One Economy to Rule Them All

TAKING THE DRUNK’S KEYS:

Milei’s Policy Challenges (luis pablo de la horra, 11/24/23, Law & Liberty)

Milei’s plan to tackle inflation hinges on the radical step of dismantling Argentina’s central bank (BCRA) and embracing the US dollar as the nation’s official currency. This proposition has sparked fervent debate, evident in the strong resistance it faces from politicians across the political spectrum and prominent academics. Nonetheless, there is a widespread acknowledgment that decisive action must be taken to confront the nation’s foremost economic challenge. Does dollarization represent the optimal strategy to set the nation on a path toward monetary stability?

There is no straightforward answer. Dollarization is not the first best choice, as it deprives central banks of the monetary policy tools they typically employ to address economic crises. For instance, in the face of deflationary pressures, a central bank would typically reduce the policy rates to stimulate economic activity. In a dollarized economy, the national central bank is either eliminated (as Milei proposes) or loses its authority over monetary policy, leaving policymakers with fewer resources to use in the event of a crisis.

Furthermore, the elimination of the BCRA implies the loss of its role as a lender of last resort to address liquidity issues within the banking sector, especially during financial crises. Likewise, the process of dollarization demands an ample supply of dollar reserves, and the BCRA has notably reduced its holdings over the past year. This reduction in reserves could potentially introduce complications in the dollarization process. The question then arises: are these challenges insurmountable?

Undoubtedly, the ideal stance for a country or a group of countries is to uphold monetary policy autonomy. However, the effectiveness of such a policy hinges on the existence of an independent central bank endowed with the capacity to promote price stability through judicious monetary measures. This stands in contrast to the BCRA, which has demonstrated a dismal track record in controlling inflation, as evidenced by the recurring inflationary episodes over the past decades.

A less radical course of action could involve retaining the peso while endowing the BCRA with independence from political interference, thereby curbing its tendency to monetize government debt. Regrettably, this option might be hindered by the BCRA’s lack of credibility and the historical inability of politicians over the past decades to effectively address and control inflation by granting independence to Argentina’s central bank.

NATIONALISM/SOCIALISM ISN’T WORKING:

Misunderstanding Milei (g. patrick lynch, 11/23/23, Law & Liberty)

It took almost 80 years. That’s how long Argentina’s economy and society have been in free fall. In some ways, it’s a testament to our greatest fears about democracy and self-government that no political leader had the political incentives and simple nerve to buck the status quo. Eighty years of relentless, grinding inflation and spiraling deficits, followed by defaults, currency devaluations, and restarts before November 19. But finally, the people of Argentina have rejected a failed status quo. Javier Milei publicly won a near landslide by Argentinian standards, and when one considers the probability of Peronist cheating at approximately 100%, the margin was likely much higher. Whether or not the alternative Argentinians have chosen will “fix the situation” is for now beside the point. They have exercised the one option they have—rejecting the incumbents for the promise of something different. That’s all that democracy promises.

[…]

Milei’s main, nay fundamental, policy proposals are all in the context of this backdrop. His firm commitment to abolishing Argentine central banking and cutting social spending is straight out of Ludwig von Mises and Milton Friedman, and it is completely appropriate given the circumstances. The only way that an “anarcho-capitalist” could be elected was in a situation of failed governance and welfare statism so dire that he could crack the door open slightly and introduce ideas unknown by the mainstream intelligentsia, let alone the average Argentine on the street. […]

There are no easy solutions here, which is part of the reason the media and its stale-minded intellectual influences have no solutions to offer. They are left with nothing but vague language, scare tactics, and labeling. What took 80 years to destroy will take decades, perhaps centuries to recreate. Well before he won the first round of voting back in September, Milei was asked what his model for Argentina was. He replied, Ireland. Ireland of course famously cut taxes and regulation, freeing its economy and spurring rapid economic growth. Argentina could do worse than Ireland, but anything different than its current path will be an improvement.

We know what works and what doesn’t. Do what works.

MORE:

Inflation Destroys Rotten Governments (HAROLD JAMES, 11/23/23, Project Syndicate)

In Argentina, the election of a radical self-styled anarcho-capitalist, Javier Milei, as president can be understood as the immediate consequence of the incumbent Peronist regime’s inability to deal with inflation, which has hit an annualized rate of 143%. Milei’s most important campaign promise was to restore price stability by abolishing the central bank and replacing the Argentine peso with the US dollar.

Ending monetary autonomy is obviously a bold and risky experiment that will severely limit government action. But that is exactly the point. Since the previous government tried to do too much, and manifestly failed, voters now feel as though anything would be better than more mismanagement. […]

[R]ussian inflation also surged in 2022, following the full-scale invasion of Ukraine – just as it had done in 2014 after the initial seizure of territory in Crimea and eastern Ukraine. Then, from April 2022, the inflation rate fell for a full year, and almost looked as though it would settle at a respectable 2.5%. But that stability turned out to be an illusion. Inflation returned this summer, following Wagner Group leader Yevgeny Prigozhin’s aborted putsch, and it now represents the greatest immediate risk to Russian President Vladimir Putin’s wartime regime.

Moscow’s city government is candid about this source of angst, and even Putin, who generally avoids acknowledging weaknesses, recently commented on inflation and its threat to Russian families. The Russian central bank has duly hiked its policy rate to 15% – almost three times higher than the US federal funds rate.

As Putin may well know, discontent over prices is often the first sign of an authoritarian regime’s loss of social support.

IMPORTED DISCIPLINE:

Dollarization for Argentina? (Scott Sumner, 11/20/23. Econlib)

1. Dollarization would solve the problem of hyperinflation.
2. If Argentina intends to dollarize, now would be a good time to do so.
3. Dollarization is not a panacea. Argentina still needs Chilean-style economic reforms, and there’s no guarantee that dollarization would lead to those reforms.
4. Dollarization is less risky than a currency board, but not completely free of risk.

There are two reasons why this is an ideal time for dollarization. First, years of hyperinflation have produced a very small monetary base (in real terms, obviously.) Many Argentine citizens have already switched their money holdings from pesos to dollars. Thus the fiscal cost of dollarization would be relatively low. Given Argentina’s severe economic problems, it would still be a heavy lift, but it’s doable if they are determined to make the switch. Fiscal reforms would obviously make the job much easier, and Milei has promised to slash the budget. I certainly don’t think he’ll cut anywhere near as much as promised, but some cuts seem likely.