Redstate

Balancing Fiscal Policy on Farmers' Backs

By blackhedd Posted in Argentina | Economy | Kirchner | Soybeans — Comments (3) / Email this page » / Leave a comment »

Something very interesting is going on in Argentina, and it relates to soybeans and beef. As you read through this, try to count the number of parallels between their situation and ours.

Argentina is run by a political power-couple, Nestor and Cristina Fernandez de Kirchner. Nestor became President in 2003, after a miserable economic collapse in 2001-02. He decided not to run for re-election last year, and blessed his wife's candidacy. She's President now.

The Kirchners have strong support among working-class Argentinians. Their opponents are the well-educated urban middle-classes, and the farmers, who represent traditional oligarchic power in Argentina.

The dynamic duo have consolidated their power by systematically weakening Argentina's Congress. And they have engineered an economic boom and cemented their support among poorer Argentinians through massive government spending.

Now Argentina doesn't export petroleum, as Mexico and Brazil do. They export agricultural commodities, some of which are in extremely short global supply. That's where the story gets interesting.

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You've probably heard about the global shortage of soybeans. Europe and China import huge amounts of the stuff, and cooking oil is a politically-sensitive (and price-controlled) staple food in China. For a handful of reasons, bean prices are far higher than normal right now. (That, and continuing rainy weather in the upper Midwest, is why American farmers will be planting more acres to beans and fewer to corn this year.)

Well, Argentina has a huge amount of fertile land that has newly been planted to soybeans in the recent past.

And soybean exports are Cristina Fernandez's piggybank.

She needs one because all of the government spending she and hubby have done are resulting in some big-time inflation. (If you're unfamiliar with Argentina's financial history in recent decades, let's just say they're the poster child for international moral hazard. Don't mention Argentina to an international banker unless you want to get bit.)

I'm told that they can't raise interest rates to cure inflation, because the country no longer has a functional banking system or private credit formation.

So Kirchner went looking for rich people to soak. Early in March, she increased export taxes on soybeans to an effective rate of nearly 44% of revenue (including income taxes). Since the cost of production is nearly 50% of revenue, even at today's elevated world prices, Kirchner has turned soybeans into a marginal economic proposition for Argentina's farmers.

This woman is a strong, tough, savvy politician (like someone else we know). But, like that someone else we know, you want to just smack her in the head for being such an ignoramus on economics.

Earth to Cristina Fernandez: when the whole world wants to buy what your farmers grow, you don't tax them out of business! You let them get fat and happy. In turn, the foreign exchange they bring in will fatten up your economy and pull your fiscal buns out of the fire.

But here's where politics trumps economics. (Sound familiar?) Poorer Argentinians think of farmers as the rich fatcats that always come out ahead by screwing the working stiff, and deserve to be taken down a few notches. Political measures that disadvantage farmers are broadly popular with the Kirchners's electoral base.

But what's happening now? Argentina's middle classes are coming out in support of the farmers, with raucous street demonstrations in Buenos Aires and other cities. That makes sense, because the farmers have been protesting their treatment by withholding ag products like beef from the cities.

And how did Kirchner respond? By calling out the goons. She reportedly has violently suppressed some of the pro-farmer demonstrations.

Pass the popcorn, and let's be careful about electing populist power couples to high office here.

-Francis Cianfrocca ("blackhedd")