A poor suburb of Bogotá, Colombia, in 2020.Mauricio Duenas Castañeda / EFE
It is easy to overlook the lessons that Latin America can teach the world regarding the management of economic crises. After all, what can a region teach in which one or more economies are always experiencing severe difficulties? Crises are the norm. In fact, the main problem in Latin America is not its chronic economic instability, but the lack of capacity shown by its leaders to learn from experience. And his propensity to get excited about public policies that, it is known, always end badly. Ideological necrophilia, the passionate love for dead ideas, reigns among politicians and rulers of the region.
This, however, does not mean that there are not Latin American lessons worth taking into account by countries with advanced economies. In fact, there is some advice from the Latin American experience that President Joe Biden and his team would do well to keep in mind.
The first is not to disrespect the fiscal deficit. The idea of belittling what happens when a government spends far more than it collects in taxes has a long pedigree and is the subject of fierce academic debate that has not been resolved. In 1932, John Maynard Keynes argued that economic recessions can be treated by substantially increasing public spending. In 2002, then-US Vice President Dick Cheney blandly asserted that "the deficit doesn't matter." The debate is still alive. In 2020, economist Stephanie Kelton published a book called
The Deficit Myth
. In this
best seller
, the heterodox economist explains why the so-called Modern Monetary Theory maintains that a government that controls its currency can increase public spending as much as it wants. Again: the fiscal deficit does not matter.
It is obvious that President Biden has decided to bet that, in effect, the huge increase in public spending that he drives is not going to cause collateral damage to the economy. More specifically, you are betting that it will not be inflationary. Or that having some inflation is not serious. Or that, in any case, this increase in prices is temporary. In addition, if it becomes very high and prolonged, inflation can be reduced with the economic policy instruments available to the Government. Economists call this
fine tuning
, the
fine tuning
of economic variables in order to
cool
an
overheated
economy.
due to the increase in public spending. But more importantly, advocates of deficit spending argue, is that inflation is no longer a problem in advanced economies. For decades, those who predicted damaging inflationary outbreaks in the US or Europe have been wrong. It is thus very easy to ridicule economists who have been announcing inflationary explosions that do not occur for years.
All these explanations that seek to show inflation as a problem that does not exist, have been repeated ad nauseam by Latin American presidents who have rampant public spending, almost always with disastrous results. It turns out that in those countries the deficit has indeed imported. And a lot. The currency is devalued, indebtedness skyrockets, capital escapes, investment falls and, of course, inflation increases and its devastating effects on those who have the least. The United States and other developed countries have conditions and institutions that make them less vulnerable to these ills. But not immune. The complacency that comes from this tolerance for inflation is dangerous.
The experience of Latin America is that once it is rooted in the economy (in prices, contracts, wages and people's expectations), inflation is very difficult to eradicate. And that the
fine tuning
of the economy often fails. And that large increases in public spending stimulate waste, inefficiency and corruption.
It is true that Latin American countries do not control their currency, while having the dollar as a currency opens up possibilities for the United States that other countries do not have. But even so, the fear of inflation is already making itself felt in the country. A survey by
Fortune
magazine
found that 87% of American adults are concerned about inflation. Larry Summers and Olivier Blanchard, two of the most respected economists in the world, believe that the huge spending proposed by Biden will be inflationary. Private investors are modifying their portfolios to make them less vulnerable to inflation.
If deficit spending enthusiasts like Paul Krugman start to cover their backs, it's time to pay attention to the Latin American experience.
This influential Nobel laureate has just written that, although he does not believe that inflation will be a problem, “this does not mean that all is well with Biden's economic program.
It may indeed turn out to be too ambitious. "
Translation: it can be inflationary.
When the economy of a Latin American country destabilizes, its inhabitants pay the consequences.
When the world's largest economy destabilizes, we all pay the price.
@moisesnaim