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 of 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:

World-System (1960-2010) Controlling the Argentine Economy.

 

Economists* should probably admit that they don't know how to control the Economy. When an economist and politician such as Javier Milei gets elected as president of Argentina in 2023 and starts waving a chainsaw around as a symbol of cutting government, critics start to get nervous.

In a prior post (here) I found that Latin American Integration could stabilize the economy of Argentina. Unfortunately, Latin American Integration has been tried before and mostly failed, probably because Latin American has it's own problems with instability. The problem leaves me searching for other Geopolitical Alignments. In this post, I'll look more carefully at the ARL20 BAU model, that is, turning inward and concentrating on Business as Usual.

Why all the hand-wringing over Argentina? Millie has become the poster boy for the US Right Wing after giving a speech (with Elon Musk) at CPAC in 2025. The current Trump Administration and it's Department of Government Efficiency (DOGE), originally chaired by Elon Musk, seems intent on copying Milei's shock therapy. Unfortunately, or predictably, it seems that Milei's shock therapy has failed and will require a Bailout from the IMF and the US. So, it seems important to ask the general question about how (if at all) an unstable economy such as Argentina can be controlled?

The argument of Shock Therapy is that if we get the Government out of the economy, the Free-Market will take over and ensure prosperity. In other words, the free market will control the economy. If you have problems, it is because the market is not free of government interference. The "free market" assertion can be proven wrong (here).

From the standpoint of Systems Theory (where we have the best understanding of how to control systems), the first step is to establish an attractor path** among the competing Geopolitical models.

The attractor path (AP) for the ARL20 LAC Input model is presented above (dashed line) with the actual historical data (solid line). There are few serious deviations from the attractor path, except for AR3 (the definitions for the state variables are given in the Measurement Matrix below in the Notes) around 1975 and after 2000. However, AR2 and AR3 are Environmental-Unemployment-Globalization controllers and should be relatively stable over time.

The attractor path (AP for AR2 and AR3) for the ARL20 BAU model is presented above. Notice that it differs from the ARL20 LAC Input model AP. The period from 1980 onwards shows departures for both historical feedback controllers. For AR2=(LU+EF+KOF-CO2), unemployment, Ecological Footprint (EF) and Globalization (KOF) departures were very large relative to Emissions (CO2). For AR3=(EF+HDI+CO2-KOF-LU), departures for Globalization (KOF) and Unemployment (LU) dominated. 

The difference between the two time plots above shows that Latin American forces caused the departures and that the two historical feedback controllers (AR2 and AR3) were unable to correct the system with a period of decades (see the Eigen Modes.

Also, in the DCM model (see the Notes below), these two historical feedback controllers interact: shocking AR2 increases AR3=(EF+HDI+CO2-KOF-LU);  shocking AR3 decreases AR2=(LU+EF+KOF-CO2). In other words, Globalization, Unemployment and Environmental degradation are used as historical feedback mechanisms to control the Economy. 

The effects take decades to work out. The historical feedback controller coefficients are weak (the off-diagonal elements in the System matrix below). The feedback effects in the full ARL20 BAU model (including growth components) are also weak.

Exercise 1: Strengthen the feedback coefficients in the ARL20 BAU model and see if you can better control the system.

Controlling how the system responds to Unemployment, Globalization, Environmental degradation will be a great deal more challenging than cutting Government spending, but better system control is needed in Argentina and a free market will not accomplish everything that is needed (here) while Latin American Integration is a long way off in the future.

Notes

* Part of my Interdisciplinary degree at the University of Wisconsin--Madison (1981) was in Economics, so I should probably include myself in this criticism!

** The attractor path of a Dynamics Components State Space Model (DCM) can be computed with a free simulation starting from historical initial conditions (see Pasdirtz 2007). The free simulation that minimizes the AIC among competing Geopolitical models is considered the "best" attractor path, using some historical judgment when competing attractor paths are not well separated.

ARL20 model AIC summary:

ARL20 model Measurement Matrix AR1=(Overall Growth), AR2=(LU+EF+KOF-CO2), AR3=(EF+HDI+CO2-KOF-LU):

ARL20 model State Space Time Plot:

ARL20 BAU model Historical Feedback Controllers System Matrix:

ARL20 BAU model Historical Feedback Controllers Shock Decomposition: 

ARL20 BAU model modes:

ARL20 LAC Input model modes:

World-System (1960-2100) A Stable Geopolitical Alignment for Argentina?

