Deregulation in Argentina: Milei Takes “Deep Chainsaw” to Bureaucracy and Red Tape

Argentine President Javier Milei has lowered inflation, drastically reduced government spending, and dismantled large parts of the federal bureaucracy. But as Ian Vásquez points out in his guest post, one of the most far-reaching efforts by his administration has been its deregulation push, with officials implementing about two deregulations per day on average since he took office, and using ingenious ways to discover where most needs deregulation. It's an Example for the World, if only New Zealand were not too sclerotic to learn from it ...

Deregulation in Argentina: Milei Takes “Deep Chainsaw” to Bureaucracy and Red Tape

by Ian Vásquez
At the heart of Argentina’s chronically crisis-prone economy is a political system that encourages unconstrained public spending and overregulation in the extreme. It is the system set up by Juan Domingo Perón in the 1940s that strengthened in subsequent decades, and that President Javier Milei promised to cut down with a chainsaw and replace with classical-liberal policies of the kind that made his country one of the most prosperous in the world a century ago.

Since assuming power in December 2023, Milei has been slashing government to that end. His priorities have been to get spending under control and to deregulate. Milei cut the budget by about 30 percent and balanced it one month into his term. That facilitated more disciplined monetary policy and the reduction of inflation from 25 percent per month when the president came to office to 2.2 percent in January 2025.

The success that Milei’s economic stabilisation has had so far is now widely acknowledged. The president took an economy from crisis to recovery much faster than most people expected: Growth returned in the second half of 2024, wages have increased, and the poverty rate, after having initially risen, has fallen below the 40 percent range that the previous government left as part of its legacy.

How much Milei has been deregulating, however, and the role that deregulation plays in Argentina’s success, is less widely appreciated—yet it is every bit as important as cutting spending. To understand why, it helps to know something about what makes Argentina’s politics different from that of most countries.

Argentina’s Peronist System

For more than seven decades, Argentina has had a corporatist system that Perón set up using Mussolini’s fascist Italy as a model. Under that system, the state organises society into groups—trade unions, business guilds, public employees, and so on—with which it negotiates to set national policies and balance interests. It’s a kind of collectivism that erases the individual, centralises power in the state, and incentivizes interest groups to compete for government favoritism through public spending and regulation.

This system gave rise to a proliferation of rules intended to protect and promote particular sectors through price controls, licensing schemes, differential exchange rates depending on type of economic activity, capital controls, preferential borrowing rates, compulsory membership in (and support of) guilds, and other interventions.

The system that the Peronist party set up discouraged free exchange, competition, and productivity but became deeply entrenched. Privileges accorded by regulation were politically difficult to lift. Legal scholar Jorge Bustamante, moreover, notes that regulation plays a more significant role in redistributing wealth in Argentina than fiscal policy does. He adds that “the waste of scarce resources caused by regulations is more serious than the direct activity of the state in the economy itself [fiscal policy], which is known to be in deficit.”

Unions in particular gained immense political power. Such was the case that Bustamante describes the Argentine system as one that “converts the unions into organs of the state when the party to which they belong [the Peronist party] is in power or converts the state into a prisoner of the unions when the party is in the opposition.”

Federico Sturzenegger, Argentina’s minister of deregulation and state transformation, made a similar point at the Cato conference we held in Buenos Aires in June 2024 with President Milei and other leading classical liberals. “The Peronist party,” Sturzenegger said, “is the manager of the status quo.… It is the manager of the vested interests; it is the conservative party of Argentina.”

The Peronists may want to conserve the system, but Milei is right in cutting it down. According to Cato's Human Freedom Index, the Argentina that the president inherited is one of the most regulated countries in the world, ranking 146 out of 165 countries in terms of the regulatory burden. As of last year, it ranked 81st.

Milei’s Cuts in One Year

Since coming to power, Milei has made wide-ranging cuts to Argentina’s bureaucracy. In his first year, he reduced the number of ministries from 18 to 8 (eliminating some and merging others), fired 37,000 public employees, and abolished about 100 secretariats and subsecretariats in addition to more than 200 lower-level bureaucratic departments.

The president has also aggressively pursued deregulation. Using a conservative methodology, my colleague Guillermina Sutter Schneider and I calculated that during Milei’s first year in office, he implemented about two deregulations per day. Roughly half of the measures eliminated regulations altogether, while the rest modified existing regulations in a generally market-oriented direction.

Milei has implemented these reforms legally and constitutionally, and they have resulted mainly from two broad measures. First, Milei began his administration by issuing an emergency “megadecree” that consisted of 366 articles. Emergency decrees are consistent with Argentine law if they meet certain conditions. They are also reviewable by Congress, which has the right to reject the orders within a specified period of time. Since the legislature did not object, most of the deregulations in the megadecree went into effect.

Second, Congress approved a massive bill (“Ley Bases”) last June that allows the government to issue further deregulatory decrees for one year. Most of Argentina’s deregulations are taking place under that authority and have been led by the new Ministry of Deregulation that began operating the following month.

The ministry is literally in a race against time, and its sense of urgency is palpable. When I visited Minister Sturzenegger and his team in November, they showed me a countdown sign outside his office that read “237 days left,” indicating the time remaining for the government to continue issuing deregulatory decrees. Sturzenegger’s team—made up of legal experts and accomplished economists—also has a clear sense of mission: to increase freedom rather than make the government more efficient. When reviewing a regulation, therefore, they first question whether the government should be involved in that area at all.

Following that approach, the government implemented deregulations in sectors of the economy ranging from agriculture and energy to transportation and housing. 

Looking at Prices

To help prioritise those reforms, the ministry looks at prices. If the cost of a good or service is significantly higher in Argentina than internationally, the regulatory burden often explains the price differential. Sturzenegger reports that deregulation in Argentina has tended to make prices fall by about 30 percent. The ministry has also set up a web portal called Report the Bureaucracy that takes recommendations from businesses and the public, resulting in numerous reforms.

Some of the reforms have been procedural. For example, government inspections are now sometimes conducted after a firm begins engaging in business (on the assumption that it is following the law and may be subject to inspection), rather than before any business is allowed to even go forward. This “ex-post” inspection of the labeling of imported textiles, for instance, led the price of textiles to fall by 29 percent. 

The government has also instituted a “positive administrative silence” rule affecting several activities by which requested permission is considered approved if the government bureaucracy does not respond within a fixed period of time. In yet another example, Milei prohibited legally sanctioned hereditary positions that had become normal practice at numerous government agencies.

