Posted by on December 21, 2019 1:38 pm
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By Natalia Motyl, courtesy of Ámbito Financiero and Libertad y Progreso

 

Many politicians and professional colleagues declare that to get out of the crisis you have to grow. Which up to a point is obvious.

 

That is why we have to transform the premise “you get out of the crisis by growing” to the question: “how do you expand your economy?”

 

According to these same, the answer to this question can be via expansion of public spending.

 

Those who argue that we are going to grow along this path must answer a second question: Where do they plan to get the resources to pay for public spending? There are three sources of financing: tax increase; higher debt or printing new money.

 

In the first case, if taxes are increased, economic activity will not vary as it would only involve a transfer of income from one sector to another. But not economic growth.

 

Our country has a tax regime that reduces the purchasing power of households, businesses and investors. In addition, it deters production, causes a growing state of social unrest and making it impossible for the economy to grow steadily over time.

 

On the other hand, consumption taxes, such as VAT, reduce the demand for goods by directly reducing the income of individuals. Labor taxes reduce workers’ salaries. In this way, money is taken away from people who could spend it, save or invest it, instead of giving it to the State whose ends, surely, are not very productive.

 

Corporate income taxes reduce investment to the detriment of the production of cheaper and better quality goods. Also, by deterring investment it reduces future economic activity. In other words, it mortgages the future welfare of all people.

 

So, if you want the economy to grow, taxes are not a plausible course of action.

 

In the second case, increasing debt cannot fuel growth when it’s being restructured. So if what you want is to grow by expanding public spending (which I do not subscribe to in any way), the last path is printing new money.

 

Unfortunately, the demand for pesos is falling, that is, nobody wants pesos in their pockets. This is the result of a sequence of bad monetary decisions that caused the gradual devaluation of the peso, which explains why prices continued to rise this year, even though the monetary expansion was reined in.

 

If the monetary policy is relaxed, injecting pesos that nobody wants in the economy, then the currency will begin to lose value faster and we will fall into an inflationary spiral. It should be noted that the main victims of inflation are the poorest people who cannot protect themselves.

 

This path will not cause economic growth, but quite the opposite will further exacerbate the economic crisis. That is why to truly grow it is necessary to implement structural reforms. Because what we really need is to give people confidence back, so that the capital scared off by the lack of long-term economic measures comes back from “under the mattress” or abroad, and is spent or placed in the bank. This is the most sensible way to “put money in people’s pocket” without mortgaging their future and encouraging economic growth.

 


Natalia Motyl has a degree in economics from the University of Buenos Aires and is an economist from the Libertad y Progreso Foundation.