4 - Something for nothing?

Summary

“There's no such thing as a free lunch”

Milton Friedman, 1975.

In the previous chapters I have shown that budgetary constraints should always be respected. When economists refer to there being no such thing as a free lunch, they mean that everything comes at a cost, and nothing is created from nothing. From time to time, most of us do get a free lunch as the result of an invitation from someone not looking for anything in return. However, in economics – and macroeconomics, in particular – nothing is free, which says much about the science of economics and the economists who add up the numbers and assess the budgetary compatibilities. In contrast, for politicians the temptation to make someone else pay for their possible excesses is strong. In the case of the macroeconomic policies discussed in this book, this temptation can take the form of reluctance to repay debts taken on by the state, especially, if they are high.

Making others pay

When, in 2001, Argentina defaulted on its foreign public debt, the domestic situation had become unsustainable (Sturzenegger & Zettelmeyer 2007). We have already mentioned that, towards the end of the 1990s, Argentina entered a recession. During that time, the authorities increased both public spending and the budget deficit while maintaining a fixed one-to-one exchange rate with the US dollar. We have seen the results of this combination of excessive public spending and overvalued exchange rates in the case of Egypt and, similarly, the Argentinians were quick to begin shopping abroad and increasing their trade deficit. Among other reasons, the government could not get into debt in the domestic currency (peso) because no one trusted the currency or was willing to buy securities in pesos. Investors and savers feared that, sooner or later, the government would be forced into an exchange rate devaluation, which would result in domestic inflation based on the country's past history and the credibility of its politicians and institutions. Thus, most of Argentina's debt was issued in dollars with foreign creditors. This resulted in a volatile situation and an eventual decision by foreign investors to stop financing Argentina any further.