Much of the impact of the deregulations has not yet been measured, but the hard or anecdotal evidence that does exist suggests that the reforms are making a significant difference. The following are some accomplishments from Milei’s first year:

• The end of Argentina’s extensive rent controls has resulted in a tripling of the supply of rental apartments in Buenos Aires and a 30 percent drop in price.
• The new open-skies policy and the permission for small airplane owners to provide transportation services within Argentina has led to an increase in the number of airline services and routes operating within (and to and from) the country.
• Permitting Starlink and other companies to provide satellite internet services has given connectivity to large swaths of Argentina that had no such connection previously. Anecdotal evidence from a town in the remote northwestern province of Jujuy implies a 90 percent drop in the price of connectivity.
• The government repealed the “Buy Argentina” law similar to “Buy American” laws, and it repealed laws that required stores to stock their shelves according to specific rules governing which products, by which companies and which nationalities, could be displayed in which order and in which proportions.
• Over-the-counter medicines can now be sold not just by pharmacies but by other businesses as well. This has resulted in online sales and price drops.
• The elimination of an import-licensing scheme has led to a 
• 20 percent drop in the price of clothing items and a 35 percent drop in the price of home appliances.
• The government ended the requirement that public employees purchase flights on the more expensive state airline and that other airlines cannot park their airplanes overnight at one of the main airports in Buenos Aires.

Many more examples could be given, but there’s no doubt that Argentines are beginning to feel the results of the reforms. Those results also help explain Milei’s approval rating of 50 to 55 percent, according to recent polls.

Year Two of Milei: The “Deep Chainsaw” Begins

In his address to the nation on his one-year anniversary as president, Milei explained that the cuts he’s made so far are only a beginning. “We will continue to eliminate agencies, secretariats, subsecretariats, public companies and any other State entity that should not exist,” he promised, and then went further: “Every attribution or task that does not correspond to what the federal state is supposed to do will be eliminated. Because as the state gets smaller, liberty grows larger.” Milei declared that he would now begin applying the “deep chainsaw.”

Minister Sturzenegger is leading the charge. A decree in February instructed all ministers to review all laws and regulations under their purview and recommend comprehensive deregulations within 30 days. In a country with nearly 300,000 laws, decrees, or resolutions, that is no small task. But according to Sturzenegger, the government has cut or modified 20 percent of the country’s laws; his goal is to reach 70 percent. He adds that the pace of firing public employees will increase.

Regulatory reforms have already picked up pace. In January, Sturzenegger announced a “revolutionary deregulation” of the export and import of food. All food that has been certified by countries with high sanitary standards can now be imported without further approval from, or registration with, the Argentine state. Food exports must now comply only with the regulations of the destination country and are unencumbered by domestic regulations.

That innovative reform, which outsources regulation, is intended to generate “cheaper food for Argentines and more Argentine food for the world.” But it is also an example of how the ministry takes input from Argentine citizens about the need to change nonsensical regulations. As Sturzenegger explained: “Countless companies have told us of the incredible hardships they had to go through to meet local requirements that were not required by the destination market. A producer who needed to certify a sample to see if he could enter the US market was asked to set up a factory first.”

In another case, Argentina required a watermelon exporter to package his product in a way that was different from what the recipient country required. So, in practice, the exporter would load the ship in compliance with Argentine law and, once the cargo left port, the watermelons would immediately be repacked.

Other examples abound. A decree in February facilitated farmers’ use of new seeds by eliminating the requirement to conduct extensive testing of those seeds. As Sturzenegger observed, in a country where agriculture plays a significant economic role, those restrictions were especially perverse: “Brazil has tripled its soybean production, largely with seeds made by Argentine researchers, working in Argentine companies but based in Brazil. The dramatic thing is that the increase in production in Brazil sinks the price of the grain while we are relatively stagnant because we cannot access our own technology!”

Another decree reduces the cost of warehousing imported containers awaiting customs inspections by an estimated 80 percent because it allows importers to keep their goods in competing locations during that time rather than solely in places run by the customs service. That cost reduction, like countless others that result from accelerated regulatory reforms, will be passed on to Argentine consumers. And to the extent that the chainsaw really does go deeper and faster in year two, the benefits will be even more pronounced.

An Example for the World

Milei’s task of turning Argentina once again into one of the freest and most prosperous countries in the world is herculean. But deregulation plays a key role in achieving that goal, and despite the reform agenda being far from complete, Milei has already exceeded most people’s expectations. 

His deregulations are cutting costs, increasing economic freedom, reducing opportunities for corruption, stimulating growth, and helping to overturn a failed and corrupt political system. Because of the scope, method, and extent of its deregulations, Argentina is setting an example for an overregulated world.

* * * * 

Ian Vásquez is Ian Vásquez is vice president for international studies at the Cato Institute, holds the David Boaz Chair, and is director of Cato’s Center for Global Liberty and Prosperity. He is a weekly columnist at El Comercio (Peru), and his articles have appeared in newspapers throughout the United States and Latin America.

His post first appeared at the Cato at Liberty blog.

Treasury's Chief Strategist doesn't understand inflation

Sadly, it seems the NZ Treasury's Chief Strategist Struan Little doesn't understand inflation.

Speaking to the NZ Capital Markets Forum, he gave the audience a helpful rule of thumb for fuel price rises here: 

[E]very US$10 increase per barrel of oil roughly translates to 10 cents a litre extra for New Zealanders at the petrol pump. Therefore, prices at around US$100 a barrel mean a 40 cents a litre increase in New Zealand.

That's helpful. The conclusion he drew from that however is not:

In that scenario [he said] ... the impact on CPI [i.e., of the official inflation figure] would be around 0.5 percentage points – that is around 3.1 – 3.2% instead of 2.7% in the baseline in the year to June 2026.

This is nonsense.

Yes, there will be a rise in the specific price level of oil. But unless there is a concomitant rise in the local money supply, there is no way that can cause a rise in the general price level, which is what the CPI is supposed to measure.

In fact, in the absence of a concomitant rise in money supply, the impact on the general price level will be precisely zero because to spend more on fuel means having to spend less on other things. 

Yes, the price rise for oil does affect almost every thing in the economic system. Which makes a problem for all of us. But the only way for all those other things to rise in price as well is for there to be an across-the-board increase in monetary demand. And the only way that can be possible is for there to be an increase in the supply of money available -- the most likely cause of that in the present environment being governments continuing to borrow too heavily.

Little's error is an example of what economist George Reisman calls the myth of Crisis-Push Inflation -- a subset of the myth of so-called Cost-Push Inflation. It's usually a way for politicians to deflect attention for  their profligacy in borrowing.

At least Little does call that out, even if he falls prey to that other error. 

'The Blithering Economic Crackpottery Of Donald J. Trump'

"Just when you thought that the Donald had already won the derby for economic crackpottery, he comes up with another even more fakakta entry. This one spilled forth when asked whether the President should have a say in monetary policy:

".... It should be done,” Trump said....”I don’t think he should do exactly what we say. But certainly we’re — I’m a smart voice and should be listened to.”

Asked how low he would like to see interest rates go, Trump made it clear he wants the new Fed chief to be aggressive. Rates should be “1% and maybe lower than that,” Trump said. “We should have the lowest rate in the world.”

"Well, actually, it was only a matter of time until we got a domineering dufus in the Oval Office who has no compunction about loudly displaying his barking economic ignorance. To our knowledge there has never been an economist—-left, right, or centre—–and possessing intellectual faculties—brilliant, feeble or in-between—- who has claimed that the 'lowest rate in the world' has anything to do with anything when it comes to monetary policy.

