Dr Hale has been weighing his snowbird options of late according to his latest communication. He writes::
“When I opened up my laptop today, my first thought was to ask why I bother writing to you in the first place. Given the big freeze we’ve had up here in New England and given my obsession with Argentina, it should make far more sense to move down for your summer and fall, thus satisfying my curiosity on a much broader front than your conscientious but limited explanations (especially since I see that low-cost international flights will be starting up this month). So what, you might ask, gives me pause? Basically your horrendous prices, which are steep even in dollar terms and which make the whole economy a non-starter in my opinion.
“Over the years I’ve read so many articles by economists explaining that inflation is the effect and the fiscal deficit the cause – a deficit which can only be financed either by directly printing money (whereby the dollar preserves and enhances its value) or by borrowing abroad (which debases both currencies since dollars thus lose their scarcity value but the pesos still have to be printed to pay for them). More often than not, their proposed solution is to make the state lean and mean by dumping a couple of million surplus public-sector employees as if this would have no further consequences. My main question today concerns President Mauricio Macri starting the week with a state reform announcement – was this even nibbling the bullet and what more could be done? Oh, and you still owe me a fuller rundown of Macri’s European tour.”
My reply:
“The central theme of the fiscal deficit has recently been joined by confirmation of a record trade deficit last year but your reluctance to come here for a first-hand inspection because of the prices evokes a third and even bigger deficit reaching 11 digits – namely tourism. This is almost entirely the result of local prices, which have induced some four million Argentines to spend minor fortunes in Chile and elsewhere on bargain shopping sprees (rather than to see Pope Francis), while the potential for international visitors such as your good self has been reduced to around half that figure. Too much of the debt incurred goes toward subsidising these trips abroad rather than upgrading the economy.
“Macri’s Monday announcements (terminating around 1,000 political nomenclatures, a crackdown on nepotism and a pay freeze for senior officials) are purely token in any fiscal terms – rather than one percent of anything, the 1.5 billion pesos thus saved are more like one percent of one percent of the economy. Slashing senior officials by 25 percent sounds impressive but in real terms only takes Macri back to the bloated levels at the start of his presidency, neutralising his own contribution.
“The crackdown on nepotism reminds me of G.K. Chesterton’s: “Where does a wise man hide a leaf? In the forest. But what does he do if there is no forest? He grows a forest to hide it” (derived from a Father Brown story where a British soldier of fortune in Brazil starts a hopeless battle in order to produce plenty of dead bodies and thus conceal a murder). Embattled over the irregular employment of a domestic servant with the error only compounded by transferring her to the trusteeship of SOMU longshoremen’s union, Labour Minister Jorge Triaca also faced accusations of nepotism over the senior appointments of two sisters. By making an issue of nepotism throughout his administration, Macri thus takes the heat off Triaca, opting to postpone the apparently inevitable exit of his top union negotiator during the collective bargaining season at least by proposing corrective action on a broader front.
“State reform cannot be postponed indefinitely but I see no immediate urgency to taking more serious steps in that direction while less painful alternatives remain available. As it happens, the most obvious avenue for savings still offers plenty of slack – if this year’s fiscal deficit reduction target under the gradualist approach is 0.7 percent of gross domestic product (from 3.9 to 3.2 percent of GDP), the subsidies for gas and electricity household bills alone still account for 1.2 percent of GDP while the serious updating of transport fares commencing this month mostly lies ahead. The fact that utility bill subsidies reached 3.3 percent of GDP under Kirchnerism whereas the current ‘social tariff’ scheme for lower-income groups absorbs a mere 0.3 percent (even allowing for certain shortfalls in the system) shows how much waste can be removed.
“Yet while the social suffering is more subjective than real, these corrections of relative prices nevertheless carry a heavy cost by delaying the downward trend for inflation – along with the upward float of the dollar, the price hikes for various public and private services (including mobile telephones and prepaid health as well as transport and utility billing) mean that this month’s inflation will be very close to last February’s 2.5 percent, thus removing any appearance of progress. Not the best data for trying to impose a 15-percent wage increase cap on collective bargaining. This also makes it harder for the Central Bank to lower interest rates credibly but their almost recessive levels conspire against growth.
“Last and probably least, the promised final summary of Macri’s European tour once complete (not possible last weekend). Really not too much to declare at Ezeiza Airport with the most striking detail France’s entirely predictable non to any fast track for the European Union-Mercosur free trade agreement – Macri thus suffered an entirely gratuitous defeat although others might argue that he has to push hard to achieve anything. At the other end of the tour Russia’s Vladimir Putin seemed mostly absorbed in his own re-election (his main interest in life when not interfering with the elections of other countries – a list not including Argentina, which would seem to indicate a low priority). Macri enjoyed a positive reception at the World Economic Forum in Davos but not on a par with his last appearance in 2016 when he co-starred with then fellow-newcomer Canada’s Justin Trudeau. Argentina also seemed on a different wavelength to the rest of the world – while Davos was very much geared to The Fourth Industrial Revolution in line with the title of Forum founder Klaus Schwab’s book, Macri appears stuck in the last century as he prepares to deal with dinosaur trade unions (to the extent of being unable to sacrifice an untenable labour minister).”
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