Economic Policy Right And Wrong

You may remember from your American history that the event that precipitated the Constitution of 1789 was that the newly independent country could not pay its debts, largely incurred to fight the Revolutionary War.  Under the Articles of Confederation of 1781, Congress had no taxing power, and had to request the states to make voluntary contributions.  Each state engaged in gamesmanship to try to get the others to pay.  The debt was in default, including debt that had been issued to soldiers in lieu of paychecks. 

Somehow our Founding Fathers thought this was a crisis.  Clearly, they had not heard of  "internationally-supported sovereign debt restructurings."  They gave the government taxing power almost entirely to pay off defaulted debt.  While they paid down that debt, they spent not one dime on transfer payments, social security, Medicare and Medicaid, a Department of Health and Human Services, a Department of Agriculture, a Department of Labor, a Department of Commerce, a Department of Homeland Security, a Department of Energy, an EPA, crony capitalism, green energy subsidies, a Department of Education, job training, pension guarantees, disaster relief, and I could continue here for quite a long time.  Worse, much of the debt had been bought up by speculators (today they would probably be hedge funds) at pennies on the dollar, and yet somehow they thought it was the right thing to pay it off at 100 cents on the dollar.  Other than paying off old debt, they spent barely 2 - 3 % of GDP on a few minimal government functions and they reserved the large majority of government functions for the states, who could not issue their own currency, and therefore had very little practical ability to spend much more money than they could promptly raise in taxes.

Result:  the most spectacular economic growth in human history for a good two centuries. 

Today, we have a new model of what to do as a country when you have trouble paying your debts, and that is Argentina.  First, you do an "internationally supported sovereign debt restructuring."  Put up a take-it-or-leave-it 20 or so cents on the dollar for existing debt, and then just stop paying anyone who doesn't take it, even though you are sitting on plenty of money to pay them in full today.  Then get the government into dictating all the minutiae of interactions in the economy.  An editorial from IBD on August 5 lists some of the most destructive recent actions.  For example, in February 2013 the government issued a policy that froze all supermarket prices.  Yup, that'll work!  I guess the supermarkets emptied out, because IBD now reports that Interior Commerce Secretary Guillermo Moreno is "reviving a 1974 law that compels holders of suitable stockpiles of flour to sell into the market at frozen prices."   Sounds an awful lot like the approach that Stalin took with Ukraine in 1932-33.  So when current stockpiles are gone, what then?  Will anyone in their right mind grow the next round of wheat under these circumstances?  Actually, the same IBD article reports that wheat acreage in Argentina has fallen from 15 million in 2000 to 12 million in 2011 to 9 million in 2012.  And then they expropriated the largest oil company, YPF.

Result: Both MercoPress and International Business Times are predicting today recession in Argentina by 2014.   Part of the ongoing slide from riches into poverty.

Meanwhile, Argentina seems to be losing some of its friends in its ongoing court battles to avoid paying the defaulted debt.  After losing in the Second Circuit a few months ago, Argentina has filed a cert petition to the Supreme Court, arguing that, despite having agreed to New York law and waived sovereign immunity, the Foreign Sovereign Immunities Act prevents any remedies from being invoked against it.  Back in the Second Circuit, the U.S. government filed a brief in support of Argentina, but the amicus deadline in the Supreme Court has now passed without their weighing in.   Don't assume from that that our leaders have backed off their views that it is good economic policy for a developing country to default on debt, engage in "internationally supported sovereign debt restructurings," and use the money for massive crony capitalism.  No, it's just that they don't want to be associated with losers.  Don't be surprised to see the U.S. weigh in if and when the Supremes ask.

For the Argentine people, being forced to pay their defaulted debt could be one of the best things that could ever happen to them.  Not so for the government of Argentina, of course. 

UPDATE:  An e-mailer pointed out that an earlier version of this article was in error in stating that the IMF had submitted an amicus brief in support of Argentina's position in the Second Circuit.  There also was an implication that the IMF had been directly involved in Argentina's exchange offer for defaulted bonds, as opposed to offering moral support for Argentina's current position in the litigation.  These errors have been corrected.  For details on the IMF's overt rooting for Argentina, see for example here