On Argentina’s (and other Latin American countries’) Discount Factor

As is widely known, Keynes posed that “in the long-run we are all dead”, as well a role for counter-cyclical fiscal policy.

In Argentina, the statement that in the long-run we are all dead is a way of living for many people. Uncertainty reigns. Thus, when a negative shock hits the median citizen the more likely response is to increase expenditures instead of saving. Why? Well, since this median citizen is not sure if he/she will be able to spend in the future—due to the effects of the shock—then he/she will choose to consume today while he/she can. That is one way of thinking that in the long-run we are all dead. Any standard model in economics that you use to rationalize your “optimal” behavior, on the contrary, will generally make you choose to “save for a rainy day: in response to temporary positive shocks. In other words, you need to smooth your consumption intertemporally so as to maximize your utility.

Basic political economy models teach us that, under normal circumstances, the median voter preferences are reflected in the elected government. Following this reasoning, then, an elected government is likely to also live by the rule of in-the-long-run-we-are-all-dead. Examples of this could be increasing expenditures (many times irresponsibly from an intertemporal sustainability perspective) to win elections and increase power, discretional redistribution, inflation-prone expansionary policies, disrespect for the rule of law (i.e. weak property rights), price controls, (recent) debt swaps at high interest rates (the next government, hopefully, will deal with it…), etc. The list can be long, but there is a word that summarizes this behavior: populism.

Of course, populism hides behind Keynes since he was the one that advocated increasing government expenditures to smooth out a recession to offset the effective demand problem. However, Keynes prescription also includes reducing public expenditures in “good times.” This is the part that populists seem to have missed. Alternatively, we can describe populists as Keynesians that misunderstood Keynes—or, I shall say, that interpret it in a biased way so as to falsely (and purposely) believe that they were supported by some degree of intellectuality. Thus, since in the long run we are all dead, let’s spend now; the next one will pay… (if lucky).

I believe this a good simplification of Argentina (and some other Latin American countries) in the 2000’s. The uninterrupted populist governments since 2001 (and the private sector as well) spent irresponsible, without any care for the repayment time. Instead of taking advantage of the external boom to improve the long-term growth and sustainability of the economy, expenditures ballooned—in good times! Now, that the world economy is in a cleansing mode, the government wants to recall that they praised to be Keynesians. Too late. Good times should have been used to accumulate for bad ones—this goes back to biblical times. (Another way to put it is that the government should have built a anti-cyclical fiscal fund instead of increasing expenditures and then appropriating private sector’s savings—AFJP’s fund—instead.)

So, what happened? A rational model of intertemporal optimization might suggest that the median Argentinean has a discount factor that is way too small (a high discount of the future, in the limit converging to zero).[1] The more so for the government, since they will not be in office when the time to pay for the excesses finally comes. The median voter will be there, though. Hopefully, he/she will be more forward-looking next time and decide based on what has been learnt. Otherwise, unless extreme luck hits the country, it will be difficult. Some extreme luck impacted Argentina between 2002 and H1 of 2008, but it was not internalized. Let’s hope that eventually the median voter will increase his/her discount factor and vote accordingly—and rationally, not only according to economic and political economy models, but also in an intertemporally social way.


[1] As in any basic intertemporal optimization model, the ratio of the marginal utility of present consumption to the marginal utility of future consumption equals the gross interest rate times the discount factor. If the latter is less than one, with a concave utility function, consumption decreases over time. The smaller the discount factor is, the greater is present consumption when compared to future consumption.

