Javier’s Milei’s election sparks the debate on how a nation should be administered back to the main scene, the Austrian school’s most prominent practitioner today likes to move against the current, could his strategy work? Although speaking broadly about Austrian economics may lead to diversions to philosophy, this article intends to abstain from such discourse and instead dive into a policy analysis of its implications and proposal for macro-stability on the fiscal and monetary pillars of a modern nation, relying solely on its economic facade. Milei’s upcoming mandate will prove vital in determining the future of these ideas as he takes on a country with a 150% inflation rate, over 50% poverty rate, and a 90% debt-to-gdp ratio. It is therefore a good opportunity for challenging conventional the Keynesian deficit-based wisdom. So what is his line of thought? What is he proposing to ensure macro-stability in Argentina? Could he impose his policies as the hegemonic line of thought in a continent as volatile as Latin America?
It is important to first define broadly Austrian economics, and to separate it from the more philosophical conceptions of libertarianism. The Austrian school is a school of economic thought which adheres to methodological individualism and limited intervention. On the fiscal spectrum, it promotes strict spending austerity, and minimal taxation. On the monetary spectrum it radically opposes conventional central banking concepts and methods, as will be outlined later in this article. There is a significant overlap in the propositions with libertarianism, which deals with the questions of value and individual freedoms, but englobes a larger domain, since it is a political philosophy. More often than not, libertarians are adherents to Austrian economics, and one could say that policies promoted by Austrian economists are inherently built on libertarian ideals. Argentina is the first country in modern times to have a government deeply adhered to libertarian ideals and the Austrian school. What follows is an examination of the libertarian economic policies promoted by Javier Milei to counteract the current state of Argentina.
Naturally, the main goal in the horizon of Milei’s government is to lower the burden given by the hyper inflationist cycle the Argentinian economy is undertaking today, and as it has been widely mentioned, dollarization is the long-term most popular solution. However, in order to be able to dollarize the economy, internal finances must be dealt with. Argentina’s main short-to-medium term problems lie on its financial insolvency, particularly with the so-called LELIQS (liquidity loans in Spanish); a central bank liability offered exclusively to commercial banks and financial institutions in Argentina, with the main initial goal to limit the circulation of currency amid inflation-targeting back in 2018. However, the instrument fails to do so as it has become the central mechanism of an intricate inflation booster. Amid rising prices, the Argentinian population usually put their money on fixed-term deposits on commercial banks which pay an interest – this is an inflow with which the banks buy the LELIQS from the CB at a marginally higher interest rate, which sets accordingly the fixed-term interest rate. The big problem is that fixed term deposits, due to outstanding price pressure, require an interest rate of about 133% in order to be profitable to the population, which in turn makes the LELIQS rate owned to banks higher. The CB has fundamentally three ways to provide these payments. The first is through debt financing, but it is worth noting that Argentina is arguably the least attractive borrower in Latin America only after Venezuela. The second mechanism is through fiscal surpluses, but as mentioned previously, it has rather run a chronic deficit, despite heavy taxation. And the last and readily available method is through monetary expansion. By payment through emission of monetary base, the CB inserts more money into circulation, creating even more inflationary pressure, which then again raises the required interest rate for fixed deposits; this method ultimately raises the LELIQS rate, requiring further monetization to fulfil payment obligations, creating a vicious cycle. It is fundamentally pushing deeper an already imploding currency.
Milei has been very direct about this issue, and his ideological convictions prove to be a convenient option to deal with such problem, at least theoretically. He first assures that the debts will be honored, mentioning it is not only a cause for further impoverishment of the population, but also morally wrong to condone it, despite its effect in halting inflation. Acknowledging the fact that further emission of monetary base, which artificially creates value that erodes purchasing power, is building one’s own grave, his main proposal is to change the fiscal regime to a non-negotiable strict austerity. First, the tax system will be simplified, no more than 10 taxes; there are currently 170 taxes, 160 of which take 0.05% of GDP. Even if tax pressure on citizens will not change substantially in numbers, it is expected that the reduced bureaucracy and complexity will facilitate tax collection for the government, while also making it more transparent. Secondly, Milei’s team plans to minimize state intervention by indulging in a substantial cut from 22 ministries in the past government to only 8, starting the upcoming 10th December. He will privatize most of the sectors involving the dissolved ministries with the exception of health, education, and innovation, which will be part of a single body called the ministry of human capital. A major related problem is the fact that state-owned firms are for the most part deficit firms, i.e., unprofitable, and solvent only because of the taxpayers’ contributions. For this reason, as it is the case with energy, particularly with the state-owned enterprise YPF (Fiscal Oil Yields), he aims at restructuring the entity and making it profitable such that upon its offering its value to the government is maximized. These measures are ultimately directed at initiating a culture of fiscal surpluses, which is his objective by the end of 2024. Having a fiscal surplus, he will be able to use these funds to pay debt without the need of monetary expansion. This will decelerate inflation, lower Argentina’s currency risk, lower interest rates, therefore appreciating assets, and ultimately stabilize the ARS with respect to the dollar. All this aim at revitalizing foreign investment in the country. Last but not least, with regards to the LELIQS, Milei has also acknowledged the interest of some funds in lending long-term to the Argentinian government to ease the repayment procedure and widen the margin of error in the fiscal sector. This is instead a controversial measure which if undertaken inadequately might cost him everything. The idea is that if he is able to repay the LELIQS with these funds and ensure monetary stability, the outstanding debt owed to these funds – which is marketable – will appreciate, since the interest rate will be expected to decline, making their investment profitable. But this measure would represent taking a big step in the dark.
From the previous discourse it has been evidenced how healing fiscal balances may pave the way for monetary stability, but there are also means of monetary policy which the libertarians have planned in order to boost the economy as a whole, under the principle of individual freedom. Provided that the government is able to solve the LELIQS issue, the main policy to follow is the elimination of the exchange control regime (cepo cambiario). This exchange control regime currently forbids the free trade of currencies: it was introduced as a measure to avoid further fluctuations with the dollar, since at the time (and nothing has changed thus far) liberalising currency trade would have meant the widespread sale of the ARS, devaluating it to previously unseen levels. If currency trade is liberalised and the LELIQS are still outstanding debt for the CB, the population has no way of trusting a stable value for the ARS and will indulge in a massive purchase of the dollar, which will further devaluate the ARS against the dollar and inflate the prices, leading to hyperflation. Moreover, after the CB’s liabilities have been extinguished, Milei plans to completely abolish the CB, which in Argentina has contributed to everything but price stability. As a promoter of the Austrian school, Milei is very skeptical of conventional interest rate steering: he believes that artificially configuring the rate to control economic cycles sends distortive signals to agents and hinders their true investment decisions, ultimately creating a bias and misdirecting investment to sectors that will not actually be a source of growth, being profitable just because of the low rates.
In conclusion, libertarian ideals of minimal state intervention and austerity provide a solution to at least part of Argentina’s problems. It is left to be seem whether this is the case in practice. It is nonetheless undeniable the appeal these ideas have nowadays specially in indebted countries, and the current political scene provides a one-in-a-lifetime opportunity for this line of thought to become an imposing force in modern politics. Longer-term goals such as the abolition of the central bank and the subsequent dollarisation of the economy are topics which will be deepened in adequately in future articles.