How Did The United States Get In The Position Of Supporting The Deadbeats In Argentina?

In the realm of bad economic policy ideas, the country of Argentina has to rank near the top of almost everyone's list.  OK, the Soviet Union was worse, but they're gone.   Cuba, North Korea, Venezuela -- there are a few more.  But Argentina was once one of the world's wealthiest countries, and then went into a tailspin for what is now over two generations.

The United States once knew what good economic policy looked like.  It made us the wealthiest country in the world.  Today, we have mostly forgotten.  We have forgotten so badly that we even support Argentina in its folly.  Most recently the U.S. government has supported Argentina in its efforts to avoid collection of judgments issued by U.S. courts to enforce repudiated Argentine debt.

The era of good economic policy in the United States is not of course the recent era of fancy Ph.D.s from Ivy League schools at Treasury and the Fed.  Rather, it is the founding era.  The prime motivation for the founding was that the government under the Articles of Confederacy had no taxing power and couldn't pay the Revolutionary War debt.  The founders recognized that they needed a government that could pay its debts and establish its credit.

Literally the first thing that the government of the new United States did on the founding was to create a plan for paying off the Revolutionary War debt at full value.  One of the best accounts I have read is in the Ron Chernow biography of Hamilton.  Significantly, much of the debt had been bought up at steep discounts after being in default for long periods.  But Washington and Hamilton recognized that the way to establish the credit of the new country and make it a player on the world stage was to pay off the debt at par.  Clearly this is not the only reason that the United States took off as an economic power, but it is one of the top few reasons.  The United States had top international credit from the time of the founding through the Obama administration, when it received its first downgrade.

Now shift to today's Argentina.   The list of destructive economic policies is long.  Here is an article from the Wall Street Journal on August 8 with a good summary: crony capitalism on steroids; subsidies for everything; currency controls with special exchange rates for friends of the government; expropriation of the big Spanish oil company YPF; raging inflation; tariffs that make most manufacturing impossible; and so on.  But high on anyone's list must be the fact that in 2001 Argentina repudiated some $80 billion of bonds that it had issued in the 1990s.

Today the United States thinks that the way to live your life, as an individual or a country, is to spend unsustainably and take on as much debt as you can get away with.  Then you do a "bailout" or a "restructuring" and resume with another round of unsustainable spending and debt.  Here is the quote of their philosophy from an amicus brief submitted last April in support at Argentina's continuing efforts to avoid paying the repudiated debt:

[T]he district court's interpretation of the pari passu provision could enable a single creditor to thwart the implementation of an internationally supported restructuring plan, and thereby undermine the decades of effort the United States has expended to encourage a system of cooperative resolution of sovereign debt crises.  Allowing creditors recourse to such an enforcement mechanism would have adverse consequences on the prospects for voluntary sovereign debt restructuring , on the stability of international financial markets, and on the repayment of loans extended by international financial institutions.

It may seem briefly that these "internationally supported restructuring plans" promote "stability," but over time it is a fallacy.   The seeming "stability" just enables the next round of overspending and bad policies to continue.  The route to economic success is the one taken by the United States.  But the word is that the United States intends to continue to submit another amicus brief in support of the Argentine repudiation in the next round in the Second Circuit taking place over the next couple of months.  We'll see how badly they embarrass themselves.