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Culture Q&A

Vito Tanzi

A reckless path

Could Argentina's economic miseries happen here?

Illustration by Grafilu

Economist Vito Tanzi grew up in Italy, gained a Harvard Ph.D., became a senior staff member of the International Monetary Fund for 27 years, and is now honorary president of the International Institute of Public Finance. Here are edited excerpts of our interview.

Was Argentina when you first went there in the 1960s better off than it is now? I was living in Washington at the time, and my first impression of Buenos Aires was that I was going from a village to a metropolis. Argentina started as a welfare state when it was still a very rich country relative to other countries, but once you created a new mentality, you created a lot of vested interests. Argentina had a very wealthy agricultural sector but did not use that money to accumulate resources for bad days. It used it to hire additional people and expand the welfare state—and eventually got into difficulty in the 1970s and 1980s.

Should countries follow some basic rules to avoid economic failure—such as, “Don’t make slicing up pies more important than baking new pies”? Yeah. Some people say keep spending and it doesn’t matter. The U.S. is moving in a very dangerous direction: If it continues to have a fiscal deficit of 4 or 5 percent per year, so the debt keeps going up, at some point there will be problems. But the first responsibility of a country is to keep its macroeconomic data in equilibrium: You cannot run a large fiscal deficit for a long time without paying a price. The second one is related to the first: You cannot spend for welfare more money than you have. 

Is Modern Monetary Theory, which is becoming popular among some U.S. politicians, an attempt to rely on magic: run deficits but don’t have to pay up, eventually? Yeah, it’s become a cult. In the last two years we have not had much inflation, so the U.S. government has been able to borrow a lot of money with very little immediate cost. There are problems. Pension funds are not accumulating assets, and people when they reach 65 will find out the problem with that. 

What lessons does the experience of Argentina hold for the United States? Bad habits: too much spending in relation to taxes. If you spend too much and don’t have a high savings rate, you have to sell more and more bonds. The public debt of the U.S. is slowly approaching the level of Italy. You project this for 10 years more and you could have a disastrous situation where the debt has grown so much that people would not want to buy it anymore. 

The public debt of the U.S. is slowly approaching the level of Italy.

Then comes hyperinflation. Argentina President Juan Perón, who kept expanding the welfare state, dies in 1974. Inflation in Argentina hits 183 percent in 1975, 444 percent in 1976. How does that happen? Two things. First, the central bank creates more and more money to finance the fiscal deficit. People begin to anticipate that prices will be higher next month than they are today, so they buy all kinds of things, essentially running away from money, and inflation starts zooming up. The moment this happens is always uncertain. 

In the 1980s Argentine inflation slowed down but then jumped again: 400 percent in 1988, 5,000 percent in 1989. What happened? The bad habits came back. The government started spending more than it should. 

Don’t people learn from the past? When the government repeatedly defaults on loans, does that make it difficult to get more loans later, with higher interest rates required? Carmen Reinhart and Kenneth Rogoff, in This Time Is Different, presented lots of historical data related to your question. The answer: People continue to be fooled. They hear lots of good promises. They’re looking for a higher rate of return. Right now many junk bonds are sold in the U.S. because the alternative is to get 0 or 1 percent, but you can get 7 percent by lending to a risky place. The temptation is to do that. 

So the U.S. has a big junk bond problem now? Definitely. It’s a huge amount of debt. Investment companies say they spread the risk over many giant bonds so if one goes broke, they still get from the other. That ignores the systemic risk when you have a recession that affects everybody. 

You’re saying what has happened in Argentina could happen here? It’s less likely. The dollar is still a world currency. But if you keep drinking too much alcohol, there’s a problem. When you have almost no unemployment and you have a fiscal deficit of 5 percent, you begin to worry. What will happen if unemployment goes to 10 percent?

Keynesian theory allows for deficits in bad times, but we’re now running deficits all the time. Yeah, and most governments don’t spend money on the most productive projects. They fund money for welfare or a group that should not be getting the money, and they’re inefficient.

