One incongruous aspect of the New England economist Dr Hale is that he claims to have the world’s most complete collection of Peanuts cartoons, so that he might be interested to know that today is the centenary of the death of the real Red Baron (Manfred von Richtofen, the World War I ace who downed a record 80 Allied aircraft in a 19-month career), perhaps even chilling a magnum of bubbly to mark the end of Snoopy’s antagonist. Be that as it may, this historical tidbit did not crop up in Dr Hale’s email this week:
“In the last six months since Mauricio Macri’s midterm triumph I’ve been watching a continual flurry of utility bill and transport fare updating and wondering why there was so much less pushback than with previous rounds – are we finally seeing backlash now? By the way, I’ve never really understood your concept of ‘regulated prices’ down there – seasonal factors I get and even national health since Obamacare but why regulate certain items within an economy supposedly running according to the laws of supply and demand? If those laws have now been accepted for the gasoline and fuel powering the buses and generators, why not for transport, gas and electricity too? That issue seems to be on the frontburner for this week’s news but how do you see longer-term trends? I see the United States in particular and the world in general as growing strongly this year as a result of Donald Trump’s crassly pro-cyclical fiscal policies but slowing down next year as Trump’s protectionism starts to bite. It looks as if Argentina might end up doing the exact opposite, marching to the beat of a different drum as usual, what do you think?”
“The political noise over these public service increases is more striking because it is not only coming from predictable quarters (thus Senator Cristina Fernández de Kirchner has already drafted a bill for a rollback and a two-year freeze) but also from within government ranks, especially the maverick deputy Elisa Carrió and the Radicals. Macri’s coalition is thus playing the old trick of being government and opposition at the same time (a trick also played by Kirchnerism when in power although more in the form of posturing against the ‘corporations’ supposedly running the country).
“Coalition allies would never challenge government policies if they did not feel that votes were at stake (especially among the middle class with the poorest favoured by the ‘social tariff’). And the voter tends to be especially quirky where this issue is concerned. Almost everybody would readily admit the absurdity of the old populist pricing from a decade-long freeze (a month’s electricity for the price of a cup of coffee etc. and I remember my own disbelief when only last January I only had to pay four pesos for a train ride to La Plata) but an almost equally large majority feel outraged by any adjustment. In my view a key factor intensifying backlash has been the inclusion of transport fares, largely spared throughout the pre-midterm period – it is one thing to receive a shock in the mail every month or so and another thing to have a daily hole burning in a pocket mostly sustained by old wages.
“A pet argument of those questioning these increases among government circles is that if gradualism is enshrined as the official economic policy, why aren’t these adjustments more gradual? But without these steep hikes there could be no gradualism. The reduction of energy subsidies from 3.2 to 1.3 percent of gross domestic product over the last two years accounts almost singlehandedly for the gradualist target of trimming the fiscal deficit by an annual one percent of GDP being attained (primary deficit, of course, since debt service is rising by a greater percentage) – no other ministry has saved on anything like this scale. No wonder Macri is standing by his unprepossessing Energy and Mining Minister Juan José Aranguren, an executive who has always been extremely economical in the application of what little charm he might possess.
“Yet this compliance with the fiscal target in one area while sparing other ministries the odium of austerity also carries a very obvious immediate price in placing another target out of reach – namely, 2018 inflation of 15 percent with retail rises for the first quarter already close to half that figure at 6.7 percent (while wholesale prices shot up 11.8 percent in that quarter due mostly to fuel price liberation and devaluation, thus placing more inflation in the pipeline). Almost impossible to find any forecast below 20 percent with the government’s main hopes pinned on this year’s total at least being lower than last. Having underestimated the impact of major subsidy cuts, freed fuel prices and devaluation, the government now finds that the only way out of this new inflation is to hold down the dollar as an anchor, even at the price of making the economy less competitive – exactly what they were trying to escape when they relaxed monetary policy late last year. You find the concept of regulated prices strange, Dr Hale, but deregulating them seems to be leading to a regulated currency.
“Finally, you might well be right about Argentine and world trends moving in opposite directions. If there are bullish forecasts of world growth reaching four percent this year with Trump’s lavish tax cuts leading the way, Argentina’s 2018 growth might well be little more than half that level due to the drought – although it should be added that the Latin American average is hardly better (the good news is that Brazil looks like being slightly ahead of the region for the first time in years, thus countering Argentina’s sagging trade figures somewhat). But unless the next harvest is even worse, the following year should be quite different. Firstly, 2019 will be an electoral year, always an economic stimulus in Argentina (and especially when the presidency is at stake). Secondly, the region should be adding momentum with average growth close to three percent and Argentina quite likely to top that level. But the rest of the world next year might fall well short of both figures if trade wars escalate amid other geopoliticaluncertainties. Although still a far cry from the war-torn world of 100 years ago when the Red Baron flew his last mission.”