"The Donald’s quip here is just sui generis humbug—a word salad, if you will, on a very crucial matter that makes Kamala Harris sound like a deep thinker. After all, who in their right mind would think that having a lower rate then the likes of Zimbabwe, Venezuela (or the Wiemar Republic for that matter) or dozens of other inflaters that dot the world economy even today provides any kind of monetary standard? 
...

"Interest rates are the price of money and debt and provide the benchmark for the valuation of all financial assets and real estate. They are, accordingly, the most important price in the entire capitalist economy and they should therefore be set by the free market, not the FOMC, the POTUS or any other arm or agency of the state.

"However, once the government apparatchiks who comprise the FOMC (Federal Open Market Committee) seized the power to set interest rates decades ago it was foreordained that some unhinged know-it-all would end up in the Oval Office claiming a piece of the action. ...

"[W]here in the hell does the Donald think inflation comes from—-failure of the Peruvian anchovies schools ... ? The Hunt brothers cornering the silver market ...? OPEC meetings ...? The beef processors cartel ...? 

"The fact is, the guy is 79 years old and has been pontificating on how to fuel prosperity and remedy inflation and other economic ills for decades, and most especially since he came down the escalator in June 2015. Yet has it ever once occurred to him that the easy money and ever lower interest rates at the central bank that he has ceaselessly advocated is actually the one and only cause of 'inflation,' and that’s the case with respect to both goods and services and financial asset prices, too?

"As it has happened, since the turn of the century the real Fed funds rate on overnight money 

(blue line, below) has been below the zero bound 75% of the time ... [meaning that s]hort-term money for gambling and speculation on Wall Street and main street alike has been free after inflation for the entirety of this century to date.

"So is there any mystery as to why the purchasing power of the consumer’s dollar earned or saved in the year 2000 has already lost 50% of it value? ... [Yet] the Donald has endlessly denounced [those responsible] for not running the printing presses even faster and hotter....

"Once upon a time, the GOP knew that inflation comes everywhere and always from the printing presses of the central bank. But as of December 2025 it has turned into such a sheepish herd of partisan hacks that it has the audacity to claim that it’s all Sleepy Joe’s fault.

"And yet and yet. The Donald is now demanding the very same 1% interest rates and another central bank printing spree that caused the last inflationary flare-up. And he is doing so while falsely claiming that he has single-handedly ended the inflation that he actually fostered during his first go round in the Oval Office. ...

"At the end of the day, the Donald has made no impact on [lowering] the inflation rate to date, but is fixing to push it materially higher owing to his out-of-this-world TariffPalooza and his utterly insensible demand that the Fed undertake another plunge into 1.0% money.

Then again, easy money, big spending and high tariff-taxes amount to the blithering crackpottery that is the essence of Trump-O-Nomics. And that surely ain’t no recipe for a new Golden Age of Prosperity."

~ David Stockman from his post 'On The Blithering Economic Crackpottery Of Donald J. Trump'

Real Fed Funds Rate Versus Purchasing Power Of The Consumer Dollar, 2000-2025

"High house prices are nature’s most reliable contraceptive"

"[A]dvanced economies are halving their populations every generation ... Naturally, everyone blames 'fertility.' As though biology suddenly went on strike sometime around 1992.

"But neither ovaries nor sperm unionised. The culprit is more prosaic—house prices. ... A new study confirmed what few were willing to admit. Housing costs explain more than half the baby drought. If housing had been more affordable in recent decades, decline in fertility would have been smaller by 51%. ...

"High house prices, it seems, are nature’s most reliable contraceptive."

~ Benno Blaschke from his post 'House prices are the new birth control'

Should we end capitalism? Or embrace it.

"Capitalism ... has been, blamed for various ills, from poverty and income inequality to pollution, inflation, child labour, and war. ... Capitalism is misunderstood because it is often confused with today’s mixed economy that combines varying degrees of economic freedom and statism. Statism gives the government unlimited power that it uses to tax, regulate, and subsidize individuals and businesses and to hand out favors (government contracts, lower tax rates, subsidies) to companies that make political contributions and do the government’s bidding.

"Because of this confusion, people blame capitalism for problems caused by the mixed economy and statism in particular.

"Consider poverty and income equality. Poverty is most persistent in countries where the government deters wealth creation through high levels of market controls, taxation, and corruption that constrain economic growth, entrepreneurship, job opportunities, and people’s ability to work themselves out of poverty and improve their incomes. The same can be said of child labour (a consequence of poverty), inflation (caused by government manipulation of the money supply, not by business seeking to maximise profits in a free market), and war (caused by government invasion of another country).

"Capitalism does not cause the problems it is blamed for but provides solutions by safeguarding freedom. ...

"In Ayn Rand’s definition, “capitalism is a social system based on the recognition of individual rights, including property rights, in which all property is privately owned.” In such a system, the government’s role is limited to protecting individual freedom ... by deterring and punishing the initiation of physical force against others ... Under capitalism, the only way to get others to collaborate is through persuasion and voluntary trade.

"Although pure laissez-faire capitalism has never fully existed ... some historical periods and countries have approximated capitalism ... [Northern] America during the 19th century (the longest uninterrupted period of peace); England, France, and other European countries during the Enlightenment (that brought about the Industrial Revolution); Hong Kong (before China’s takeover); and smaller countries like Estonia (that liberalised their economies after the collapse of the Soviet Union).

"Capitalism is good for people and their environment because it produces and protects freedom, the social condition that human flourishing requires. ... [C]apitalism did not create today’s problems but has helped solve or reduce them. ...

"If we want human flourishing to increase, we must not reject and banish capitalism but embrace and defend it ... "

~ Jaana Woiceshyn from her post 'Should we end capitalism?'

Pay no attention to the (mad) men behind the curtain [updated]

Readers here might remember I got some stick for calling John Key a fucking moron a while back. A fucking moron, specifically, for repeated calls for the Reserve Bank to juice up house prices again, just so home-owning voters will feel better again. Feel better again, and then vote National.

"The guts of what’s wrong," explained the moron, "is that the housing market is going down, not up" — and "then you have a negative wealth effect," and voters feel bad. And when they feel bad, they vote for the other team.

Classic short-termism.  Stuff rocket fuel into the economy, and then all things will be jake for the governing political parties. This, by the way, was Key's "one simple trick" while Prime Minister: ensure massive house-price inflation, no matter the economic and social dislocation, and then sit back and watch home-owners fooled into feeling better off, and borrowing and consuming more, regardless of the economic consequences. (Consequences for which we're all still paying, by the way.)

In the US, the discredited "wealth effect" — "a gussied-up version of Keynesian stimulus, only targeted at the prosperous classes rather than the government’s client classes" — is generally felt in the stock market. Pundits there are starting to get nervous about a soaring stock market with anaemic growth in the economic system itself, with "important implications for the path of America’s stockmarket boom and its economy."

The good times could continue, at least for a bit longer [says 'The Economist']. ... [But] might a wealthier society also take a harder fall? Bears would point to the bursting of the dotcom bubble in 2000, when a brutal stockmarket slump pushed America into recession. ... The stockmarket might be more of the economy. It still is not all of it.