Argentina just entered what Paul Krugman has called (here) a Classical Monetary-Financial Crisis. The Peso is collapsing, the Central Bank is trying to defend the currency (but is running out of money) and the US is ready to support Argentina with a $20 Billion Swap Line (Bailout). What triggered the crisis? According to Google AI:

After discussing the economics of the crisis, Paul Krugman concludes:

In this post, I'm going to argue that the "alternative strategy" involves Geopolitical Realignment within the World-System. The forecast plot at the beginning of this post shows the ARL20 model being driven by three alternative input systems: (1) the Random Walk (RW, no input, muddle through), (2) the USL20 model (Hegemonic Dominance) and (3) Latin American Integration from the LAC20 model. US attempted dominance of Argentina has been going on since after World War II and it is about to fail (ARL20 model US Input [96.74 < AIC = 106.6 < 117.3]). 

The best Geopolitical model for AR1 (Growth in the Argentinian Economy, see the Measurement Model in the Notes) involves integration with other Latin American countries [63.72 < AIC = 123.9 < 154.1].

Not only is the future forecast for Argentinian growth better under Latin American Integration, but also the system response to shocks is better than the ARL20 BAU model and the integrated system is stable. Under the BAU model (an unstable system), positive shocks to the system reduce growth; under the LA Integration input model (see the Notes), positive shocks increase growth as would be expected.

However, we can't give up on the BAU model (here). Latin American Integration has been tried before and has a history of failure. After World War II  the US tried to drive the movement but simply ended up as the dominant Hegemon. A question I will investigate in a future post is whether Latin American Integration would benefit other countries in the region. Until stable Integration does benefit enough countries (a long time in the future?), the Economy of Argentina will likely continue lurching from one crisis to another (unless changes are made in the BAU model).

You can experiment with the LA20 BAU model here. Suggestions are given in the code for how to stabilize the model.

Ex. 1.0 Can you find a way to eliminate cycles once the model has been stabilized? 

The solution to this Exercise can be found in the LA_TECHP model which I will describe in a future post. 

Descriptions of how the Dynamic Component State Space models are constructed are given in the Boiler Plate.

Notes

Reading:

• Why is Trump Bailing Out Argentina -- Paul Krugman (2025)
• The Bubbly Economy of Argentina
• Seven Futures for Argentina
• Austerity and Anti-Systemic Protest (Argentina)
• Unstable Systemic Cycles in Latin America

Please see the Boiler Plate for a description of the DCM State Space Models.

 ARL20 model  Measurement Model:

The ARL20 State Space includes three Historical Feedback Controllers: AR1=(Growth-EF) Overall Growth balanced against the Ecological Footprint (EF). AR2=(LU+EF+KOF-Q) an historical feedback controller balancing Unemployment (LU), Ecological Footprint (EF) and Globalization (KOF) against Output (Q). AR3=(EF+CO2-KOF-LU) an historical controller balancing Ecological Footprint (EF) and CO2 Emissions against Globalization (KOF) and Unemployment (LU). Together, the components explain 98.8% of the variation in the indicators.

 ARL20 model  LA Input Model:

Compare the LA Integration System matrix (above) with the  ARL20 BAU model. Notice that (1) all the coefficients in the System Matrix (F)  are reduced in size and (2) the largest effects in the Input matrix (G) are from the LAC Unemployment (LU) controller (LU-Q-EG=1.57) and the LAC Labor Force Controller LA3=(N+L-CO2-Q=1.6)  on AR2 (Argentina's unemployment Controller).

 ARL20 model  LA Shock Input:

The shocks presented above are from the LACL20 Model (see below): (1) A shock to growth of the Latin American Region increases growth in Argentina. (2) A shock to the Unemployment (LU) controller (LU-Q-EG) reduces growth. (3) A Shock to the Populaton-Labor Force Controller (N+L-CO2-Q) increases growth. An explanation of Historical Feedback Controllers can be found in the Boiler Plate.

LACL20 Model Measurement Model:

The LAC State Space contains one Overall growth component (LA1, all indicators weighted positive and approximately equal) and two Historical Feedback Controllers (see the Boiler Plate): LA2=(LU-Q-EG) an Historical Unemployment controller balancing Output (Q) and Energy Use (EG) against Unemployment (LU), explaining 2% of the variation in the indicators. LA3=(N+L-CO2-Q), an Historical Labor Force controller balancing Population Growth (N) and Labor (L) Force with CO2 Emissions and Output.