Latin Advice for Joe Biden

The lessons that Latin America could give to the world, especially the advanced countries, with respect to the management of economic crises.

It is easy to dismiss the lessons Latin America could give to the world with regard to managing economic crises. After all, what could a region that has always had at least one economy experiencing severe turbulence teach? Crises are the norm. In fact, the principal problem of Latin America is not its chronic economic instability, but rather the incapacity shown by its leaders to learn from experience. And its propensity to be enthusiastic about public policies that it already knows will end badly. The necrophilic ideology — the passionate love for dead ideas — rules among politicians and governments of the region.

This doesn’t mean, however, that there are no worthy lessons to be considered by countries with advanced economies. In fact, there is some advice to be derived from experience that Joe Biden and his team should take into consideration.

The first is to not disrespect fiscal deficit. The idea of minimizing what happens when a government spends a lot more than it raises with taxes has a long history, and is the object of a fierce yet unresolved academic debate. In 1932 John Maynard Keynes argued that economic recessions could be treated by substantially increasing public spending. In 2002, then U.S. Vice President Dick Cheney affirmed that “deficits don’t matter.”

The debate is still alive. In 2020 economist Stephanie Kelton published a book called “The Deficit Myth.” In this best-seller, the unorthodox economist explained, with what is called “Modern Monetary Theory,” that a government that controls its currency is able to increase public spending as much as it wants. Once again, the fiscal deficit doesn’t matter.

It is obvious that Biden decided to bet that, in effect, the enormous increase in public spending he decided upon would not be inflationary. Or that if there were some inflation it would not be bad. Or if it happened, this increase in prices would be transitory. Furthermore, in case it became high and prolonged, this inflation could be reduced with the instruments of economic policy at the government’s disposal. Economists call this “fine tuning” — or the fine adjusting of economic variables with the end of “cooling” a “superheated” economy by increasing government spending.

But the proponents of deficit spending argue that what is most important is that — in advanced economies — inflation is no longer a problem. For a number of decades, those who predicted harmful inflationary surges in the U.S. and in Europe were shown to be mistaken. Thus, it is very easy to ridicule economists who for years were announcing inflationary explosions that never happened.

All those explanations seeking to show inflation as a problem that doesn’t exist were repeated exhaustively by Latin American presidents who rampantly increased public expenditure, almost always with disastrous results. It happened that, in those countries, the deficit became very important.

The currency is devalued, the debt increases, capital flees, investments fall — and this is clear: Inflation grows, along with 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 they are not immune. The complacency that comes with this tolerance of inflation is dangerous.

In the experience of Latin America, once it becomes rooted in the economy (in prices, contracts, salaries and people’s expectations), inflation is very difficult to eradicate. The “fine tuning” of the economy usually fails, and large increases in public spending encourage waste, inefficiency and corruption.

It is true that Latin American countries don’t control their currency, while having the dollar as a reference opens possibilities for the U.S. not available to other countries. But even so, the fear of inflation can already be felt in the United States. Research from Fortune magazine revealed that 87% of the adults in the U.S. are worried about inflation. Larry Summers and Olivier Blanchard, two of the the most respected economists in the world, believe that the packet of Biden spending will be inflationary. Private investors are modifying their portfolios to make them less vulnerable to inflation.

When enthusiastic advocates of deficit spending, such as Paul Krugman, begin to take precautions, it is time to pay attention to the Latin American experience. The influential Nobel laureate ended up writing that, although he doesn’t think that inflation will be a problem, “None of this means that all is necessarily well with the Biden economic program. Maybe it will indeed turn out to be excessively ambitious.”

When the economy of a Latin American country is destabilized, its people pay the consequences. When a major economy of the world is destabilized, we all pay the price.

*Translator’s Note: This was written in Spanish and translated to Portuguese for Estadao by Augusto Call.