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Mark Tooley

Denominational divide

The United Methodist Church is heading for a split, leaving lots of questions

Institute on Religion & Democracy

On Jan. 3, a group of leaders in the United Methodist Church crafted a proposal to divide the denomination into separate liberal and conservative communions. The denomination’s General Conference must vote on the proposal in May, but both liberals and conservatives back it. For a segment airing on an upcoming edition of The World and Everything in It, I spoke with Mark Tooley, president of the Institute on Religion and Democracy, an organization that advocates for Christian orthodoxy. Here’s an edited version of our conversation.

The main issue cited for the split is same-sex marriage. But are there other disagreements between the conservative and liberal factions of the denomination? There are many, many, many issues of disagreement within the United Methodist Church—sexuality is only the superficial. The traditional side sees the church as having a chiefly transformative role—evangelizing, winning new disciples to Christ, new birth, a changed heart, a changed mind, personal holiness, and sanctification. The liberal side would see the church’s role as affirming people where they are, creating an inclusive community, and working for social justice. 

Why are the conservatives forced to form a new denomination under this proposal? Didn’t they win the last vote on this issue? Conservatives are the global majority, but in the U.S. conservatives have almost no political power. Liberals dominate the church hierarchy and bureaucracy, and most American clergy are liberal. The conservatives generally don’t have a lot of interest in inheriting the liberal church bureaucracy, which many see as un-reformable and financially unsustainable. Whereas liberals tend to have a much higher regard and cherish the church bureaucracy that they have controlled for so many decades.

It was much more important to conservatives for each congregation to have the freedom to choose a conservative denomination. And we believe that if people have the freedom to choose, traditional Methodism will come out ahead. 

What could change between now and General Conference in May? Well, the only growing part of the church—and the part of the church that is now almost a majority—is United Methodism in Africa. That’s why conservatives have a global legislative majority and have been able to maintain the official teachings about sexuality. But the Africans have not yet really spoken to the issue of schism and how it might work. So how they come down will certainly have an impact on the final outcome. 

How will a split shake out among churches in the United States and around the world? There are close to 13 million United Methodists around the world—about half of them in the U.S. and half overseas. Of the 6.7 million in America, probably the split will cause at least a half million just to leave altogether at least. That takes us down to 6 million. Of those 6 million, I would expect 2 or 2.5 million to align conservative or 4 or 3.5 million to align liberal. And, of course, the 2 million conservative American United Methodists would align with Africa, which is 5.5 million. So you may end up with a conservative denomination of 7 or 8 million Methodists. 

Do individual churches decide to leave, or does a whole conference make the decision together? It’s both. So, conferences can make a decision. If they do nothing they go with the liberal church. If a local church doesn’t like the decision of its conference, it can make its own decision by majority vote and take its property. 

Any idea what happens to pastors’ benefits—things like insurance and retirement—if they do decide to go with the new denomination? That’s protected, and the pensions agency would continue servicing both sides. 

You’ve predicted the process will be “messy and often tragic.” You also wrote that “many local congregations will divide and die.” Why? The vast majority of United Methodist congregations are not strictly liberal or conservative. Your average congregation probably has a slight right-of-center majority in the congregation, and its clergy are usually left-of-center. The clergy overall are more liberal than the laity. But I think most churches are probably 60/40 one way or the other, and I imagine of over 30,000 congregations in America, probably several thousand will be so divided. A division may be so acrimonious that they will never recover. 

Under this proposal, the new denomination will receive $25 million. What will be left for the current UMC? Why did the committee decide to divvy funds this way? Leaders estimated that the agencies of the denomination may have $120 million in undesignated assets, so one-third was set aside for conservatives—$40 million—and then both sides would be contributing towards a fund to help ethnic churches, which took the conservative side’s amount down to $25 million. 

Anything else to add? This should be seen by traditional Methodists as an opportunity, unique in our lifetimes, to revive Methodism in America, which has suffered continuous decline since the early 1960s. The traditional Methodist church, newly organized, will have the ability—finally—to evangelize and to replant Methodism around America, especially in those areas where it has imploded over the last century: in the major cities, on the West Coast, and in the Northeast. So it’s a very exciting time to be a Methodist.

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George Friedman

Beyond the panicky headlines

Questions remain after the death of an Iranian general

Kevin Vandivier/Genesis Photos

Many American journalists report battles within our government but don’t recognize fissures in the regimes of Iran, China, and other countries. I spoke Sunday evening (audio here) with international affairs strategist George Friedman, chairman of Geopolitical Futures, and asked him how his background in intelligence and international strategy influenced his perception of last Friday’s sensational report from Iraq. His edited responses are below.