It's not. And nor is the housing market. We can't get rich just by selling each other houses. (And kudos to one National minister at least who understands that.)

Yet David Stockman is concerned that nothing has been learned from the last major crash. 

Roughly 15 years ago it was reasonably well understood that the Great Financial Crisis of 2008-2009 had been case of speculation run amuck on both Wall Street and main street alike. These credit and housing bubbles, in turn, had been fuelled by the massive money-printing sprees of the Greenspan and Bernanke Fed.

It might have been presumed, therefore, that the mad money-printers [at the US central bank] would have had second thoughts about the underlying cause of these great economic disasters—that is, the dubious Greenspan policy known as the “wealth effects” doctrine. In simple terms the latter held that if people felt richer owing to soaring home prices and their stock market winnings, they would spend more freely and fulsomely, thereby goosing the Keynesian cycle of ever more spending-sales-production-income-and spending, which was to be rinsed and repeated in an endless round of rising prosperity.

At the end of the day, of course, Greenspan and his heirs and assigns at the Fed turned out to be unreconstructed Keynesians and the wealth effects doctrine a monumental economic con job. The latter did not make society richer; it just made the rich richer. Or stated more directly, main street got inflation at the grocery store, gas pump and doctor’s office—even as the asset-holding class experienced unspeakable windfalls in their brokerage accounts.

Let's not repeat the same mistake again here — especially when local interest rates are already below our trading partners, with no noticeable effect on genuine economic progress. Please: pay no attention to the mad men behind the curtain.

UPDATE:

"The advocates of annual increases in the quantity of money never mention the fact that for all those who do not get a share of the newly created additional quantity of money, the government's action means a drop in their purchasing power which forces them to restrict their consumption. It is ignorance of this fundamental fact that induces various authors of economic books and articles to suggest a yearly increase of money without realising that such a measure necessarily brings about an undesirable impoverishment of a great part, even the majority, of the population."

~ Ludwig von Mises from an interview 'On Current Monetary Problems'

15 YEARS AGO: Houses are homes, not investments

A topical guest post from NOT PC first posted here from nearly 15 years ago (well, 13, close enough?) when house-price inflation was already rocketing ...

    Guest post by Vedran Vuk of Casey Research 

Recently, my parents were considering purchasing some real estate. As the financial professional in the family, they asked me, "What do you think? Will it go up in value? You know... not now, but eventually?" I've heard the same thing over and over again. In response, I shared my opinion: "Would you pay the current market price to live there even if its value never increased?" If the answer is yes, buy the property." Essentially, is the house worth it as a home, not as an investment?

In the past few decades, the concept of home ownership has been completely turned on its head. Previously, homes were considered a very long-term consumption good. Do you think anyone in the 18^th, 19^th, and prior centuries ever considered tripling the value of their homes by retirement time and selling them to move beachside? In the vast majority of cases, such ideas never crossed their minds.

Yet, somehow along the way, this became a reasonable investment expectation. Even today, home buyers still make their purchases with the hopes of escalating prices. But are homes really wise investments?

Consider the difference between your house and an investment such as Apple (NASDAQ: AAPL) stock. At a major company, the opportunities can be truly limitless. Apple can produce cashflows from computers, iPods, iPads, and future innovations that are just dreams and concepts today. If the local market is oversaturated, Apple has the option of spreading out all across the world. As a result, Apple's stock price has gone from $17 in 2005 to $540 today. Can your house do the same? Unless there's a hyperinflation ahead or your house is located in the New York City or London of the 21^st century, the answer is no. Why? Because your house is ultimately a product--and products have an upper bound to their prices.

To understand this difference, there's no need to drag out the Case-Shiller Index or analyze complex statistics. Suppose one bought a single-family house over a decade ago for $200K. At the peak of the housing bubble, the price reached $500K; to his joy, the owner sold it and moved thereafter to retire in the Bay of Plenty. Can the house's price go higher from here? With Apple, the stock price can just keep climbing with greater profits and innovations. But is that true with real estate?

For the sake of argument, let's say that prices do keep rising. Eventually, the second owner sells to another buyer for $1 million a decade later. Guy number two also peacefully retires in bounty. Well, where does that leave the third guy? Unless real salaries make an incredible jump in the same time period, no one will be able to afford the home next. The median worker earning $51K won't be selling such a house for retirement; instead, it will take him until retirement to afford it. In many ways, this "investment" more closely resembles a Ponzi scheme. (Yes, Ponzi schemes work: for those who get in early and get out - as the recent real-estate bubble demonstrated.) Ultimately, there's an upper bound to housing prices - they can't continue rising perpetually with no end.

The same is true of any product. At $300 for the newest iPod Touch, Apple might be doing well, but at $10,000 per unit, there likely would be very few buyers. As a homeowner, you're not holding a company that can innovate, cut costs, and enter new markets. You're ultimately holding a product which must be either sold to the next user or leased to the next renter. Houses are a good created for a specific use - to put a roof over one's head. They are not magical money machines. Previous generations understood this very simple concept. One built a home as a place to live and escape the elements - and worse yet, the squalor of tenement housing. Homes were not retirement tools, but rather long-term goods.

Unfortunately, policy makers still view homes as investments and are always worried about low prices. But is it really healthy to play another round of the same Ponzi scheme? Suppose the Reserve Bank manages to inflate housing prices again. There will be another boom in which some folks will make a tremendous amount of money. Eventually, housing prices will hit an unrealistic upper bound. Again, home prices will violently drop, resulting in homeowners deeper underwater than now. Of course, the banks will again take a hit as the mortgage holders. As long as real incomes trail the rise in housing prices, there will ultimately be a correction of some sort.

So, do I think the current real estate market is just fine? No, of course not; but I don't think shocking houses prices back into a bubbly stratosphere is the solution. Ideally, I'd like to see increasing housing prices, but only at the pace of real growth in society's wealth. Over the last few decades, houses grew in value for good reasons and bad. On the good side, the economy had been expanding. On the bad side, central banks’ low-interest-rate bubble artificially inflated housing prices beyond what made sense for economies to sustain.

If US companies such as Apple are creating greater abundance in society, it makes sense for US housing prices to grow with greater wealth. But, bringing house prices higher on a wave of printed cash does not make anyone wise investors, but rather willing participants in a Ponzi scheme where someone else will be left holding the bag. Though that might be an attractive solution for those underwater on their mortgages, it's no solution for the economy as a whole--nor for the next buyer, or the next but one. 

Vedran Vuk is a senior research analyst with Casey Research

Q: "Why does Trump want to control the Federal Reserve board?"

"Questions you should be asking right now: 

"1. Why does Trump want to control the Federal Reserve board? 

"2. Why does Trump want to staff it with an economist who's best known for his crackpot scheme to intentionally devalue the dollar & effect a backdoor national debt default?"

