Supporters say the changes will help Argentina address its diminishing fiscal and trade surpluses in the short term. But more importantly, it will allow for greater financial stability and the use of incentives and disincentives to steer investment capital and loans toward businesses and projects that increase jobs and boost domestic production. Critics say the reforms will lead to over-regulation that will constrain finance, and worry that the government will go too far with new spending.
The changes break a host of taboos in the dominant school of monetarism in neoclassical economics and conservative policy circles -- a bold effort to show that central banks can play more proactive roles by providing credit to promote productive investment and job creation, and doing so with an eye to ensuring greater socioeconomic equality.
Such interventionist policies have been rare in recent years. In the 1970s, the financial services industry complained that interventionist central banks were too easily "captured" by populist governments who recklessly increased public spending in order to get re-elected. They famously complained that too much central bank financial oversight was constraining investors' "animal spirits" and amounted to "financial repression," prompting leaders such as U.S. President Ronald Reagan and British Prime Minister Margaret Thatcher to promise liberalization reforms and "independent central banks."
This began the trend in the 1980s of IMF loan conditions and policy advice that pushed central banks to make decisions in increasing isolation from the fiscal demands of governments -- and thus from voters' preferences. Over the last few decades, low inflation became the leading goal of monetary policy, regardless of what else might be happening in an economy, and any fiscal policy goals had to be constrained to accommodate it. In other words, monetary policy came first, and fiscal policy goals were second. The financial sector benefited from the low inflation and the greater degree of freedom to invest capital in speculative activities afforded by deregulation, but government-spending and public investment consequently suffered.
Argentina's dramatic turn will now allow fiscal policy goals to lead, while monetary policy takes steps to accommodate it. But even after 25 years of having their way, economic conservatives disagree with the new tactic; Abel Viglione, an economist at the Bueno Aires free market think tank Fiel, objects to the new mandate precisely because it once again subordinates monetary policy to fiscal policy.
In response to her critics, Central Bank President Marcó del Pont denied that printing currency necessarily leads to inflation, especially when inflation is rooted in other causes. While monetarists may view inflation as primarily the result of too much money in circulation, Marcó del Pont argued that economists should also consider additional sources of inflation, such as bottlenecks in supply routes or external factors like price hikes on international markets -- factors that have been known to spur inflation in Argentina and other countries like it. In such cases, simply raising domestic interest rates -- as the IMF often demands -- does little to solve the root of the problem. What's really needed, in many cases, is increased public investment targeted at clearing up supply bottlenecks or buffering against external shocks.
Yet it is precisely such increased public investment that is often discouraged by the IMF, which claims that rising fiscal deficits will lead to higher inflation and crowd out more efficient private sector investment. Others point out there is little evidence that deficits lead to higher inflation, and more importantly, it all depends on what exactly the governments spend: If the deficit is used to increase public investment in infrastructure, human capital, technology, and R&D -- measures that will ultimately increase the economy's future productivity (and more than pay for themselves with higher taxes over the long run) -- such deficit spending should be OK. Yet critics of this approach worry the government will squander the expenditures on unproductive investments or wasteful consumption, only adding to the debt burden.
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