The Olasky Interview - Vito Tanzi

NICK EICHER, HOST: Today is Tuesday, February 18th. We’re glad you’re along today for The World and Everything in It. Good morning. I’m Nick Eicher.

MARY REICHARD, HOST: And I’m Mary Reichard. Coming next: The Olasky Interview.

According to recent reports from the Treasury Department, the U.S. deficit is nearly 20 percent higher than it was this time last year—even as the treasury is bringing in record amounts of money. At current levels, the government is on track to add more than a trillion dollars to our debt this year.

EICHER: This isn’t only an American problem. Many countries have faced similar situations in the past. One of the most dramatic happened in South America, in once-wealthy Argentina. 

During years of economic growth, the country introduced many government-funded programs. But when Argentina’s economy cooled in the 1970’s, politicians embraced deficits instead of discipline. 

One result was runaway inflation: In 1975, the rate of inflation was a staggering 183 percent. But it got even worse a year later: 444 percent. Then came a period of relative stability following spending cuts, but then the government reversed course and sparked an inflation rate in 1989 that hit 5,000 percent.

Do you wonder what that means? Say a gallon of milk is about $3. At 5,000 percent inflation, by the end of the year, that same gallon of milk would cost $153.

REICHARD: WORLD Editor in Chief Marvin Olasky recently spoke with economist Vito Tanzi. He served as a senior staff member of the International Monetary Fund for 27 years. Tanzi is currently the honorary president of the International Institute of Public Finance. 

In this excerpt of their discussion, Marvin begins by asking if Argentina’s economic miseries could happen in our country.

OLASKY: So what lessons does the experience of Argentina hold for the United States?

TANZI: Yeah, well you cannot overdo it. You know, in Argentina, you know, they had some terrible years in the 80s you know, when the inflation went to the sky, hyper-inflation and so forth. They created, they tried to create orthodox policy and then the bad habits came back. Now that bad habit essentially was too much spending in relation to taxes. If you spend too much and you don’t have a high saving rate domestically, you begin to accumulate…you have to sell bonds. 

In the case of Argentina, unfortunately the bonds they could sell, were bought by foreigners so they had to pay them in dollars and not the pesos. The U.S. doesn’t have this situation yet, not at this moment, but can this go on forever? Ah, I doubt it.

OLASKY: And so the Keynesian Theory, you can run deficits in bad times, but basically we’re running deficits all the time now.

TANZI: Yeah. You can run deficits where first, if you ever get into a recession, you know, if you’re in a recession, taxes go down. Spending doesn’t not fall and therefore you run a deficit. And that’s, you know, the Keynesian theory. I think there are very few people who would be against that. There are some at the, at the Chicago school, you know, but uh, but essentially that kind of deficit is tolerated. 

Another one is that if you have good times, for a while, you could run a deficit. Especially if you do certain things. Suppose that you can identify infrastructure projects which are highly productive, you know, projects you  really should do. You know, and you borrow money and you invest it in that thing, then you are doing the same thing that some companies do. Companies borrow money and make investments. As long as the rate of return on the investment is higher than the cost of the borrowing, it’s not a problem. But you know, most governments don’t spend money that way. Most governments don’t spend money in the most productive projects. They spend money for welfare, for groups that should not be getting the money and for inefficiency and so forth. So that’s a different story. You know.

OLASKY: If we keep doing what we’re doing, what would you expect our situation to be in say 10 years from now?

TANZI: Well, if you look at the data of public debt, the public debt of the U.S. is slowly approaching the level of Italy. If you project that for 10 years, you could have a disaster situation where the debt has grown so fast that people will not want to buy it anymore. The banks sooner or later will begin to have an impact on prices. So, you know, you could have a situation that could easily deteriorate and the economy always comes back to haunt you when you try to defeat it. But sometimes it doesn’t happen quickly enough that people see the connection. You know,

OLASKY: Are there are some basic rules that countries should follow to avoid this kind of devolution of falling into poverty, for example: don’t make slicing up pies more important than picking more pies.

TANZI: Yeah. Then there is, you know, there is s big controversy among economists at the moment. Some people like Blanchard for example, he is a well known economist, and some others, who have come to this idea of what they call the new monetary theory, which is that a country can spend…don’t worry, you know, keep spending, it doesn’t matter, you know, spending doesn’t matter. So that’s one theory. 

Another one is the traditionalist. And I was for 20 years, I was the director of the fiscal affairs department of the IMF, you know, and uh, I became convinced that the first responsibility of the country is to keep macroeconomic data in equilibrium. You cannot keep growing a fiscal deficit as the U.S. is. The U.S. is moving to a very dangerous direction. I think over the longer run, you know, of course the U.S. is still a long way from it, but if they continue this space of having a fiscal deficit of 4percent or 5 percent a year and the debt keeps going up, at some point there will be problems. The first rule is macroeconomic equilibrium. The second one is, it’s very much related to the first, that you cannot spend more money than you have.

OLASKY: So in the United States we have the tendency to think that it cannot happen here. But you’re saying basically it could happen here I take it?

TANZI: Yeah, it’s less likely. You know, and I don’t want to be pessimistic. I mean, the U.S. is not Argentina. The U.S. is still a world currency, you know, but if they keep running this year, you know, with full employment, they, you know, the lowest unemployment rate, ever, they say. You know, 3.6 percent. With that situation, and you have a 5 percent fiscal deficit, that means that you’re spending more than you’re getting in revenue. You know, you begin to worry about, you know…

REICHARD: That’s economist Vito Tanzi speaking with WORLD’s Marvin Olasky. Excerpts of their conversation also appeared in the February 1st issue of WORLD Magazine.

(Illustration by Grafilu) Vito Tanzi 

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