~ Phil Magness

Doug Casey: "The goal is to remake the world’s monetary regime"

 

"Stephen Miran’s appointment to the Federal Reserve isn’t just another personnel move—it’s the placement of Trump’s Reset architect inside the very institution that will help carry out America’s most ambitious economic overhaul in generations.

"If you’re still unfamiliar with what Trump’s Reset entails, I strongly recommend checking out Matt Smith’s comprehensive analysis. He’s done the heavy lifting of connecting dots that were only hinted at in Miran’s original white paper. ...

"The goal is to remake the world’s monetary regime….

"But there are consequences to Trump’s plan - one of which is a guaranteed period of painful adjustment. ...

"Trump doesn’t just want a weaker dollar - he wants a dollar that is radically devalued against every other currency on earth. ... a dollar devaluation of 90%.

"That may sound horrific - but it’s only slightly less than the devaluation of the 1970s, when the dollar lost 75% of its purchasing power.

"Anyone not holding 'real stuff' - like gold, silver, natural resources, commodities, etc. - is going to see a dramatic drop in their standard of living.

"Team Trump will deal with US debt the way governments always deal with debt…

"By inflating it away - and with it, the purchasing power of your US dollar savings....

"But he wants more than just a weak currency.

"He wants to change the nature of the US economy by copying China['s] model of state-backed investment.. ... [and] industrial policy ... [demanding] large profitable corporations reinvest in China. ...

"Trump’s plan will [demand] the same of US companies. And the Trump plan is already in motion. Apple announced a $500 Billion investment in America in late February ... [Intel were forced to give a ten percent cut to the US Government.] ... Expect to see many announcements like these ....

"[Trump's advisor Stephen] Miran makes it clear that nothing good can happen until the burden [sic] of having the reserve currency is shared by our trading partners.

"Does that mean the dollar will lose its status? Probably."

~ composite quote from Doug Casey's 'The Mar-a-Lago Accord Confirmed: Miran Brings Trump’s Reset to the Fed' and Matt Smith's 'Get Ready for Trump's Monetary Reset'

"Let me get this straight: the Republican Party now favours concentrating power in one individual to impose protectionist tariffs, centrally plan the economy, nationalise stakes in private businesses, and use the Fed to create massive inflation to monetise soaring budget deficits."

~ Peter Schiff 

Rocketing rates rises rightly reviled

"Look at me, I'm on a bus!" Second-prize winner in the "my council spends too much awards,"
Greater Wellington's spender-in-chief Daran Ponter unfortunately ignores the exits.

BY HOW MUCH HAVE YOUR rates gone up by this year?

If you're "lucky," they've only risen by under 3 percent — that's if you're under the regime of either the Whanganui or Waitomo District Councils, or the Bay of Plenty Regional Council. You, dear people, are the "lucky" ones. Only a 3-percent rates rise

Not so lucky however if you live under the arm of the Clutha District Council, Upper Hutt City Council, Waipa District Council, Hamilton City Council, or Hastings District Council. If you're unlucky enough to have those folk on the letterhead of your. rates bill, then you're forced to pay more than 15 percent more this year than last year.

And pity those poor folk in Hastings.  Over the last three years, under Mayor/Chair Sandra Hazlehurst, their rates demands have gone up by just under 50 percent. Fifty percent in three years! And there are four councils demanding even more over these last three years — West Coast Regional Council demanding 66 percent more than they did in 2022, and Greater Wellington 55 percent more.

Well, I guess Wellington does need to fix its pipes, right?

But here's the problem. Those rocketing rates rises haven't been going to fix the pipes, have they. Like every other council ni the country, the Greater Wellington Regional Council has found what its politicians and planners think are far more important things on which to spend your money.

Monuments. Landscaping.

Bread. Circuses. Consultants.

Overseas trips.

All paid for from your rates, which also pay (almost) for their hefty borrowing. 

You can find all these frightening figures at the Taxpayer Union's Rates Dashboard 2025, released today.

>> CHECK IT OUT

THE FIGURES ARE FRIGHTENING. BUT they still don't reveal the whole truth.  'Cos even with rates rocketing, these profligate bastards still can't pay their way. They're not just over-spending, they're over-borrowing.

At least 11 councils have net debt-to-revenue ratios of more than 200 percent.

Hamilton is on 281 percent, just four points away from the limit on councils’ debt covenants. Queenstown Lakes is on 265 percent. Tauranga is on 248 percent now, but forecasting to blow the 285 percent lid from 2030 onwards.

“Some are reaching their debt ceilings, which will have the auditors in a twist,” says [Greater Wellington's Spender-in-Chief Daran] Ponter. “That’s a real issue. If you look to the UK, Birmingham has effectively gone into liquidation in the last few weeks. There’s a city of two to three million people that basically can’t pay its way anymore.”

Hamilton’s mayor Paula Southgate [42% rates rises over three years]and Local Government NZ vice president Campbell Barry, who is the Hutt City mayor [45% over three years], today published research showing the wide gap between council revenues and capital spending obligations, over the 10 years of the new longterm plans.

The research, by Infometrics, shows councils had already committed to $23.3 billion capital investment from 2021 to 2024. Infometrics principal economist Brad Olsen says once construction inflation is added in, that’s nearly $3 billion more.

It's all very well for Nicola Willis to say she wants councils to "stick to the basics" and "not waste ratepayers money" — "focusing on the things people expect them to do, which is the rubbish, the roads, the pipes, the basics - and not all the fanciful projects" — but she is doing damn all about it.

It's just more politico-blather.

Sandra Lee, 2002: Let's get councils
spending more, and doing less core

Nicola Willis is Finance Minister. She should have a good talk to her hopeless Local Government Minister Simon Watts about repealing the one Act that gave explicit permission for councils to begin focussing on all the fanciful projects, and to ignore the things people expect them to do, such as the rubbish, the roads, the pipes, the basics ...

That Act was the Local Government Act, which receives far less opprobrium than it should.

JUST OVER TWO DECADES AGO, in 2002, the then-Local Government Minister was the hard-left Alliance Party's Sandra Lee. And it was then that local government debt began to rise dramatically — not because councils around the country were over-investing in infrastructure; not because they were going hard on their core business; not at all because they were building, maintaining and upgrading roads, bye-roads, drains, pipes and parks as they were damned well supposed to. For the most part, instead, with some significant exceptions, they weren't. What they began building instead was a lot of expensive fucking monuments. 

Monuments mostly to themselves.

The culprit here was Sandra Lee's Local Government Amendment Act 2002, which granted to city councils, district councils and regional councils a "power of general competence" (I know, right?) which would enable them to enter into any activity they wished, with the only limit being their imagination and the pockets of their ratepayers.

Prior to Sandra Lee's Local Government Act, councils could only do what they were legally permitted to to, i.e., to carry out their core business. After Sandra Lee's Local Government Act, however, the leash was off. And council credit cards started straight away racking up debt for vanity projects everywhere. 