When you heard the news that Iranian Gen. Qassem Soleimani had met his earthly reward, what was your instant reaction? What in the world was the head of Iranian intelligence doing just south of Baghdad airport? The last thing you do is allow your head of intelligence to go in harm’s way. You don’t want him captured, you don’t want him questioned. Yet there he was, meeting with the head of Iraqi intelligence. So my first thought was, “This is not how you plan a major attack. This is what it looks like when you're panicking.” 

‘This is not how you plan a major attack. This is what it looks like when you're panicking.’ —George Friedman

Would it have been possible to capture him? I don’t know that we don’t have him as a prisoner. I know one thing: A head of intelligence—the head of Quds Force, his mind filled with the secrets of Iranian intelligence operations—does not go to a meeting in an unsettled country where he might be captured. 

Has Iraq become a tributary of Iran? Well, obviously it’s not enough of a tributary of Iran to make it fully safe. The issue: There are just some things that senior intelligence people don’t do. It would be like in the Cold War, the head of U.S. intelligence deciding to go to a meeting in Bulgaria—probably not wise. So, the issue here is what is going on in Iran, that would cause him—a very, very good professional—to take this sort of risk?

And that’s still a mystery? We know the Iranian economy is in shambles because of sanctions. We know there has been a great deal of unrest. We know the sphere of influence Iran has developed ran through Iraq, Syria, and Lebanon. There have been riots in Lebanon. The Israelis are hammering the Iranians daily in Syria, and the Russians are not protecting them.  And in Iraq there were anti-Iranian demonstrations. 

So, we know that the Iranian position is under tremendous pressure. Normally, at this time, you protect your top assets, and you send other people. So, from the intelligence point of view, this is not the way it works, but it’s what they did. 

What would cause panic?  The Iranians are wondering if the U.S. has penetrated Iranian security. We seem to have been hitting targets, and that seems to disturb them, but even more disturbing is that Soleimani was meeting the head of Iraqi intelligence. And if you’re going to have these two guys meet, you’ll do it in Tehran. Or someplace safe. You will not do it outside the airport.

About 10 years ago, you wrote of the 2010s: “The United States will be required to make a distasteful accommodation with Iran, regardless of whether it attacks Iran’s nuclear facilities.” That seemed to be an accurate prediction during the Obama years. Is it still an accurate prediction?  We don’t know what Iran is going to be. We have to remember that Iran is going through a deep internal crisis. They have been arresting people, they’ve been releasing people, there have been debates, and so on. Everybody assumes this Shiite Islamic regime is secure. It’s not.

When the United States withdrew from Iraq and President Trump basically said, “I don’t want to be involved in a 19th year of war,” suddenly Iran had a sphere of influence that ran from Iran to the Mediterranean. Thus far there has been a standoff with the United States not using military force primarily, but squeezing the Iranian economy.

With the killing of Soleimani, we are in a different place. So, over the next year or two, we’re going to be seeing how this evolves. At this moment, everybody is, of course, shocked, shocked that he was killed. But the real question that everybody’s asking is, “Who betrayed him?” 

How will the Iranians respond? They are threatening external responses. They want to know how the Americans got wind of it, what security failure was there. So what’s going on right now in Iran is a witch hunt: “Who knew what, when? Who did they speak to?” They’re going through all the records, all the movements, and everything else. Something went terribly wrong to a regime that has had things going terribly wrong for a year or two. 

The view we tend to get in The New York Times and other publications is: The sky is falling. What do you think of reports like that? Part of the picture is that the internal politics of the United States are such that whatever the president does, it will be catastrophic—in the press. But it’s also that Iran has power, particularly covert power. It does not have nuclear weapons. It does not have a military force that can challenge United States. 

The United States, for that matter, doesn’t have a military force to challenge the 80 million Iranians. We’ve learned, hopefully, that occupying a hostile country is hard—and it doesn’t always work out as you’d want, so we’re not going to go to war. They may strike at us, but we have shown a remarkable capability of striking at them, and now we’re threatening their leaders.  There’s a huge psychological crisis in Iran. Their security apparatus, which is one of the best in the world, has been compromised.


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