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Javier Milei took a chainsaw to Argentina’s budget, and the country is slowly emerging from a fiscal morass. But cuts come with consequences.
If you haven’t been paying attention, America’s fiscal situation is in severe crisis on far too many fronts. This starts with our national debt, nearing $35 trillion, which is growing at a frightening pace, fueled by a deficit that is double the historic average as a percentage of gross domestic product.
America’s fiscal mess is the elephant in the room. Everyone can see it. The International Monetary Fund, the Congressional Budget Office, the U.S. Treasury, the Federal Reserve, and notable names in the financial services industry — from JPMorgan Chase’s Jamie Dimon and Citadel’s Ken Griffin to “Black Swan” author and former quant trader Nassim Nicholas Taleb — have all used some approximation of the phrase “an unsustainable fiscal path” to describe America’s economic footing.
Actions have consequences, and fiscal austerity brings about some unpleasant realities on the way to restoring economic balance.
Even the corporate press, which has long run interference for the U.S. government, is sounding the alarm. The Los Angeles Times recently reported, “International Monetary Fund Managing Director Kristalina Georgieva praised the strength of the U.S. economy but warned its current level of deficit spending was not sustainable and could crimp U.S. and global growth if it’s not brought under control.”
Crisis seems inevitable without action, yet there seems no political will to do anything to fix and restore America’s financial foundation.
As Bloomberg’s Niall Ferguson has shared in his eponymous Ferguson’s Law: “Any great power that spends more on debt service (interest payments on the national debt) than on defense will not stay great for very long.”
The Economist in a recent article called America’s fiscal outlook “disastrous, but forgotten.” But the longer it remains forgotten, the harder it will be to save.
Argentina has been brought up as a model of what could be done. Although Argentina is an economy that has been fraught with debt and corruption for more than 100 years and is considered an outlier for the way it behaves, its dire financial situation — which included massive inflation and real poverty for a large swath of its population — finally gave the people of Argentina fortitude to elect a president who would do things differently.
Javier Milei, Argentina’s new libertarian president, campaigned with a chainsaw and promised massive cuts in government spending. He’s kept his promise. From his first days in office, he eliminated entire ministries and fired tens of thousands of government workers.
These moves have been lauded in many circles, as Argentina announced it had a $315 million fiscal surplus in the first quarter, per Reuters, the “first of its kind since 2008.”
Milei’s actions have also come with a cost, one not often discussed among those who are heaping praise.
Actions have consequences, and fiscal austerity brings about some unpleasant realities on the way to restoring economic balance.
At the end of the first quarter of this year, Argentina’s industrial output decreased more than 21% on a year over year basis. Reuters notes, “Milei's ‘chainsaw’ cost-cutting program helped achieve rare fiscal surpluses at the start of the year and allowed the central bank to rebuild reserves, but the economy is suffering, with consumption, construction and manufacturing down sharply.”
That’s the reality. When cuts happen, they will have an impact. This can mean a recession, which may be necessary to allow “growth” to shift from the government to the private sector. And that is painful, unpopular, and can spell political suicide for those who attempt it.
Tough times often create a path to opportunity, especially if a country’s economic engine is given the chance to thrive.
That is the choice that Americans face. Our current fiscal path is impossible to sustain. Barring some perfect “Goldilocks” scenario involving growth, government spending needs to be cut, and we need to face the consequences from doing so. Otherwise, the debt will need to be monetized, destroying more purchasing power and opening a bigger chasm between the elites and Main Street Americans.
It's a tough choice, and one that can’t be made without the American people forcing their representatives to make those difficult decisions. But without massive protests, phone campaigns, and attention, you can bet that nothing will be done.
Does America have the stomach to do what’s right for its own preservation? We still have time, but it will take an immense about of moral strength and patience to do so. We don’t want to become Argentina before we are forced to make a change.
Carol Roth
Contributor