I'd like to say I told you so. I'd like to, so I will. Because I was as outraged then as I am now:

Libertarianz Leader Peter Cresswell is outraged at today's announcement by Helen Clark and Minister of Local Government Sandra Lee to grant local authorities "a power of general competence" in order to "enhance the well-being of their communities." "The well being of everyone in a community is more likely to be enhanced by retaining a tight leash on councils," says Cresswell, "since most councils have already well demonstrated they struggle for competence."
    "Local government throughout New Zealand's history has demonstrated its utter incompetence in handling the loot they confiscate from ratepayers by wasting it on such idiocies as the New Plymouth Wind Wand, the Auckland Britomart edifice, and the Palmerston North empty civic building." he said. ...
    "More substantially," says Cresswell, "there is a crucial constitutional principle at stake -the constitutional principle that citizens may do whatever they wish, apart from what is specifically outlawed, whereas governments and councils may only do what is specifically legislated for. The main purpose of this constitutional principle is to keep a leash on government, both central and local. It is this leash that is beginning to gnaw at local governments, and it is this leash that Clark and Lee propose to untie."
    "It is a dangerous step to take," warns Cresswell, who points out that councils are being given more 'freedom' at he same time as the Resource Management Amendments Bill threatens to take away even more freedom from New Zealand property owners. "The constitutional principle is being reversed," he says. "Even as they propose giving local government wider powers to act, they are taking away the power of individuals to act for themselves," says Cresswell. "Every property owner should rise up in protest," he says.
    "Libertarianz will be making a strong submission on the consultation document," says Cresswell. 

Which we did. For all the bloody use that it did: The Clark Government passed it, a succession of Local Government ministers since since has kept it, and every bloody local councillor ever since Sandra's "permissive" Act has spent like a drunken sailor on shore leave with a start-up founder's credit card.

The New Zealand Local Government Funding Agency (LGFA) supplies around two-thirds of that council debt, and last time I looked their tab was just over $18 billion. That's about $20,000 for every ratepayer. Add to that an existing $5 billion of Auckland and Christchurch council debt. And those numbers are every year by around a billion a year as ballooning rates rises fail to keep up with even-more ballooning council spending.

And as you can now see, it's not like they've been spending much of it underground.

In Christchurch they've been turning the city into "an innovative and modern community with major facilities from Akaroa Wharf to Te Kaha Canterbury Multi-Use Arena." In Wellington they've been watching the city's infrastructure crumble while they vote to spend hundreds of millions on earthquake-prone inner-city monuments of questionable value. And here in Auckland, council have allocated yet another billion dollars (plus fuck-ups) to pour down the ever-expanding black hole of the train set with the ever-disappearing-opening date, plus several hundreds of millions more to continue transforming the place into "one of the world's most liveable cities."

A shame there are still very few plans to make it an affordable one.

What on earth is to be done?

You know, here's an idea.

Instead of keeping Sandra Lee's Local Government Act and binning Three Waters, which is where this new Coalition Government went, how's about — and hear me out, now that you've all heard the story —how's about we bin Sandra Lee's act and tell fucking councils to stop over-spending, to close down their PR departments, and to get back to their core fucking business.

Maybe you could suggest something like that to Simon Watts, who's the current Local Government minister. 

But you'll have to explain to him first who Sandra Lee is, and what she did back then to stuff things up. Because the gormless twit does appear a bit simple.

UPDATE: It's been pointed out to me that Simon Watts is trying to overturn some of Sandra Lee's Act, and argued that I've been unnecessarily harsh about him in my conclusion.

Nearly two years into his job, he is introducing an Act he says will "refocus" councils to their core jobs.

. . . .

 . . . .

. . . .

Unfortunately, however, while this is good as far as it goes, it's the Act from way back in 2002 that still needs a bullet.

 

Javier Milei has revolutionised regulatory reform in his Argentina, taking a virtual chainsaw to useless bureaucracies. In a recent interview with Lex Fridman, Javier Milei revealed his method, described here in this guest post by Daphne Posadas. Here's ere's how his "chainsaw model could still inspire real reform in Washingtom, and even back here in Wellington...

Javier Milei’s Chainsaw on Bureaucracy

by Daphne Posadas

“What is the difference between a madman and a genius? Success.” That opening line set the tone for Javier Milei’s two-hour interview with Lex Fridman. In it, Argentina’s libertarian president reflected on the first few months of his administration following his historic electoral victory on November 19, 2023.

Milei has been called many things, but his methods and philosophy thrive under scrutiny. In a free society, being questioned is both a challenge and an opportunity. What sets Milei apart is his ability to answer tough questions with logic, evidence, and, most importantly, results.

His anarcho-capitaliist rhetoric is—as he said—rooted in a libertarianism that has an “unrestricted respect for the life project of others based on the principle of non-aggression and in defense of the rights to life, liberty, and property,” a definition championed by Alberto Benegas Lynch, Jr., and that follows John Locke’s ideas.

A Model Exported

Milei’s reforms haven’t gone unnoticed in the U.S., especially after the announcement of the Department of Government Efficiency (DOGE), to be led by Elon Musk and Vivek Ramaswamy.

In the interview, Milei highlighted how Argentina’s Ministry of Deregulation and State Transformation, led by Federico Sturzenegger, is systematically dismantling protectionism and privilege by eliminating 1 to 5 economic restrictions daily.

This approach is catching attention worldwide, as Musk and Ramaswamy have hinted at adapting this “chainsaw” strategy. Ramaswamy recently posted on X: “A reasonable formula to fix the U.S. government: Milei-style cuts, on steroids.”

The Chainsaw Reforms

If there’s one image that defined Milei’s 2023 campaign, it’s the chainsaw. He carried a real chainsaw to his rallies, chanting “¡Motosierra! ¡Motosierra!” (Spanish for “chainsaw”) as a symbol of his promise to slash Argentina’s bloated bureaucracy.

When Milei took office, Argentina’s inflation was out of control, climbing at almost 1% per day. Fixing the fiscal deficit became his top priority, knowing nothing else would work without a solution on that front. In just a few months, he made drastic changes: cutting over 50,000 government jobs, shutting down more than half of the ministries, slashing regulations, and removing subsidies.

The results? Inflation has dropped from 211% year over year in December 2023 to 107.4% in November 2024, according to the latest inflation data from INDEC. According to UFM Reform Watch’s Daniel Fernandez, Javier Milei’s government has now achieved 10 consecutive months of primary fiscal surplus: “Between January and October 2024, the Argentine government accumulated a primary fiscal surplus equivalent to nearly 1.7% of GDP”—a remarkable turnaround.

Milei: A Former Academic

As a former economics professor, Milei excels at breaking down complex economic concepts. Early in the interview, he provided a roadmap for those interested in understanding Austrian economics with big references: Human Action by Ludwig von Mises and Principles of Economics by Carl Menger, two starting points for him. He also name-dropped other thinkers, including Murray Rothbard, Friedrich Hayek, Hans-Hermann Hoppe, Jesús Huerta de Soto, Juan Ramón Rallo, Philipp Bagus, and Walter Block—a quick guide to both Anglo and Hispanic perspectives on libertarian thought.

