One of the lessons learned from Argentina’s economic downfall over the past five years is that government spending in any country, if not kept under control, is sure to create severe impediments to sustained long-term growth.
The Argentine government’s inability, or unwillingness, to reign in its outlays was a significant, if not primary, cause of the disastrous economic situation the country has been experiencing. By not balancing its books, the Argentine government lost the confidence of many citizens who correctly assume that their government is a highly mismanaged, untrustworthy institution. Moreover, the government has crowded out its own people and businesses from borrowing by bidding up the interest rate, effectively stifling entrepreneurship and new investment.
To make the problem even worse, Argentine government officials bent on doing something about the budget situation have been largely unsuccessful in reducing expenditures, and have been equally unable to raise taxes significantly enough to at least make an effort to become fiscally responsible. Argentina has incurred massive debt through this process.
Argentina’s tax-and-spend policy has clearly not promoted economic development. Nonetheless, Argentine politicians who realized that government spending is out of control have been defeated, overthrown, or ruined. Politically, the costs of cutting back have been too much to bear, and programs have been kept in place even though the government is unable to afford them. This has resulted in a crisis of historic proportions.
In a cross-country analysis, Argentina’s government spending as a percentage of GDP is high — it has fallen under 30% only once in the past 20 years, and at times has reached 40%. By comparison, in Chile, a country in relatively good shape economically, only 25% of GDP is comprised of government spending. Even in Brazil, a country notorious for huge budget deficits, spending reaches only about 30% of national output.
All of this points to one clear economic principle: Governments that over-tax and over-spend do more to inhibit growth than promote it. Countries like Chile, which have successfully maintained public spending, are proof that limiting government promotes economic stability and avoids budget crunches in times of recession (when tax receipts inevitably tend to fall).
How did Argentina devolve from being one of the world’s most prosperous countries to chaotic situation it is in today? In the 1940s and ’50s, populist Juan Peron began to create a welfare state, doling out enormous sums of public funds to his favorite causes. When the economy began to struggle in the 1970s, it was very difficult politically to tell the welfare recipients that the plans were no longer economically feasible. Left without any other options, the treasury began to issue debt and print currency to pay for its social programs, which proved detrimental.
So today, Argentina is faced with a daunting task of cutting back on expenditures while maintaining social stability. To date, they have failed to solve this Catch-22.
Americans should remember this lesson whenever new spending programs are proposed: After government has expanded, it is extremely difficult to shrink it in the future. As people grow used to certain benefits they do not easily let them go. With a few exceptions, social programs, when enacted, are there to stay.
The Bush administration is correct in slashing taxes to achieve a more efficient means of governing, but tax cuts are only half of the equation. Rampant government spending can be just as damaging to the economy as high taxes. And in an era of inevitable defense expenditures, the president must look for ways to limit the growth of government in other areas.
The Argentina example is more proof that runaway spending only leads to economic disaster.
— Matthew A. Beem is a native of Memphis, Tennessee. After completing his master’s degree focusing on international trade, he started a telecommunications company in Buenos Aires, Argentina, in 2001.