient, well monitored government is best suited to address transportation and health issues. Short term, simple economic activity like selling hot dogs or plasma TVs is best suited to private entrepreneurs. US economy and culture will again flourish only when we achieve the magic 10% or less Republicans.

“Don’t fear socialism. Fear anti-socialism.”

Posted by IKnowNemus | Report as abusive
 

Considering the full scale ‘invasion’ of South (specifically: Central) Americans to the United States, this could be an unfortunate reality sooner rather than later. Many factors are to blame, however, it saddens me that we could already be on the precipice of a slow collapse of American society.

To detractors of this analysis: sometimes the truth hurts.

But perhaps they have a better quality of life in Argentina? Something intangible and not quantified by statistics. The GNH factor. Gross National Happiness.

Posted by Drew | Report as abusive
 
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