There has been a lot of discussion of newly elected Argentine president Javier Milei’s proposals for economic reform. Much of that discussion has been on how successfully he will implement his ambitious proposals for freeing Argentina’s highly statist economy. He has proposed getting rid of the central bank and putting Argentina on the US dollar standard that, if successful, would bring Argentina’s inflation rate down from triple digits to single digits. He has proposed slashing government spending by as much as 15 percent of GDP. To put that in perspective, if the US federal government did that, it would cut spending from about 24 percent of GDP to about 9 percent of GDP. He has proposed eliminating eleven government ministries and agencies and privatizing many of Argentina’s government-owned enterprises.
What he will achieve is difficult to know. As Danish physicist Niels Bohr said, in a famous line often also attributed to baseball legend Yogi Berra, “Prediction is very difficult, especially if it’s about the future.” But what we can say is that Milei has a highly developed understanding of the most important ideas in economics. He will almost certainly make better decisions and more-thoughtful trade-offs than if he had the low-level, or even zero, understanding that is typical of politicians. A look at some of his pronouncements in interviews shows a sophisticated analytic mind at work.
This is from my latest article for Hoover’s Defining Ideas, titled “New Argentine Leader’s Economic Savvy,” Defining Ideas, December 7, 2023. Javier’s economic understanding is quite impressive.
Read the whole thing.
READER COMMENTS
Thomas L Hutcheson
Dec 8 2023 at 11:05am
Better than the typical politician is a pretty low bar. 🙂
There is nothing in the list of policy idea that shows particularly profound economic insight.
Jon Murphy
Dec 8 2023 at 12:01pm
Well, the post isn’t about “profound insights.” It’s about Milei’s economic understanding.
David Henderson
Dec 8 2023 at 5:40pm
You write:
True. But it’s a pretty relevant bar when we’re talking about someone who’s a politician. Moreover, he’s not just above the bar; he’s way above the bar, as I’m guessing you saw by reading my article.
You wrote:
True. And as I’m guessing you also noticed, (1) I wasn’t discussing his policy ideas: I was discussing his understanding of economics and (2) I wasn’t claiming he had profound economic insight, just that he had strong economic understanding.
On the profound part, though, there is one part that’s profound, given how few economists have made or have seemed to understand the point: namely his understanding of how politicians create externalities. See if you can find that point ever made by Krugman or Stiglitz or even more market-friendly people like Gregory Mankiw. And even if you find them making it once–and I bet you won’t–you won’t find them taking it on, as they should, as one of the standard tools in their analytic kit.
BC
Dec 8 2023 at 9:15pm
Milton Friedman basically makes this point when he talks about the four ways to spend money, although he doesn’t use the term “externality” explicitly. He points out that policymakers spend other people’s money on behalf of yet other people, and that is the least efficient of the four ways. Because policymakers spend other people’s money, i.e., costs are externalized to the policymakers, policymakers tend to not to spend frugally much like polluters don’t economize on pollution of other people’s property. Also, because policymakers spend on behalf of others, i.e., benefits are externalized, then policymakers tend not to spend the money in the way that would most benefit those external beneficiaries.
Thomas L Hutcheson
Dec 8 2023 at 7:22pm
True. I did understand you to be saying that Miele has good understanding on the basis of the policies he uses that understanding to propose. Otherwise, why even mention the polices?
David Henderson
Dec 9 2023 at 3:33pm
You wrote:
I didn’t say that at all.
Jon Murphy
Dec 8 2023 at 11:24am
Well this is good to hear. I don’t know much about his non-economic policy ideas, but at least when it comes to economics, Milei is quite competant. That makes the comparisons to Trump, at least along this dimension, unapt.
Jim Glass
Dec 10 2023 at 1:43am
“Argentina’s Milei on Dollarization, Central Bank, China (Full interview in English)” — Bloomberg: https://www.youtube.com/watch?v=fhqq3zDW6E0
Milei is light years ahead of Trump in every direction. In the interview above, when asked what he thinks of Trump, see how deftly he sidesteps the question. Have you ever seen Trump deftly sidestep anything? 🙂
Milei is very like Trump in one way, he has massive experience on TV and in media and really knows how to use it to make a populist impact. As to his economics…
David Seltzer
Dec 8 2023 at 3:21pm
From what I’ve read, Milei seems to have a firm understanding of Sowell’s dictum, “There are no solutions, only trade-offs. Avoiding the search for a perfect solution takes opportunity costs into consideration.
Matthias
Dec 8 2023 at 9:14pm
You discuss Cantillon effects in the article.
I’m very suspicious of them. Your description of how they are supposed to work makes sense in a ‘hydraulic’ economy. But as soon as you through expectations into the mix, it’s not clear why people wouldn’t anticipate the highly predictable effects of new money.
All else being equal, you’d expect some price increase all over the economy as soon as the coming new money becomes reasonably certain? When the new money actually enters the economy for the first time should be a non-event?
Jon Murphy
Dec 9 2023 at 2:38pm
Just because something is highly predictable and expected doesn’t imply people will immediately act. They may prepare (assuming they are aware) but the effects will still be staggered.
For example, tonight where I live we’re supposed to get some pretty severe thunderstorms. I’ve taken some precautions (getting my errands done earlier). But I’m still not going to shut my patio door and windows until the storm arrives. To do so now wouldn’t make sense.
But Cantillion Effects are very real even outside a “hydraulic” economy (recall he, and Hume, were writing centuries before Tinbergen developed and formalized the hydraulic model). Time matters. It takes time for information to develop and disperse. Likewise, it takes time for money to disperse. So, even if we know something is coming down the line, we’re still faced with the noise from inflation: am what I am seeing a real (ie relative) price change or just inflation? The answer to that question is what matters here
Matthias
Dec 10 2023 at 7:15am
Maybe, but that dispersal of information really is about expectations. And it starts as soon as the expectations become solid, and that’s necessarily when the money hits the market. And there’s also no solid reason to expect that the dispersal of information will be related to ‘where the money flows’.
It’s mostly about which parts of the economy have the least sticky prices.
Making this concert of expectations work well is one reason to have clearly communicated central bank policies and targets. (Or rather more gwnerally having clearly communicated monetary policies, since your country doesn’t need a central bank.)
You are right that there are some uncertainties. But you would need to explain why you expect people to make systematic, biased errors of underestimating when forecasting inflation.
Jon Murphy
Dec 10 2023 at 7:43am
Except that prices are sources of information.
No need to rely on systemic, biased errors. Simple probability will do. Rarely, if ever, are people subject to information directly from the reports the Fed reads to help set monetary policy. Rather, we are subject to the financial news’s interpretation of a editors interpretation of a press release author’s interpretation of the meeting minute taker’s interpretation of the Federal Reserve Board’s interpretation of the reports’ authors’ interpretation of the information. At each step, there is some probability of error. Consequently, the odds of the message getting jumbled increases. Indeed, in this situation I just laid out, if there is a 5% error at each step, by time the information reaches the end user, there is a 26.4% chance the message gets scrambled and, consequently, people will not have “correct” expectations.
Matthias
Dec 10 2023 at 6:35pm
Yes, prices are an important part of how information gets transmitted.
But you don’t have to rely on the prices you paid. You can look at how prices in other parts of the economy behave to inform your own expectations about the future.
You are right that few people look at primary information, and that mistakes are possible. But noise traders aren’t much of a problem, and are even good, as they drive up the rewards up for grabs for well informed people.
The article talks about Argentina, but you bring up some US context. We can go with that. In the US you have the TIPS spread, which is essential the difference in price between inflation adjusted government bonds and those not adjusted.
FRED helpfully prepared graphs for the 5 and 10 year inflation forecasts implied by those prices. I don’t need to read any news and figure out how to interpret them, I can just look at the graphs and read the relevant numbers.
And those forecasts don’t need to wait for any money to actually hit the economy. They can anticipate. (And yes, the TIPS spread is calculated from real prices that someone paid. But there’s not hydraulic model of money working it’s way through the economy trade by trade, sector by sector.)
In Argentina the situation is arguably simpler:
They currency is so useless, that they can treat the real value of the USD as approximately constant in comparison and everyone is hyperaware of the (black market) exchange rate and how it’s developing. Anyone who borrows will likely be aware of differences in interest rates, which is also a market measure of expectations of how the exchange rate will develop.
No need for individuals to track press releases by the central bank to form useful and accurate expectations.
Jon Murphy
Dec 10 2023 at 7:44pm
Yes, and that is precisely why Cantillion Effects come into play
Roger McKinney
Dec 11 2023 at 10:06am
“it’s not clear why people wouldn’t anticipate the highly predictable effects of new money.”
It should be clear. Few people are economists and few mainstream economists relate inflation to the moneyvl supply. Fewer think long term. Mises wrote that the economist’s job is to convince people to look up and consider the long term once in a while.
Pierre Lemieux
Dec 9 2023 at 3:59pm
David: Your Hoover piece is interesting. There is one point I would challenge, though. Baumol’s definition with the “directly” qualification perhaps avoids my critique, but not Mankiw’s.
An externality is indirect, incidental, unintentional; otherwise, there are externalities everywhere. If I kill a customer in the crossfire as I am robbing a bank, it may be considered an externality. But if I kill him because he pull out his pistol, it is not an externality. Similarly, the fear I would have created in all future bank customers’ minds would be an externality, but not the death of the teller who refused to give me the money. Another example I give in my Regulation article on externalities:
It is true that this distinction depends on the contour of what is unintentional, incidental, or indirect. It is also true that it is often not made explicit in treatments of externalities: E.J. Mishan mentions it in passing towards the end of his Introduction to Normative Economics. All that further illustrates the general shakiness of the concept of externalities.
But if you take seriously the distinction mentioned above, it significantly reduces the number of government externalities. The government knows that it will harm homeowners when expropriating them to build a parking lot, but it does not do it for that purpose–just as the paper mill only indirectly dirties your lungs in the process of manufacturing paper.
Roger McKinney
Dec 11 2023 at 10:08am
Great article! I loved the section on fascism and think the US is more fascist light than anything.
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