When Fridman dug deeper and asked about his economic philosophy, Milei replied: “Ideally, anarcho-capitalist; in reality, minarchist.” This summarizes his pragmatic approach to reducing the state’s size through what he calls “the largest structural reform in Argentina’s history” while being realistic about what’s possible. Here Milei also addressed criticism from some libertarians, saying they often fall for the “nirvana fallacy”—expecting perfect solutions in an imperfect world.

Key Takeaways

There are two main takeaways from Milei’s interview with Fridman. First, Milei knows what he’s talking about. Too many politicians don’t really understand economics, but Milei clearly does. He doesn’t just memorise numbers; he explains the reasoning behind his decisions, and it makes sense. Second, market-driven reforms can deliver results. Contrary to popular belief or experts’ advice, these changes don’t require decades to show their impact.

Will these reforms catch on all the way to the White House? [Or here in Wellington?] Only time will tell. But for now, it’s clear that Milei’s approach is turning heads around the world.

I highly recommend watching or listening to the full conversation [dubbed into English]. It’s an incredibly stimulating discussion, particularly for economics enthusiasts eager to see theory translated into real-world policy action.

Daphne Posadas is a Project Manager at the Foundation for Economic Education's FEE en Español, the Spanish branch of the Foundation for Economic Education (FEE). She holds a Bachelor’s degree in International Relations from Universidad Francisco Marroquín, andis pursuing a Master’s degree in Economics at the University of Troy, Alabama. In 2021, she was a panelist at the Mont Pelerin Society conference, becoming one of the youngest speakers in the conference’s history.

Her post first appeared at the FEE blog.

More on trade

Oops. 

"Here's the thing about Trump's tariff plans," explains David Henig, focussing just on the economic vandalism in the States. It will undoubtedly mean it will almost certainly be cheaper to simply manufacture everything outside the US and just import the final product.

He explains that a flat tariff, whether 20% as suggested for most non-US products—or up to 60%, as the moron is proposing for Chinese goods—would be levied in a "non discriminatory [fashion] between intermediate and finished goods. Trump may only be thinking of final consumer goods," if 'thinking'is really even the correct word to use in a context such as this, "but they [finished goods] may only account for 5% of imports." So ...

What does it mean for Trump's tariff plans that nearly all US goods inputs are intermediate goods? Essentially, that if all goods attract a 20% tariff, then it will almost certainly be cheaper to simply manufacture everything outside the US and just import the final product.

What does that mean in plain English?? 

"Intermediate goods" is what economists call stuff that businesses buy to make other stuff. So in that graph above, it means all those capital goods, industrial supplies, and car parts and engines are all intermediate goods. But so too are any consumer products that businesses buy intending to make subsequent sales—they are all, of them, inputs into the "final production" of American goods.

Thus [as Don Boudreaux explains], nearly all imports that are not raw materials are appropriately classified as intermediate components.

And so: 

the percentage of American imports that together comprise the category “intermediate components or raw materials” is far larger than 53%. Indeed, it’s likely well over 95%.

So what does that mean in simple economics? 

In economics so simple that even a moron (or a US president) could understand? 

It means that if tariffs are imposed as the moron intended then "it will almost certainly be cheaper to simply manufacture everything outside the US and just import the final product."

Oops.

And it goes for us too.

"Australia’s federal treasurer Jim Chalmers has criticised the Reserve Bank for raising interest rates, instead of taking responsibility for the green inflation he and his fellow incompetents unleashed. ...
    "'[A]s the government braces for more weak economic figures due this week ... Chalmers said the government was focused on walking the tightrope of bringing down inflation without further pressuring people “already being hammered by higher interest rates”. ... '
    "The failure of Chalmers and his fellow incompetents to address grid instability, plummeting dispatchable capacity, and unpredictable price spikes is particularly reprehensible, given that all they need to do to fix this problem is ditch all their green energy mandates, and encourage the construction of enough new coal plants to stabilise the grid.
    "In my opinion Australia is now all but un-investable. With an uncertain electricity grid, spiralling prices, crumbling wage restraint, rampant inflation and soaring interest rates, and an incompetent government which is more focussed on shooting the messenger than addressing the underlying economic problems, who in their right mind would risk investing in Australia?"

~ Eric Worrall from his post 'Aussie Green Economy Blame Storm Gathers Momentum'

When libertarian economist Javier Milei was elected as Argentine president to fix the results of decades of mismanagement, he proposed a series of economic reforms dubbed by his critics as “shock therapy" – including slashing government spending, cutting bureaucracy, and devaluing the peso.

Critics warned these measures would be disastrous, and many took it for granted that the remedies would deepen Argentina’s recession. But as Jon Miltimore explains in this guest post, a year on and it's becoming clear that the reverse has happened ...

Did Javier Milei Just Lift Argentina Out of Recession? 

by Jon Miltimore

During his first year as president, Javier Milei has been waging a bitter but largely successful campaign against inflation.

Now, Argentines received more welcome news: their economy is growing again.

“Economic activity rose 1.3 percent from April, above the 0.1 percent median estimate from analysts in a Bloomberg survey and the first month of growth since Milei’s term began in December,” Bloomberg reported on July 18. “From a year ago, the proxy for gross domestic product grew 2.3 percent.”

The positive economic report, based on data from the Argentine government, is a surprise to many.

The 2.3 percent year-over-year increase defied expectations of a decline of similar magnitude, Bloomberg reported. As Semafor notes, the Argentine economy was projected to have the least economic growth of any country in the world in 2024, according to the International Monetary Fund.

A ‘Wrecking Ball’?

Argentine economists I spoke to said that the numbers are encouraging, but the country’s economy is far from being out of the woods.

As most people know, Milei inherited an economic mess decades in the making. When the self-described anarcho-capitalist assumed office in December, Argentina was suffering from the third highest inflation rate in the world—211 percent year over year. The poverty rate was north of 40 percent, and Argentina’s economy was declining.

With his country’s economy in a full tailspin from decades of Peronism, Milei proposed a series of economic reforms dubbed “shock therapy” that consisted primarily of three components: slashing government spending, cutting bureaucracy, and devaluing the peso.

Critics warned that these measures would be disastrous, and many took it for granted that the remedies would deepen Argentina’s recession.

The former head of the International Monetary Fund’s Western Hemisphere Department, Alejandro Werner, said Milei’s strategy could tame inflation, but at great cost.

“A deep recession will also take place,” Werner wrote, “as the fiscal consolidation kicks in and as the decline in household income depresses consumption and uncertainty weighs on investment.”

Felix Salmon, the chief financial correspondent at Axios, concurred, comparing Milei’s policies to “a wrecking ball.”

“Milei’s budget cuts will cause a plunge in household income, as well as a deep recession,” wrote Salmon.

Despite these warnings, Milei delivered his “shock therapy” plan in the first few months of his presidency. Tens of thousands of state workers were cut as were more than half of government ministries, including the Ministry of Culture, as well as the Ministries of Labor, Social Development, Health, and Education (which Milei dubbed “the Ministry of Indoctrination”). Numerous government subsidies were eliminated, and the value of the peso was cut in half.

