Public consumption grows at a 30% annual rate

Prolonged blackouts, high inflation and the accelerated loss of reserves are all signs of deep macroeconomic imbalances. The energy crisis will not be solved by fining utilities, neither inflation will be stopped by announcing price agreements, nor the reserves will be recovered by discouraging traveling abroad. The key issue is to restore the macroeconomic balance by stopping the exacerbated growth of public consumption led by economic subsidies and redundant public employment.

The heat wave eased off and there was a decline in economic activity –because of days off, holidays and vacations– but the electric service is still not working normally. Meanwhile inflation remains high and still growing, and the dollar in the black market keeps rising. Notwithstanding the deepening of old problems, the official diagnosis has not changed. Given the serious energy crisis, fines are announced for utilities and threats of nationalization. Given the high inflation, price agreements were announced. Upon the loss of reserves, new obstacles to foreign purchase are created.

An alternative view is to consider these problems as the sign of severe macroeconomic imbalances. In particular, it is important to point out that the growth of aggregate demand (the sum of government consumption, private consumption, investment and exports) is inconsistent with the evolution of aggregate supply (GDP plus imports).

According to official information provided by the Ministry of Economy, aggregate demand between 2007 and 2013 grew at a 22,3% rate per year, well above the 6,2% annual increase in aggregate supply. The growth of each component of aggregate demand was as follows:

·  Exports grew 18.1% and investment grew 21.8% annual average.

·  Private household consumption grew 22.2% per year

·  The government consumption grew 29.3% per year

These data shows that the growth in aggregate demand in the last 6 years is led mainly by public consumption, whose expansion reaches 30% annually. In the official view, this phenomenon has a positive connotation because it is laid out as a Keynesian type strategy; this means that the acceleration in the expansion of spending stimulates production. Leaving distances aside, it is being compared with the stimulus policies that have been practiced in recent years in the US.

The diagnostic error is that Keynesian type strategies have a logic in a context of high idle capacity (high unemployment, excessive investment). Under these particular conditions (that occurred in the 2008 U.S crisis and the 2002 Argentine crisis) it is relevant to stimulate in order to achieve a better use of available capacity. But once this instance is overcome, continuing to expand public spending fatally produces inflation. Even more serious is the rapid growth in government consumption done at the expense of investment (such as those needed to avoid blackouts) and the deterioration of export capacity (that explains the paradoxical leak of reserves when international prices remain at an unprecedently high level).

It is indispensable to correct the excess of domestic consumption that is being led by the public sector.  The profound macroeconomic imbalances prove it so. Although this has, in the political rhetoric, the negative connotations of a “economic adjustment”, it’s much more costly from a social point of view to keep battling the collapse in energy supply by fining companies; or to try to reduce inflation with price agreements; or to try to reduce the fall in reserves by discouraging foreign travel. These measures along with others of similar characteristics are, at best, mere voluntarism.

The “adjustment”, understood as the correction of imbalances generated by the expansion of economic subsidies and redundant employment, is unavoidable. The only thing that remains to be settled is how and when it applies. If it’s done quickly and professionally, it wouldn’t be very costly from the social point of view and could generate a path of sustained progress. But if it is delayed with evasive arguments and hypocritical speeches, the social cost, as past experiences show, will be enormous.