Change for the worse in Argentina

Mary Anastasia O'Grady:

As the presidential campaign drones on, Barack Obama and the Democrats are fleshing out the promise of "change" with some specific, big-government policy proposals. Many are familiar, perhaps because they already have been tried – in Argentina.

That country has gone from South American breadbasket to world-class basket case. For the long version of how it happened and why Americans might not want to try it, hop on a flight to Buenos Aires. Here's a condensed version:

Although the winding down of Argentina to the status of international deadbeat began a century ago, the latest chapter is instructive. In March, President Cristina Fernández de Kirchner seized on rising soybean prices to slap "a windfall tax" on soy exports. Farmers refused to pay, the president wouldn't budge, and a deadlock ensued.

Much of the rest of the country joined sides with the growers. But the uprising is no longer a tax revolt. It has become a rebellion against unfettered executive reach – or, in the view of the opposition, Mrs. Kirchner's authoritarianism. A week ago thousands of Argentines poured into the streets of cities around the country, banging pots and pans to express their dissatisfaction with their president's heavy-handed ways. It was the largest public outcry since the economic crisis in 2001.

Mrs. Kirchner, whose approval rating is down to 20%, responded to the protests in a harshly worded speech on Tuesday. She warned that "the country cannot be governed by casserole dishes, bullhorns and roadblocks." Easy to say now. But it was saucepans in the streets that led to the collapse of the government of President Fernando de la Rua in 2001. Mrs. Kirchner didn't seem to mind that overthrow of democracy, perhaps because her Peronist husband Néstor Kirchner was subsequently elected president.

Nor did Mrs. Kirchner cry foul when her husband used "emergency powers," delegated to him by the Peronist-controlled Congress, to rule by decree for five years. There was no intervention that Mr. Kirchner considered out of bounds. It was, after all, "a crisis." He imposed price controls, raised export taxes, increased populist subsidies, abrogated contracts, stiffed creditors, ended central-bank independence and even manipulated inflation statistics. The private sector and profits were demonized and the press was harassed.

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This gets us to the root of the problem, which developed long before the Kirchners' abuses of market and legal principles. The constitution once held limited government and private property to be among the highest ideals of the land. But in the 1920s these protections, which had made the country a magnet for immigrants and the seventh-largest economy in the world, began to erode.

An early example of this assault on liberty was when Congress imposed a rent freeze to deal with a housing shortage after World War I. This only exacerbated the problem, and in 1922 a politicized Supreme Court widened state powers to allow the regulation of rents. That decision put property-rights protection on a slippery slope. A decade later the Court gave the legislature the power to regulate interest rates.

The interventions didn't end there, and as state control of the economy expanded and the nation grew poorer, the country could not recover its footing. Economic populism and labor militancy took hold; protectionism blossomed and Argentina became a welfare state. Meanwhile, the informal economy swelled under the high cost of legality.

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There is no one dumber or more dangerous than a person who thinks he is smart enough to run a command economy. The command economy is at the heart of Argentina's problem. It works no better in Argentina than it worked in the Soviet Union or the US. Housing is a prime example. Rent controls reduce the supply of available housing because they reduce the incentive to build new housing, which drives up the demand for the available housing which requires rationing and standing in line.

In the US two cities with the highest cost of housing are New York and San Francisco, both of which have building restrictions and rent controls. In contrast, Houston has neither and it has some of the most affordable housing in the world. You can get a home two to four times larger than either New York or San Francisco in Houston for about one fourth the costs and if you like you can throw in a swimming pool.

In Argentina the government is killing the export business with a ridiculous confiscatory tax on the production of farmers for the benefit of those who didn't produce something of value to others. This takes incentives away from both groups. The farmers have less incentive to produce if the government is going to confiscate the results of their effort and the people get the benefits of their efforts have less incentive to produce on their own.

You get the feeling there are no intelligent economist in the Kirchner government, or if they exist they are not being listened to. When you have a government that believes it can repeal the law of supply and demand, you have a government not only out of touch with the people, but out of touch with reality and common sense. You have Mugabe's Zimbabwe and Kirchner's Argentina.

Argentina has the potential for a great economy if the government will just get out of the way. Now it is stifling the productive potential of its people and causing money and investments to also flee.