By Daniel Lacalle

Source: Mises.org

This text was copied from the source above mentioned. All Rights Reserved

The so-called Economic Emergency Law announced by the new government in Argentina is simply another massive set of tariffs and burdens on the private sector to finance the bloated public expenditure in a country where confiscatory monetary and fiscal policy is the norm.

What is the major problem with the recent Economic Emergency Law? That it does not address the country’s massive monetary and fiscal imbalances. Worse, the law and in particular the decisions to raise retentions on the agricultural sector  aim to increase the confiscatory nature of Argentina’s fiscal policy.

With this emergency law, Argentina raises taxes—again, in the country with the highest tax rate in the region—and further burdens exporters by increasing the percentage of US dollar revenues that the government keeps.

The representatives of the producers in most regions have confirmed it: These are measures that lead producers and exporters to bankruptcy, since with the current levels of withholding for soybeans, corn, and wheat, profitability is already zero or negative in leased fields. In the case of oilseed, the gross margin will be negative at $105 per hectare. It’s a ruinous policy.

In reality, the so-called economic emergency plan functions as a huge set of tariffs against Argentine producers and the private sector.

The extractive and confiscatory vision for the economy, which has persisted through different Argentine governments for several decades, has gotten even worse.

The Argentine government begins with an error of analysis. They think that putting greater retentions on exporters will improve Argentina’s battered reserves, which is simply false, and comes from that extractive vision that assumes that adjustments can only be carried out by destroying the export economy and savings. The evidence that it does not work is clear, but the successive governments of Argentina believe that the problem is the strength of the US dollar and not their destruction of the purchasing power of the Argentine peso. However, the collapse in demand for pesos inside and outside the country is the direct cause of an insane monetary policy. Introducing higher taxes, withholdings, and pitfalls to economic development does not strengthen the demand for pesos or improve the economy. These are measures that lead to Venezuelan hyperinflation.

No country has strengthened the demand for its local currency by confiscating savings and salaries through massive increases in the money supply and confiscatory fiscal measures. It is a double expropriation of wealth.

The idea that the economy will be relaunched with a strong issuance of pesos should be discarded. In the last ten years Argentina’s monetary base has increased by 1,414.31 percent—that is, Argentina is the country that has increased issuance of local currency the most after Venezuela and Iran, causing decreasing demand for pesos and general deterioration of the economy, which has gone from stagflation to depression.

Increasing taxes and withholdings is the equivalent of demolishing one of the few competitive, exporting, and efficient sectors that remains in Argentina, and it is all because of the refusal to touch the disproportionate public spending.

Argentina will not strengthen its growth, productivity, and foreign reserves with a fiscal policy that is confiscatory and a monetary policy is extractive and inflationary. It will instead destroy the economy’s capacity to generate employment and attract investment.

It is very sad to see a country with the potential of Argentina fall back into the trap of thinking that monetary and fiscal imbalances are solved by raising taxes and printing more pesos. President Fernández recently stated that “we must end the habit of saving in dollars” while announcing a huge issuance of pesos “to strengthen growth.” It shows the refusal to understand that the citizens do not save in US dollars because they are evil or ignorant, but because they know that their few savings and real wages will be confiscated via monetary policy, diluting the country’s wealth in an ocean of decreasingly valued pesos useless to most local and global economic agents.

Argentine governments cannot continue to fool themselves into thinking that the problem is external. It is no accident that the country has the second-highest inflation in the region, which is also ten times higher than the average. And it is no coincidence that it has a much poorer economic growth than neighboring countries despite the challenges the latter suffer.

Argentina’s problem is not that taxes are low—it extracts the largest wedge in the region—nor of hawkish monetary policy—the increase in the annual monetary base is more than seven times that of the region’s average over the past ten years. It is quite the opposite. Argentina is only going to take off when it recognizes that its fiscal and monetary imbalances are not the fault of the citizens and their small businesses, but of a government that is still determined to believe that two plus two equals twenty-two.

Daniel Lacalle

Daniel Lacalle has a PhD in Economics and is author of Escape from the Central Bank Trap, Life In The Financial Markets and The Energy World Is Flat.