America Goes for Broke

Friday, June 25, 2010
By Paul Martin

Argentina was once an economic marvel of the New World — but no more. Is the United States in danger of following a similar path to economic ruin? Jim Powell fears so.

By Jim Powell
FFF.org

Amidst a multitrillion dollar spending spree, President Obama apparently believes it’s inconceivable that a mighty nation such as the United States could go broke.

Yet France, once the most powerful nation in Europe, went broke and was plunged into a revolution that consumed the king and queen. Germany was bankrupted by reparations following World War I as well as the ruinous costs of sustaining money-losing, government-run enterprises (particularly railroads). Chile’s socialist regime was bankrupt during the early 1970s. In recent years, Thailand, Korea, and Hungary were bailed out by the International Monetary Fund. Russia, Ecuador, Pakistan, and Ivory Coast have defaulted on their debts.

Argentina is probably the most intriguing case for Americans now. Argentina is currently broke, and last year President Cristina Fernandez de Kirchner seized private pension funds in a desperate effort to cover government budget deficits.

Argentina has been in trouble for so long that it’s easy to forget that from about 1880 until World War I it ranked among the world’s wealthiest nations. The most lavish buildings in Buenos Aires date from that era. They include towering, ornately embellished monuments in the classical style, such as Banco de la Nacion (1888), Palacio Municipal (1891), Casa Rosada (1894), Hotel Paris (1895), and the National Congress (1906). Buenos Aires business barons dined at the turn-of-the-century Jockey Club, whose lavish rooms were decorated with tapestries and gilded mirrors. Writing about Buenos Aires in 1914, the American minister G.I. Morrill marveled at its sophistication:

An afternoon walk shows the city very much like Paris in its architecture and fashionable stores. At night it is a big white way with electric lights blazing a trail to the light-hearted cafes and theaters.

James Bryce, the British author who wrote a great deal about the Americas, gave a similarly enthusiastic account in 1916:

All is modern and new; all belongs to the prosperous present and betokens a still more prosperous future.

Argentina prospered thanks to booming exports of beef, wheat, and wool. It was endowed with some of the most fertile land on Earth. Immigrants from Spain, Italy, Germany, and elsewhere powered a dramatic economic expansion. Foreign investors expressed their confidence in Argentina by financing railroads and heavy industries.

But politicians were beginning to disparage Argentina’s remarkable market economy. Radical Civic Union leader Hipólito Yrigoyen, known as “el polido” (the hairy armadillo), talked about government intervention in the economy and won the 1916 presidential elections. He didn’t actually do much, other than keep Argentina out of World War I and enable the country to prosper by exporting its valuable commodities to belligerents. Elected again in 1928, he proved unable to deal with unrest resulting from the Great Depression, and an army coup forced him out of office two years later.

Argentines responded to the Great Depression by raising tariffs that shielded local industries from overseas competition. This was intended to promote industrialization, but competitive companies failed to develop behind tariff walls, and the tariffs forced farmers to pay more for manufactured goods, undermining the natural advantages of Argentine agriculture.

The rise of Juan Perón

In May 1943, a group of military officers, known as Gruipo de Oficiales Unidos, issued a declaration of Argentine nationalism. Among them was Juan Perón, an influential 47-year-old colonel. “Germany is making a titanic effort to unite the European continent,” they wrote. They vowed to make Argentina supreme in South America. The following month, they overthrew the conservative government of President Ramon S. Castillo and selected the tall, charming, and impulsive Perón to be the new government’s labor minister.

A teacher’s son, born in Lobos, October 8, 1895, Perón had launched his career as a teenage army cadet. From 1939 to 1941, he had served with the Argentine embassy in Italy. He admired Mussolini and Hitler for policies that he believed could help promote “social democracy” in Argentina. He recognized that to further his ambitions, he needed a power base. As labor minister, he was able to assert power over unions and manipulate them to help expand his own power. In 1945, he issued a regulation requiring that collective bargaining agreements be approved by the government. He awarded government jobs to union bosses who supported him. He made life difficult for union bosses who opposed him. He publicized everything he did for unions. His lover, Eva (Evita) Maria Duarte, a rancher’s daughter, became a popular radio personality.

Alarmed that Perón was emerging as a political threat, the military arrested him on October 12, 1945. Some 300,000 union members gathered in front of the Casa Rosada, the government’s main office building, to protest his arrest. He negotiated for his release and for a cabinet filled with his supporters. He was freed on October 17, thereafter celebrated as Loyalty Day.