Even before Milei’s policies were given a chance to succeed, many continued to attack them.

“Shock therapy is pushing more people into poverty,” journalist Lautaro Grinspan wrote in Foreign Policy in early March. “Food prices have risen by roughly 50 percent, according to official government data.”

Yet the official government data Grinspan cited was a report from December 2023, before Milei had even assumed the presidency.

Contrary to the dire predictions, the results of Milei’s policies have been better than even many of his supporters had dared hope.

During the first half of 2024, inflation cooled for five straight months in Argentina, the Associated Press reported in July. Though consumer prices were up 4.6 percent in June from the previous month, that’s down from a 25 percent month-over-month increase in December, when monthly inflation peaked in Argentina. Meanwhile, in February the government saw its first budget surplus in more than a decade. And just days ago, an economic report was published showing a massive decline in poverty in Argentina.

Many doubted that these successes were possible, and the conventional wisdom said that wringing inflation out of the economy and slashing government spending could only be achieved at great cost: a deepening recession.

Escaping Recession?

The data suggest that, contrary to what so many people predicted, Argentina may not be slipping deeper into recession following Milei’s shock therapy. Instead, its economy is healing.

“Argentina is officially out of recession after 7 months of Javier Milei’s economic reforms,” Daniel Di Martino, a University of Columbia student pursuing his PhD, tweeted. “Remember, the economy was in recession since mid-2023, half a year before he got into office.”

Others, however, warn that it’s premature to say that Argentina is out of its recession.

“I will be careful of claiming ‘out of the recession,’” Nicolás Cachanosky, a native of Argentina and Associate Professor of Economics at the University of Texas at El Paso, told me. “Maybe the Argentine economy is getting out of a recession. Maybe not. All I’m saying is that it is too early to confirm, given these numbers.”

Cachanosky notes that interannual figures can be misleading, and that the data in question are relative values and not technically growth rates. While it’s still unclear where Argentina’s economy will go from here, it bears exploring why so many people, including many economists, doubted that its economy could be growing again already. There are two primary reasons, one of which is legitimate.

The first reason is a legitimate concern that sharp reductions in government spending will likely result in short term pain, even though it’s a necessary step toward economic healing.

“The government spends a bunch of money and keeps people employed,” one economist I spoke with told me. “When that slows down, you’re going to be able to measure the impact of that.”

This is why some free-market economists I spoke with expressed doubts that Argentina had already escaped recession. Cutting tens of thousands of jobs, even unproductive ones, and slashing hundreds of millions in subsidies is bound to have an impact on economic activity. Long term that impact will be positive because it will result in a more efficient allocation of resources, but it’s not unreasonable to assume it will first result in economic pain.

A second reason is a poor understanding of economics.

In the Keynesian school of economics, it’s taken as gospel that government spending fuels economic growth. This is why you’ll find so many Keynesians who argue that even destructive phenomena like war and hurricanes are actually good for the economy, because they stimulate government spending.

This was the argument economist Paul Krugman made several years ago when he said that an alien invasion, real or fake, would be good for the economy, since it would mobilise a massive amount of military spending, similar to World War II.

The idea is simple: government spending is good even if it’s producing goods that are unnecessary, such as weapons created for an alien invasion that is not even real.

The idea that Argentina would be slashing government spending during a recession runs counter to Keynesian orthodoxy, which teaches that recessions are precisely when “fiscal stimulus” is needed the most, since negative economic conditions often result in a predictable market failure: a decline in spending.

Broken Windows and Economic Growth

In other words, Argentina is flipping the macroeconomic script. In a world in which government spending hikes are deemed “a perfect solution in battling recessions,” Milei is providing the opposite: he’s slashing government outlays.

Yet a Mercatus Center study conducted by Tony Caporale and Marc Poitras, titled “The Trouble with Keynesian Stimulus Spending,” points out the obvious problem with such stimulus schemes:

[The Keynesian] approach fails to account for several significant sources of cost. Besides the cost of waste inherent in government spending, financing the spending requires taxation, which entails an excess burden, the reduction in output resulting from workers’ reduced incentive to work. Furthermore, the employment of even previously idle resources involves lost opportunities to invest in alternative uses of these resources.

Caporale and Poitras are talking about an elementary economic concept: opportunity costs. These costs refer to what one foregoes or gives up to purchase a good or service, an idea the economist Frédéric Bastiat explored in his famous “broken window” parable. Economist Jonathan Newman offers a tidy summary of the story, which appeared in Bastiat’s 1850 essay 'That Which Is Seen, and That Which Is Not Seen.'

It goes like this: a boy throws a brick at a baker’s window and a crowd gathers to discuss the economic consequences. They console the baker by pointing out that glass-repair companies need business, too, so it isn’t all bad news. After further reflection, they conclude that total employment and spending in the community has increased because of the broken window, and that this little spark of spending by the baker to repair the window sets off a chain reaction of spending. Now the glazier has extra cash to spend on various items, and the people who sold him those things now have extra income, and so on.

The crowd draws the conclusion that destruction is beneficial for the economy because it stimulates spending and employment.

Does this sound absurd and too good to be true? Well, it is. Bastiat’s parable revealed the absurdity of Keynesian economics before Keynesian economics existed.

Bastiat was challenging readers to see the unseen. Economists shouldn’t focus solely on the glazier’s profits that resulted from the rock thrown at the baker’s window, any more than they should focus solely on the jobs created by military spending. They must also focus on the costs of these actions, too.

This is the flaw that has long plagued Keynesians, and it helps explain why so many took it as gospel that slashing government spending in Argentina would deepen its recession.

When it came to Milei’s reforms, critics and prognosticators were focusing on the seen: tens of thousands of lost jobs, and billions in reduced spending. On one hand, this is perfectly rational. These cuts will come with easily measurable costs, and are likely to reduce economic activity in the short term. On the other hand, whether they are seen immediately or not, there are countless opportunities created by Milei’s reforms, which are dismantling the least productive parts of Argentina’s economy: its bureaucracy.

Whether Argentina’s burst in economic activity in May was a blip or the beginning of a long-term trend of economic recovery is something only time will tell. (Data indicate there was a sharp increase in agricultural production, which could be explained by favourable seasonal conditions or some other factor.)

It’s certainly possible that, after decades of economic pain from Peronism and mass money-printing, Argentina has more work to do before its economic recovery arrives. Yet Adam Smith once noted that the formula for prosperity is surprisingly simple, and it doesn’t contain government “stimulus”: just “peace, easy taxes, and a tolerable administration of justice.”

Milei knows this, fortunately. And he is showing no signs of relenting in his campaign to crush inflation and government spending to return Argentina to prosperity.

“What [is] the alternative?” he told the BBC. “To continue to print money like the previous administration that generates inflation and ends up affecting the most vulnerable?”

* * * * 

Jonathan Miltimore is the Managing Editor of FEE.org and a Senior Writer at AIER. His writing/reporting has been the subject of articles in TIME magazine, The Wall Street Journal, CNN, Forbes, Fox News, and the Star Tribune.

His article first appeared at the FEE blog.