Few things are more dangerous than a badly applied analogy. That was evident in surrealistic speeches two weeks ago at the Summit of the Americas in Monterrey, Mexico. Curiously, however, ideological enemies can apply the same bad policies.
President Bush went to Monterrey to talk about terrorism and free trade, two issues of little intrinsic interest to most of his counterparts in this hemisphere.
Venezuela’s Hugo Chavez and Argentina’s Nestor Kirchner came to grandstand for their political constituencies back home. Mexico’s Vicente Fox and Brazil’s Luis Ignacio da Silva put in defensive appearances to head off anything threatening to their nations’ interests.
All in all, it was a yelling match between the deaf and the unhearing.
Chavez and Kirchner excoriated the United States for the supposedly harmful policies it supposedly has forced on their respective countries.
Chavez made an impassioned argument that the United States, through its purported lackey, the International Monetary Fund, opposes Latin American governments applying the very sort of Keynesian deficit spending programs that President Franklin D. Roosevelt used to get this nation out of the Great Depression. If only Venezuela and Argentina could run big Keynesian-stimulus deficits again, he asserted, they would soon be prosperous and just. Kirchner and da Silva nodded enthusiastically all the while.
This was the fundamental, tragically flawed analogy.
First, while it is a generally accepted myth that New Deal deficit spending ended the Depression, the true historical record is less clear. New Deal deficits were moderate, erratic from year to year, and based on political expediency rather than any reading of Keynes, whose book came out late in the game. Many New Deal programs such as the National Recovery Act and Agricultural Adjustment Act are now viewed as improvised, but counterproductive, stopgaps that did more harm than good.
The Depression ended when Federal Reserve Chairman Marriner Eccles guided the newly reorganized Fed away from the disastrous policies it had imposed from 1929 through 1934, and when military spending in anticipation of World War II created true fiscal stimulus.
The fundamental difference, however, is that the United States in the 1930s was far different from what Venezuela or Argentina are now or ever were. Before the Depression, the United States had been a thriving industrial democracy for decades. Education and health levels were good. Government at all levels had problems of corruption and inefficiency, but was far more effective than that of virtually any South American country, then or now.
The United States had a well-established rule of law with secure property rights and an independent and largely honest judiciary. Millions of Americans knew how to run successful businesses. The overall structure of economic and social institutions made it comparatively easy for businesses to succeed without having to resort to the rent-seeking so pervasive in much of Latin America.
Venezuela, Argentina and Brazil are rich in natural resources and have hard-working populations. They lack, however, almost every other positive factor that the United States had 70 years ago. Without those factors, deficit spending is a weak tool to pull a nation out of a short-term recession. It is ludicrous to think it can foster long-run growth.
No serious economist, including Keynes or his followers, ever argued that expansionary fiscal and monetary policies could make a country grow faster in the long run. Indeed, great evidence shows that the contrary is true. Yet Latin American populists continue to cry that if only they could spend much more than they bring in, year after year, everything would be hunky-dory.
The United States could finance erratic budget deficits in the 1930s, and sustained ones under contemporary Republican administrations, because in 214 years the Treasury never has failed to pay any holder of a U.S. bond. Most South American governments have defaulted on their foreign or domestic debts multiple times over the same period.
Argentina and Venezuela are not poor because of capitalism, the IMF, neocolonialism or globalization. They are not poor and unjust despite having leaders like Chavez and Kirchner. They are poor precisely because such demagogic populists have so dominated their politics. The political culture of Latin America is a more central cause of that region’s poverty and injustice than anything done in Washington, New York or London.
The supreme irony, however, is that while Bush alternately fidgeted and smirked during Chavez’s and Kirchner’s bombast, his basic approach to economic policy is essentially the same as theirs: Cut taxes and/or increase spending to benefit the narrow groups that form your key political support, run big deficits year after year, and everything will somehow be wonderful in the end. George W., Nestor and Hugo really have forged a consensus on this.
The IMF is as harshly critical of current U.S. fiscal policy as it is of Venezuela’s and Argentina’s. The only difference is that two centuries of unbroken U.S. payments to bondholders allow us to thumb our nose at IMF warnings. If you don’t need to borrow from the IMF, that institution is as impotent and irrelevant as the Communist party.
No one in their right mind would lend to nations headed by Chavez or Kirchner. The two must be eating their hearts out as they see the United States glibly run deficits greater than their own nations’ GDPs.
© 2004 Edward Lotterman
Chanarambie Consulting, Inc.