The military agreed to hold presidential elections on February 24, 1946, and Perón won with 52 percent of the vote. His battle cry was economic nationalism. He introduced a Soviet-style five-year plan. He established a government monopoly of the export trade: farmers had to sell their commodities to the government and accept below-market prices, and the government then sold the commodities overseas at higher, market prices. Perón used the profits to subsidize favored industries. He took control of the central bank, the vaults of which were loaded with gold bars. He went on to nationalize the insurance industry and grabbed assets in its portfolios. He nationalized aircraft-construction companies, oil companies, and commercial shipping companies. He nationalized the British-owned railroads and telephone system.

Perón maintained the support of labor union bosses by making sure their members received benefits regardless of their productivity. He ordered employers to pay one month’s wages as a Christmas bonus. He decreed more national holidays. He launched a government-run retirement program like Social Security. He subsidized summer camps and rest homes. At the same time, he insisted on controlling union decisions about strikes and other labor policies.

Consolidation of power

The more power Perón acquired, the more inconvenient the Argentine constitution became. Enacted back in 1853, it specified some limits on what the government could do. Most inconvenient was the one-term limit. Since Perón’s supporters controlled both houses of Congress, he simply rewrote the constitution, and the Argentine congress rubber-stamped it. The new constitution went into effect March 1949 without the pesky term limit. The constitution also enabled Perón to gain arbitrary power during a “state of siege.” Gone was an 1853 provision protecting private property. Perón’s constitution said that “private property has a social function.… It is incumbent on the State to control the distribution and utilization of the land.” The new constitution declared that minerals, petroleum, coal, waterfalls, and other natural resources were “inalienable property of the Nation.”

Perón and Evita, who by this time had become his second wife, encouraged a personality cult to bolster their power. They appealed to the “descamisados” (“shirtless ones”), who were the putative principal beneficiaries of Perón’s policies. He staged vast, orchestrated rallies that promoted his socialist-fascist doctrine, called justicialismo. She established the Eva Perón Foundation to extort contributions from businesses, distribute some proceeds to the poor, and promote their personality cult. Her supporters hailed her as “the Mother of All Argentine Children.”

Journalist Philip Hamburger observed the personality cult first-hand during the mid 1940s. “Everywhere I heard the same stories,” he wrote in The New Yorker.

How Señor Perón is at his desk each morning by 6:30 and does not leave until 7 or 8 at night; how Señora Perón arrives early at her office in the Under Secretariat of Welfare and Labor; how she receives from 10 to 20 delegations of farmers, laborers and sheepherders a day; how she attentively listens to their problems and comforts them with advice or a promise that their demands will be granted; how she has worn herself to the point of anemia by her untiring social work; how, when she travels around the countryside, she is greeted as though she were a saint.

On Loyalty Day, October 17, 1951, Evita declared, “I ask you today, comrades, only one thing — that we will all swear publicly to defend Perón and fight to the death.” She died in 1952 of cervical cancer, and to this day people leave flowers at her family vault in Buenos Aires.

The personality cult, however, couldn’t avoid the economic crises that were a consequence of Perón’s policies. Government spending led to inflation, which disrupted the economy and discouraged long-term business investment. Coddled by subsidies, Argentina’s nationalized industries stagnated. Burdened by taxes to pay for industrial subsidies, agriculture slumped, and Argentines, who before Perón had excelled as world-class producers of wheat and beef, had to endure coarse black bread and a meat shortage. One writer commented,

By 1953, there were fewer paved roads than in 1945, neon lighting was curtailed, and shop window displays were lit up with kerosene, while there were fewer cars per head of the population than in 1929.

Argentina dissolved into chaos. The country was rocked by strikes. Coup attempts spurred Perón to further concentrate power. He kept weapons out of the hands of his supposedly beloved descamisados. He blamed speculators for his troubles. He jailed opponents and padlocked their presses, including La Prensa — among the most influential Argentine newspapers. His supporters burned Catholic churches and such bastions of the aristocracy as the Jockey Club.

“During the dictatorship,” recalled Argentine poet Jorge Luis Borges, “they sent police to monitor my lectures, fired me from my small library job, and named me poultry inspector.” He added, “I resented Perón making Argentina look ridiculous to the world.”

The economic turmoil caused by Perón’s inflation, price controls, exchange controls, interest-rate controls, trade restrictions, and nationalizations led to political turmoil that weakened his grip on power. In 1955, the Argentine military pulled off a successful coup against him, and he was sidelined for the time being. Union bosses, however, remained powerful, and union members’ pay increased faster than productivity, which caused more economic problems.

Perón’s successors

Meanwhile, a home-grown socialist theoretician mounted an intellectual defense of government intervention that dominated public policy debates in Argentina. The theoretician was Raoul Prebisch, born in Tucoman, Argentina, April 17, 1901. He earned an economics degree at the University of Buenos Aires and was a professor there from 1925 to 1948. Over the years, he held a number of positions at the United Nations. His principal idea was that free trade enabled rich countries to exploit poor countries. He rejected Adam Smith’s observation that peaceful trade was mutually beneficial. Prebisch argued that the “terms of trade” worked against the “Periphery” (agriculturally based poor countries) and in favor of the “Center” (industrialized rich countries). Hence, his claim that by exporting agricultural commodities and importing manufactured goods, the Periphery impoverished itself. He insisted that the only way the Periphery could gain an equal footing with the Center was to develop its own industries behind tariff walls. He viewed foreign exchange restrictions as self-defense against the Center. He urged Center countries to give the Periphery foreign aid as a way of compensating for their supposedly unjust advantages. Third World dictators loved the idea of free money. But Perón had pursued the kinds of policies Prebisch favored. They flopped in his homeland and everywhere else they were tried, as it turned out.

After Perón’s overthrow, there were three military rulers, then politician Arturo Frondizi. He tried to cut the bloated railroad workforce by 75,000, but union bosses had him overthrown in March 1962. His successor, Dr. Arturo Illia, had a go at trying to reduce government intervention in the economy, but soon he too was gone. Lt. Carlos Ongania asserted military control of the government, provoking strikes and riots.

Exasperated military leaders agreed to set elections for March 11, 1973. Perón wasn’t permitted to run for the presidency, but his stand-in, Hector J. Campora, won and helped Perón maneuver his way back into power — with his third wife, María Estela (Isabel) Martínez de Perón, a former cabaret dancer. Perón promised more goodies for unions, and again he shut down publications that opposed him. Mercifully, he died at 78 on July 1, 1974.

Isabel took over, and the public sector went wild. Money-losing nationalized enterprises expanded their payrolls by 340,000 during her presidency. Inflation hit 335 percent in 1975. Violence escalated, claiming more than 1,000 lives. She was overthrown in a military coup on March 24, 1976.

Runaway inflation

It was common knowledge that government control of business converted it into a vast jobs program, and endless wage demands consumed all the capital. Businesses incurred losses that couldn’t be controlled because executives were forbidden to reduce compensation levels or fire any union members. On the contrary, political pressure actually led to more hiring and bigger losses.

The military couldn’t help manage Argentina’s 353 nationalized industries because officers were in the same racket. The Ministry of Defense sat atop a morass of nationalized military industries. The biggest was Fabricaciones Militares, which was involved with iron ore, chemicals, gun powder, tanks, and much more. The air force had aircraft factories. The Navy operated shipyards. Since the military couldn’t control its own nationalized industries, few observers were surprised that it failed to resolve chronic problems of nationalized civilian industries.

Unable to cut government spending, Argentine ministers repeatedly announced anti-inflation plans that consisted of currency devaluation and controls on prices, wages, foreign exchange, and interest rates. But government printing presses churned out bales of paper money, and inflation skyrocketed. By June 1985, it hit 3,000 percent. The old peso was abandoned, and Argentina adopted a new peso, but since government spending remained out of control, the new peso soon became worthless like the old peso. The new peso was replaced by the austral. Various economic controls caused endemic shortages. Capital flight accelerated amidst worsening economic crises.

In the years since then, a succession of Argentine presidents have had some hopeful moments when market reforms were introduced, but invariably these collapsed because of lobbying from interest groups, especially labor unions. Programs once started became politically impossible to stop, regardless how harmful they proved to be.

Politicians seem to promote government intervention in the economy because they imagine they will gain more control; but intervention causes increasingly serious economic problems that ironically lead to political problems and a loss of control.

Comedian Enrique Pinto, who performed in Buenos Aires variety shows, ridiculed Argentina’s humiliating descent from wealth to poverty. He said, “It took real talent and perseverance to bring down such a wealthy country.”

Americans might have a hard time coming up with solid reasons that something like this couldn’t possibly happen to us.

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