Don’t Cry for Me, Albany
Charismatic, populist leader, pretty blonde first lady, intractable financial crisis masked by a cavalcade of cash, before it happened to Andrew Cuomo and Sandra Lee here in New York, it happened in Argentina.
Following the suicidal Falkland Islands invasion, reform of Argentina’s long cycle of borrowing and hyper-inflation seemed assured by the late 90s. With the peso convertible to the US dollar, Argentines had the confidence to save and invest, knowing their proceeds couldn’t disappear on the government printing press. The economy had enjoyed steady growth through most of the 90s, with promise of more.
So why did Argentina need loans from the International Monetary Fund? When The Free Agent borrows money, it is either for investment, such as her modest cottage, or to solve a short-term liquidity problem, such as she infrequently experiences at her cash-only show-tunes piano bar. While she questions whether any government expenditure since the Federal Aid Highway Act of 1956 can properly be called investment, the Argentine government had not mended its ways at all. Like a deadbeat who reforms his credit rating in order to score and default on a new and bigger loan, Argentina’s prosperity was a smokescreen. Borrowed funds disappeared into familiar sink holes—government salaries and pensions, and subsidies to the provinces. Debt and currency crises in other emerging markets in the late 90s motivated the IMF to mask Argentina’s looming default by issuing a new loan even when it was clear it could not pay the interest on its existing debt.
As a scorched-earth bonus, because debts had to be repaid in dollars but Argentines were paid in pesos, the previously functional banking system was hollowed out as the government desperately tried to satiate its lenders. (As a general rule, The Free Agent grabs her wallet when politicians start talking currency restrictions.)
On December 23, 2001, Argentina defaulted on private foreign lenders, and a revolving door was installed on Casa Rosada, the presidential palace. The convertibility system was ended two weeks later, by June, the peso was trading at 26 cents. In 1999, 10% of Argentines were indigent, by the end of 2002, 28% were.
Like the rural provinces in Argentina, US local governments have become addicted to handouts from the capitals above them. When local property tax revenue falls short, when homeowners short sell or abandon properties, for example, they appeal to state coffers. When states, long on pensions and other entitlements, fall short on sales and income tax (and in 2009, all but 6 did) they look to Washington. Like Buenos Aires, when Washington can’t make payroll, it has to two options—ask buddy nations like China and Saudi Arabia for a tenner till payday, or fire up the printing press.
Such is the complexity of New York’s finances that a supposed budget hawk like Mister Cuomo can nobly tilt at windmills, “Albany must give up its insistence on pleasing the special interests rather than serving the people.”, while supporting expansion of New York City’s ludicrous rent control laws. His idea for dousing the explosion in Medicaid spending will sound as familiar as Evita’s great torch song: improve delivery while cutting costs. (When Wal-Mart does that, New York’s reaction . . .well, that is perhaps for another column.)
In 1990, fifteen years after New York City’s bailout, public debt was $14.4 billion. In 2000, before debt reform was enacted, it was $37 billion. A peep inside New York’s public debt can today shows obligations of $60.4 billion. (Five years ago, it was $48.5 billion, almost exactly the amount of Argentina’s IMF loans when it defaulted.)
Without paging through, to use an arcane reference, phone-book-sized state budgets, The Free Agent will posit the single most important similarity between New York (ville et department), Argentina, and Washington. Unlike The FA, or you, or any private person or corporation, they have the ability to borrow money with no responsibility for paying it back. Forget about the debt ceiling, The Free Agent proposes a tiny adjustment to the way governments borrow money: that any non-capital borrowing must be repaid within the elected term of the borrower. Politicians get rewarded by kicking the debt can down the road, pleasing voters today and shifting the burden onto public schoolchildren whose rudimentary math skills they hope prevent them from appreciating the iniquity. The Free Agent would like taxpayers to lend money less like Fannie Mae and more like the local Italian Brotherhood.