How much Government Expenditure is Too Much in Argentina?

 

In a prior post (here), I looked at President Javier Milei's attempt to impose Shock Therapy on the Argentine Economy. A central argument of Milei's policies is that government expenditure must be cut quickly because, given Neoliberal Theory, government policies and expenditures interfere with the growth of a free-market economy. But, Shock Therapy is based on an untested assumption: How Much Government Expenditure is Too Much?** In this post, I'll look at the question from the standpoint of Systems Theory.

From the perspective of Systems Theory, government expenditure in Argetnina is out of control.

At the same time, increased government expenditure (G) would have helped Argentina grow but was inhibited by Regional Latin American forces (LAC). 

Typically, the How-Much-is-Too-Much debate is conducted in terms of percentages, for example, 90-100% of GDP is too much debt. ChatGPT summarizes the recommendations above and concludes that 55-60% of Govt. Spending/GDP is "Too Much". However, in a qualifying sentence, ChatGPT concludes:

And, I would add, Latin American Regional Conditions (LAC). In other words, Milei's "Chainsaw" is a bit too much a blunt instrument.

System theory has more general answer to the  How-Much-is-Too-Much question and it involves: (1) constructing alternative attractor paths for Overall Growth in the Economy (AR1 in Argentina, see the Measurement Model below in the Notes, AR1=(Growth-EF) where EF is the Ecological Footprint) and (2) investigating which path (to include Government Expenditure driven) is best (using the AIC criterion). 

Two paths for AR1 are presented in the graphic at the beginning of this post: (1) AR1 driven by Government Expenditure and (2) AR1 driven by the Latin American Regional Economy (LAC, the best). In other words, more Government Expenditure would create more growth for the Argentine Economy but that growth is limited by the Latin American Regional Economy.

And, the relationship between growth in Argentine Government Expenditure and the LAC Regional Economy is unstable. In other words, government expenditure will keep growing unchecked, exponentially, forever (see the forecast above and System model in the Notes where the dominant eigenvalue is greater than 1.0, F[1,1]=1.089).

So, although more government expenditure might increase growth of the Argentine Economy, growth in Government Expenditure is out of control. Whether Milei can get it under control is another question. And, as is often the conclusion from Systems Models (see the Limits to Growth), slowing down growth rates, not slashing budgets, is what will bring spending under control.

Notes

** Readers familiar with the This Time is Different Controversy will recognize the "How Much is Too Much" debate as a familiar theme in Economics: How much Debt is too much? How much Inflation is too much? How much Financialization is too much? etc. etc. etc.

AR State Space:

System Matrix and Input Matrix for Government Expenditure: