November 24, 2014
The darkest stag night
How both sides of ‘stagflation’ feed each other
The neologism “stagflation” is not an Argentine invention (apparently it was coined almost half a century ago by Britain’s Conservative Party to convey their perception of what Harold Wilson’s Labour government was then inflicting on the British economy) but perhaps few countries are more naturally prone to falling into its vicious circles.
If the real wages of a society fall, then prices have little choice but to follow suit according to the eternal laws of supply and demand. But Argentine psychology does not work that way. If a firm finds itself selling less, its natural reaction is to raise the price by way of compensation for the loss in sales (and then some to cover the future inflation which this behaviour triggers, especially with inflation such a self-justifying prophecy in Argentina). The higher the prices, the less products sold in the zero-sum game of a stagnant economy — this is how stagnation and inflation feed each other.
Via the Price Watch programme, business was forcibly introduced to an alternative method by a government without the least intention of helping them — and all items under that system have sold like hot cakes (as the first to be dragooned into this scheme, the big supermarket chains achieved the miracle of being more competitive than Chinese retailers for a while). But did anybody draw the lesson that this might be worth trying on a genuinely voluntary basis? It seems not.
Apart from psychology (the domain of Gary Becker, the Nobel Prize winner who died earlier this month), the consumer-led growth model which was the essence of Kirchnerism until this year also leads naturally to stagflation — investing in demand at the expense of supply inexorably pushes up prices and discourages production. The highest wages in Latin America — always a boast for Kirchnerism and never seen as any disadvantage — simultaneously lead to greater consumer purchasing-power and a less competitive economy with the public sector increasingly feeling obliged to pick up the payroll in order to maintain full employment. This leads to deficit financing (despite heavier taxation) and rising inflation from unbacked money — between them the inflation and the taxes kill the real wages which are the base of the model, as can clearly be seen in this year’s trends.
But were those real wages ever real in any deeper sense? Of course, they stayed ahead of inflation for several years in the “won decade” (not any more) — in that sense they were real once upon a time. But sustainable high wage levels take rather more than union negotiating muscle and state decree — not Adam Smith’s route to the wealth of nations. Argentina’s basis for paying the highest wages in Latin America has been largely primary products and a so-called import substitution industry which depends on billions of dollars of imported inputs — not only a semantic confusion but a conundrum which has thrown dollar availability and the balance of trade into a twist from which there is no visible way out.
With productivity gains regarded as the enemy of full employment (perhaps correctly on the basis of the experience of the 1990s), wage levels have been objectively too high to be justified on the basis of a pretty mediocre product mix and yet Argentines by and large have never felt overpaid, even in better years. The country’s critics might explain this as a massive sense of entitlement (all those jokes about the best business deal being to buy an Argentine for what he is worth and sell him for what he says he is worth, etc.) but this also indicates that economic laws ultimately do not lie. Inflation denial distorted the exchange rate and confused nominal and real growth, permitting per capita incomes as high as US$20,000 to be reached (when at the same time only a quarter of households are reported to be above 12,500 pesos a month) but Argentines still felt underpaid. In part because they are not fooled about the ravages of inflation but also because they feel what they earn falls short of this country’s vast potential and resources (agriculture, shale, minerals, even Patagonian wind energy), reflecting a world of lost opportunities.
All vanity about this country’s human capital aside, the workforce is right to feel underpaid because it is unaccompanied by investment. The words of the former Harvard president Derek Bok: “If you think education is expensive, try ignorance” could also be applied to productivity. It is not a question of Argentine workers being better or worse than others — if made to type with one finger on an Olivetti, the best secretary in Argentina would inevitably lose out to any drudge from elsewhere applying 10 fingers to the latest computer. Incredibly enough, a German worker only costs three-quarters of an Argentine when measured in productivity and unit costs — despite much higher pay (with the new Mindestlohn minimum wage close to a monthly 2,500 euros in some sectors), shorter hours with the Feierabend early start to the weekend, longer holidays, etc. — because the depth of capital goods and training behind their efforts is so much greater.
Argentina’s sophisticated workforce could be far more productively employed with more investment in technology. But when industry is overtaxed (not to mention the ban on repatriating dividends) and the workforce overpaid relative to the value of its output, then that investment does not step forward. Nor is such development a matter of survival in Argentina, as it is in some countries, thanks to the wealth of natural resources — sitting back and waiting for the next soy harvest is also an option for taking life easy by making it worse.
In conclusion, as this column began with a mention of Harold Wilson, at least two things about Wilson could be relevant to Argentina today. Firstly, he did not suffer unduly from being tagged with the “stagflation” label because the next year England won its only World Cup and his government gained a free ride for the next four years until the following World Cup. Secondly, Wilson’s best-known contribution to the political lexicon was the reflection: “A week is a long time in politics.”