6 Responses to "On Argentina’s (and other Latin American countries’) Discount Factor"

  1. mario   February 1, 2009 at 2:51 pm

    Hi from Argentina, good article Nicholas, I would rather say that if policy continues to be “buying” the median average vote through cheap clientelism, “we’ll be dead in the short term, rather in the longer run” As a family, we do build a cushion for “rainy days” but people here donot have a foresight while voting, but rather look back on “yesterday’s” event and cast the ballot. Politicians, specially belonging to Peronism, know the trick very well and act accordingly with cheap incentives close to election times. Hopefully this time , the damage done to the farm area, close where I live, will not let these tricks pass clean.Best regards

  2. Guest   February 3, 2009 at 12:16 am

    great piece, nicholas. i always enjoy these short, think pieces, especially the ones on populism. anyways, could voters and politicians be individually rational, even though the outcomes are worse than what they prefer due to everyone behaving the same way. this is assuming that voters don’t think that any non-peronist party (or a non-populist party) could really win office and make various institutions pursue more market-oriented (conservative) policies and that if they (mainly lower class individuals) vote for some a non-populist party they will very likely lose clientelistic privileges (which are very important to the poor)? if the populist, peronist political leaders also see things this way, then what incentive do they have to change policies, since they’ll continue to win elections? yes, the electorate will get upset with the populist peronist political leaders, but these leaders can blame it on the argentine landed elites/bourgeois and/or the international economic system.

  3. Nicolas   February 4, 2009 at 11:37 am

    Mario and Guest,Thanks for your thoughtful comments–I agree with both of you. The “sad” part of it is that the people learn the tough way. Adjustments are painful. The more so, since more conservative governments are blamed for doing these adjustments. I believe, however, that they are driven to do it–they need to given the situation that they inherit; they wouldn’t need to if the excess had not existed in the first place, right?Best,

  4. mario   February 4, 2009 at 3:52 pm

    Guest, very true, for the peronist-populists if the recipe works well, why change ? They have a hostage 30% vote assured, which gives them the floor to continue the party. However this last government won with the support of the middle class too ! And this is a more serious issue to address.Nicolas, the excess has been built up through decades,and now it is a snowball. I believe it is interesting to compare how in developed countries such as the US , the cheap financing credit party was also sponsored , albeit not directly by goverment, but through cheap rates and lack of oversight, with dire results as seen today. This is not populism, but how would you name this situation ?

  5. Nicolas   February 4, 2009 at 7:33 pm

    Mario,You make a good point. How will I call the U.S. episode? Clearly not populism. Let me argue why. With all the mistakes that I realize you are aware of, some differences are the following. Low interest rates along with regulation problems–taking as the source of the problem were implemented for purely macroeconomic purposes. I doubt political motivations behind them, especially since the Fed is independent of the Treasury. It is also worth mentioning that center-left political parties in U.S. (such as Democrats) will be classified as right-wing in the Argentine political spectrum–they are responsible in economic terms compared to a Latin American populist party. I guess I would call the 2000s’ policy probably irresponsible in some dimensions, but not motivated for the same purposes as populism. True, government expenditures went out of control–but for U.S. standards, not for LA standards. Anyway, I guess it was just lack of anticipation on the part of the Treasury, and could be part to blame on Grinspan. In my opinion, Bernanke is currently doing the best that he can given the circumstances. With smart and active people on the new Treasury I am inclined to expect good things. Very importantly, this left-of-the-center government seems to be ready to do whatever it takes to put the economy back on track–a stark difference to populism. And I guess that so would have done a republican government. In times of crisis, whatever the causes, I believe that the government will do whatever is in the best interest of the people. If so, I think will be in the best interest of the world population.

  6. mario   February 5, 2009 at 11:45 am

    First of all, thanks for taking your valuable time to comment on the postings. I am not an economist, just a very interested observer on how this world crisis will unfold, as in my opinion , the world is navigating unchartered waters as of today, furthermore it is a privilege to listen to such valuable insights such as yours or Dr.Roubini’s. In any case, and taking clearly into consideration, that we are undergoing here the most basic, ruthless and painful populism, which unfortunately is the way ordinary ppl understand democracy down here, and this, in turn, has nothing to do with institutional strength through different governments in developed countries, I do beg to differ on the fact that lack of regulation for financial institutions was taken for macro reasons, imho, they did follow a political pathway, pigeonholed by a set of beliefs in the self-controlling nature of the markets, which all the citizens are dearly paying today. Other than that I fully agree with your a.m. statements. I eagerly wait for another good piece coming from you. All the best