Big Government Rocks – Part 1

The proposition that big government gets things done — and the corollary that the bigger the government the better it gets — is one of those propositions that sound better the less one thinks about it. But it falls apart under even the slightest load of analytical and empirical examination. Best not to think too deeply about it if one wants to maintain that misconception.

In a recent post (Javier Milei at the UN) I had heaped praise on Argentina’s Javier Milei for cutting his government. Argentina’s economy was in shambles because of insane socialist (but I repeat myself) policies. I won’t go into the details of the absolute disastrous path that Argentina was accelerating on; you can look it up at your leisure. Milei upon assuming office began to put on the brakes and with some luck, will put his nation on the road to recovery.

Argentina

Let’s focus on Argentina since Milei is interesting. In the 1920s, it was one of the wealthiest countries in the world, with an economy that was remarkably prosperous and sophisticated for its time. It was among the top 10 richest nations globally, with a per capita GDP that rivaled or even exceeded many European countries and the United States.

It was a major global exporter of agricultural products, thanks to its fertile lands and a robust agricultural sector. The economy was deeply integrated into the global trade system, with strong economic ties to Britain and other European nations.

Its per capita GDP in the 1920s was approximately $2,500 to $3,000 (in 1990 international dollars). For comparison, the per capita GDP of the US was around $3,500, of the UK around $3,000, and France approximately $2,800.

That was then. This is now. From the top 10 economies of the world in terms of per capita GDP, it is now 71st in the list with a per capita GDP of around $13,000 (compared to the US’s $87,000.) Granted it is not a poor country — the world average is $14,000, and China is $13,000. Still that’s a decline. What bought that about?

Short answer: government. Longer answer: big government.

Let’s look a little bit into that, shall we? It’s never one thing: it’s always a combination of factors. Political instability in the 1930s began the slide. Then Juan Perón’s aggressive import substitution strategy created inefficient state-controlled industries, reduced international competitiveness, increased government spending, and protectionist policies that discouraged foreign investment.

Then the government frequently resorted to printing money to cover budget deficits, which led to inflation and discouraged long-term economic investment. Populist labor policies led to rigid labor markets and high labor costs, and loss of international competitiveness.

If you are paying attention, you’d notice that all this was not the doing of some nefarious foreign agents or aliens from Alpha Centauri (it’s too far away.) This was the handiwork of the Argentinian government — and a big government it was.

If you have any familiarity with the Indian economy and its government, you’d notice some similarity: the import substitution industrial policy, the idiotic land and labor policies, policies that discouraged foreign investment, etc. Argentina was prevented from continuing to flourish by its big socialist government; India was kept hungry and poor by its big socialist government.

This digression on Argentina’s big government was motivated by a few comments on that blog post on Milei. He is doing the best he can by cutting down big government. We don’t know if he’d be successful. It’s too early to tell. But here’s one indicator. He reduced the monthly inflation from 25% (Dec 2023) to 3.5% (Sept 2024). That’s a reduction from an annual inflation rate of 4,250% to less than 52%. Notice the difference?

Socialism — another name for big government — was strangling the life out of Argentina. Milei is strangling big government so that Argentina may once again have a shot at life. But some who love big government because they suck on its ample teats find all this very distressing. Quite understandable but all the same they are mistaken.

But I am an economist. It’s my avowed aim to help people steer clear of bullshit that gets thrown at them.

In a comment to the Milei post, reader “Darth” had pointed to a YouTube video titled, “Mariana Mazzucato: How the State Drives Innovation” and a page titled, “Stop Whining about Big Government.” Go visit those if you wish but I am not recommending them. I note those for completeness.

Thanks to Darth’s comment, it jolted me out of my slumber. This kind of nonsense has to be resisted if civilization has to survive. I will explain why we should kill big government. In a bit.

Here’s part 2 of Big Government Rocks.

Author: Atanu Dey

Economist. View all posts by Atanu Dey