New Macroeconomic Lessons From the recent Past: Recent Concise Notes regarding Argentine Macroecomic mistakes from inflation stages

New lessons about the Argentine macroeconomic behavior have shown us since the last ten years at least. But, why do we consider that the current situation is a set of mistakes? It is an interesting question for several reasons. Mainly, because some academic economists, and policy makers, especially on the government side, have argued that Latin American Developing countries has a complex behavior regarding its macroeconomic aspects, and its consequences are problems which have been in Argentina for the last years. Assuming this, we consider that there is a misconception to explain the current situation. Especially if we note that the Argentine macroeconomic maladies do not exist in other developing countries. From this regard, inflation is one of the problems which affects our country although it is an almost unique situation in the world.   

On the whole, Argentina has several problems as a consequence of the macroeconomic mismanagement, i.e., a short run economic policy. From our point of view, these mistakes have generated from wrong and unsustainable macroeconomic policy, and we have to take it as lessons for the immediate future.

First and foremost, from our point of view, policy makers have to view the economic growth as a balance in all economic aspects such as demand and supply side. On the other hand, the persistence of the strong acceleration in growth may be unsuitable. Although, there is special cases like China, the faster the economic growth, the higher probability of economic distortions. Thus, we agree with balancing economic growth instead of the deep economic accelerations. Policy makers have to generate a balance in the dynamic of the economy. From these respects, the following are our main arguments about it.   

Firstly, we consider that a consistent push demand and the income policy have been negative, because it has been unsuitable according to the supply dynamic. Especially if we see the long term, because their scope has been ineffective, and we have to think on a systemic perspective when we manage the national macroeconomic in an integrated economic framework. From this perspective, the economic history has great resources to explain that the persistency of the increase in the public and private expenditures, combined to the expansion of the income policy, generate a dangerous source for the future. In such framework, we remember the so called structuralism view which considers that in economies like Argentina, there is a deep external economic restraint from the current account of the balance of payments as a result of applying an industrial policy which needs imports goods like machines. So, if the income increases faster than the supply´s fundamentals at a high persistence, there will be two stages.

The first is related to the increase of inflation. At the very beginning, people do not recognize the loss of their real income, as a result of the increase of the nominal wages. This effect is called money illusion. However, the growth of goods prices would higher than the income. Thus, there will be great inconsistencies on the nominal economic variables side. For instance, a cup of coffee may be more expensive than a monthly tax public service.  

The next economic stage is associated with the appearance of external economic restraints, and the fall of the economic growth. In such framework, there are financial constraints, because of foreign money. Additionally, the pursuit of controlling the national inflation may generate several policies such as exchange rate controls, and limitations on prices. Although these policies may be effective on the short run, the sustainable on the long run will be almost impossible, because of the generation of price inconsistencies which makes difficult the stabilization of nominal variables to one direction. It was noted in several opportunities like in the seventies and eighties. In that time, many Argentine presidents applied this economic policy with negative consequences. The economic policy perspective, that tried to manage the macroeconomic misalignments, had a weak ability to resolve those current problems.

This framework was characterized for less economic tools than the economic objectives, and chaos. Therefore, policy makers thought about solving the macroeconomic instability and economic external constraints by controlling nominal variables like wages, and prices. This perspective could be effective, but motivated more problems. The main problem was the unstable economic dynamic. For instance, if there was an opportunity to adjust prices, not only the retailers remark their prices, but also there was an inflationary inertia that push up prices faster than if there was a stable economy.

This second stage was mainly observed as an inflation process. The key fact was the past inflation which generates inflationary expectations, and therefore, a critical inflationary inertia. Thus, there are two possibilities to stabilize the macroeconomic nominal variables: on the one hand, an orthodox program that attacks some nominal variables such as exchange rate, quantity of money, etc., and on the other hand, a systemic program that not only regulates nominal variables, but also the economic expectations.

The first option is very famous in Latin America. The political economy of the last century was characterized by this type of programs such as the so called IMF economic programs.

The second type is wider than the first, because its perspective is systemic. A suitable view to attack an inflation process should be related to the administration of several economic variables. It is associated with a socio-economic agreement to pursue the inflation deceleration. The macroeconomic policy should responsible for coordinating domestic price makers like interest rates, wages, amount of money, public expenditures, domestic prices, and corporate investment in many economic sectors. It could be possible by the coordination of expectations and building an agreement to modify prices once for all, and then, fixing it. From this perspective, we think that this macroeconomic coordination should minimized the growth of the inflation tax, and then, stabilizing the inflation dynamic in the medium run. This process is gradual but suitable for the objective. Additionally, we have to recognize that the essential tool to this program is the political side. The core of a macroeconomic program is the political aspect, i.e., the power of the program.

Finally, as in life, we have two alternatives. One is related to the short run. Another is an agreement which it is built step by step where the way is large, and unfriendly, but the end could be successful.