A Lesson in Reaganomics That Could Revolutionize Argentina

13.12.2016 • Central Banks

By Ivan Carrino – The Monday Newspaper (Argentina) –

John Maynard Keynes is, without a doubt, one of the most famous figures in the history of economics. Obviously, the founding father of economics is Adam Smith. Another well-known economist is Karl Marx, who is known for his revolutionary outlook and critique of the market economy. Nonetheless, Keynes holds a unique place among the world’s most prominent economists. 

This is because many people believe – I am an exception – that Keynes, who was English, singlehandedly ended the Great Depression when he recommended that governments all over the world lower interest rates and increase public spending as way to lower unemployment and jumpstart economic activity.

The strategies recommended by Keynes dominated economic policies throughout the second half of the 20th century and all economists came to believe that economic growth hinged on what the government did.

If growth slowed and inflation fell, then the government had to implement “expansionary policies” to rekindle economic growth. If the opposite was true and inflation rose and economic activity grew at a rate faster than was advisable, then the government had to “put the breaks on.”

What Keynesian economists never predicted was a situation in which the economy was failing to grow and prices were simultaneously increasing.  When faced with this scenario, known as “stagflation,” implementing Keynesian strategies is simply impossible.

In the 1970s, especially from 1976 to 1980, the United States experienced a period of stagnation with inflation. Prices were increasing at a steady rate – between 6 and 12%- but the economy was growing at a much slower rate – far below its long-term potential.

To add to the mix, the United States – the world’s economic powerhouse – was burdened by regulation. The most significant regulation was gas price controls. Just like everywhere else in the world where they institute price controls, you found long lines of furious drivers at every gas station. The gas shortages made everyone so desperate that
fighting broke out, as you might remember from several 1970s movies.

At the end of the 1970s, the United States was a victim of Keynesian policies and interventionism. Growth was poor, inflation was increasing and regulation was choking business activity.

It was in this context that Republican Ronald Reagan, a former Hollywood actor, won the election. He pledged to revolutionize the economy by lowering taxes, removing regulation and fighting inflation.

The Argentine economy bears many similarities to the U.S. economy in the 1970s.  After a decade of populism, the economy is
stagnant, inflation is very high and regulation is the order of the day.

In today’s Monthly Report I will tell you all about the “Ronald Reagan Revolution” and its effects on the U.S. economy. This historical analysis will show us if Mauricio Macri will be able, in one term, to undo the damage done during the Kirchner years.

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