By JAY HALLEN
The opening decade
of the twenty-first century has seen a slow but distinct decline in American
capitalism. Economic policy has become increasingly overrun by central
planning, redistribution, and government picking of industrial winners and
losers. Beginning about half a century ago, those elements helped sink another
free-market powerhouse—Argentina. While Barack Obama is no Juan Perón, the
president’s misguided policies threaten to squander our economic advantages,
just as Perón’s did in Argentina.
Government
intervention in the housing market, caused by low interest rates; direct
subsidies, such as the home-mortgage interest-tax deduction; and the market
distortion caused by Fannie Mae and Freddie Mac—the two state-backed entities
that make virtually all home loans now—has helped throw the American economy
into a tailspin. A rerun threatens to occur in the student loan market and perhaps also health
care, two areas where the government now plays an outsize role in financing and
subsidies. Subsidies and bailouts to favored sectors have come at substantial
cost to the taxpayer. The notion of “too big to fail” removes banks’ incentives
for responsible risk-taking, while the Fed’s continued “quantitative easing”
plays to the American consumer’s worst instincts: the over-leveraging that
brought about the current crisis in the first place. Meanwhile, the U.S. Treasury
retains a 27 percent stake in General Motors and refuses to sell its shares lest it realize a
multibillion-dollar loss. But with government-subsidized Chevy Volts losing $49,000 per car, any increase in GM’s share
price seems a long way off.
President Obama’s
response to the Great Recession and then a pallid recovery has been guided more
by “fairness,” a thinly veiled code for redistribution, than by free-market
principles. As it stands now, the top 1 percent of Americans generate 16
percent of the nation’s income butpay 40 percent of the income tax. This isn’t enough
for Obama: he’s pushing for still-higher taxes on those who create jobs while
increasing transfer payments and entitlement spending for everyone else. Recent
publication of a 1998 video in which Obama declares, “I actually believe in redistribution,” helps reveal the
philosophical underpinnings of his economic agenda.
To see the
long-term consequences of these policies, Americans can look to Argentina, a
country that was once strikingly similar to the United States. As outposts of
the “New World,” both were settled by frontiersmen who tamed a wild landscape,
setting the foundation for valuable agricultural and livestock industries. The
frontier spirit contributed to strong federalist traditions, which in
Argentina’s case drove the outlying regions to take up arms against the
dominance of Buenos Aires throughout the nineteenth century. Free trade with Europe
powered both nations’ economies, attracting foreign investment and millions of
European immigrants between 1880 and 1930. By 1930, Argentina’s GDP and
per-capita income rivaled those of Germany, Canada, and Australia. This period
was Argentina’s golden age, and the country remained a free-market bastion
through the 1940s. Buenos Aires was the “Paris of the South,” with a trove of
cultural and architectural treasures that reflected the country’s wealth.
Then everything
changed. As soon as Perón assumed the presidency in 1946, he sought to appease
his political base in the labor unions with dictates of full employment and
wealth redistribution. He incited massive strikes in order to coerce the
private sector into accepting increasingly pro-labor legislation. In a similar
vein, the National Labor Relations Board’s 2011 filing of a lawsuit against
Boeing, which built a plant in South Carolina to avoid strikes and delays to
its Dreamliner, revealed the Obama administration’s willingness to insert
itself into private industrial disputes on labor’s behalf.
Deciding that
Argentina needed industrial “self-sufficiency” more than it needed its
productive agricultural sector, Perón advanced government subsidies to
inefficient manufacturers, protecting them with high tariffs. Predictably,
these actions crowded out agricultural investment, weakened the country’s
profitable export base, and drove unemployed workers to Buenos Aires and into
the arms of state-subsidized factories and their associated unions. Such preferential
treatment recalls the Obama administration’s fascination with green energy and
the $527 million that it squandered in the Solyndra scandal, along with the federal
stimulus bill’s funding of costly boondoggles like California High Speed Rail. The California rail project
is almost guaranteed to lose between $50 and $100 billion, though it’s
difficult to say exactly how much, because the price tag keeps rising. Labor unions, corporate
railroad interests, and environmental extremists—all part of Obama’s political
base—continue their lobbying efforts for the project. Note, too, that when
Perón nationalized banks, railways, shipping, and utilities, he poured revenues
into social-welfare projects, among them the revitalization of a National Mortgage Bank to fuel housing loans.
Sound familiar?
Perónism’s effects
were soon clear. Between 1945 and 1948, Argentina’s $1.3 billion trade surplus
was eviscerated. Argentina borrowed heavily from the United States, forcing the
nation’s central bank to print money to service the debt, devaluing the peso by
70 percent between 1948 and 1950. Political leaders made some genuine attempts
at reform, but Perón’s overhaul of economic institutions and tradition of
central planning proved hard to undo. After decades of high inflation and
continued stumbling from one crisis to the next, the country defaulted on its
debt in 2001 and had to be bailed out by the IMF and other international
lenders.
Argentina’s fall
from grace remains unprecedented in modern history. It was driven by the hubris
of a government that took its country’s affluence for granted and thought it
could manage the economy better than the private sector could. And it shows
what America could look like in 30 years. The size of the U.S. government has
accelerated measurably under the Bush and Obama administrations. From 1980 to
2000, government spending held steady between 30 percent and 35 percent of GDP,
but it jumped to 37 percent after Bush’s second term and is now at 41 percent as Obama’s current term
comes to a close. As government grows, so do annual budget deficits, themselves
a brash assumption that economic growth will continue indefinitely. Interest
rates today are at rock bottom, penalizing those who would save or invest
conservatively. The Fed’s current expansionary policies may devalue the dollar by as much as 33 percent
over the next 20 years.
America’s 2008
recession, aided as it was by government intervention, has pushed the country
closer to becoming a handout nation in which those relying on government for
sustenance and services may soon outnumber those earning the money that funds
these goods. Argentina became such a nation when the government seized control
of the economy, rendering much of the population de facto state employees,
dependent on some form of federal largesse. The recent news that one-third of American households now
receive Medicaid and food stamps complements a report that nearly half of Americans don’t pay
income taxes. Mitt Romney’s infamous “47 percent” comment, while technically
inaccurate—many who don’t pay income tax do pay payroll tax, and seniors
receiving Medicare and Social Security shouldn’t be described as “victims”—was
nonetheless correct in spirit. These trends suggest that the United States is
becoming a nation of “makers” and “takers,” which may someday lead to a
dangerous electoral tipping point. Politicians would be forced to pander to a
vast constituency with even higher taxes and spending, while the political
discourse becomes even further divided between social and business interests.
The Argentine case
study shows that even wealthy New World countries, blessed with natural
resources and a diligent immigrant workforce, can bring ruin on themselves
through economic mismanagement. To restore growth and escape economic
stagnation, the United States must return to its free-market roots, rather than
travel farther down the path of intervention, dependency, and decline.
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