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USA: Don't Cry for Enron, Argentina

by Paul KrugmanSan Francisco Chronicle
December 12th, 2001

Last week, the Web site ran a mock news story: "Enron Admits It's Really Argentina." It was pretty funny, though quite unfair -- unfair, that is, to Argentina.

Yet, the satire was more on point than its authors realized. Not long ago Argentina, like Enron, was a darling of the financial community. And like Enron, Argentina was held up as a role model, to a large extent by the same people -- Argentina's monetary system, in particular, was lauded in the pages of Forbes and the Wall Street Journal, and feted at libertarian think tanks.

Why did the same people tend to admire Enron and Argentina? Because in their different ways, both the company and the country tried to turn back the clock to 1913. Both were experiments testing the libertarian credo: that the great expansion in government's role between the two world wars was unwarranted. Both were supposed to demonstrate that government activism is unnecessary, and that radical laissez-faire works.

The Enron experiment was, in essence, about doing away with regulation -- regulation of prices, regulation of financial trading. Most of these regulations had their origin in fear that consumers, workers and investors would be exploited by those whom Theodore Roosevelt called "malefactors of great wealth."

Enron used its political clout to create what one of its own executives called a "regulatory black hole" in which it could operate freely.

What Enron's admirers believed was that experience would demonstrate fears about unregulated markets to be unjustified. Unfortunately, what disappeared into that black hole was not bureaucratic clutter but billions of hard-earned dollars, including those of Enron's own employees. Or maybe it wasn't a black hole, but rather a wormhole, and those billions of dollars emerged in some other universe -- say, overseas bank accounts. For it turns out that malefactors of great wealth do exist, and some of them were running Enron.

If Enron was an experiment in doing away with regulatory activism, Argentina was an experiment in doing away with monetary activism. Argentina returned to a colonial-era monetary system, a "currency board," which took government out of the loop. No more lurching from crisis to crisis, no more disruptive government interventions: Argentina would provide sound money, and leave the rest up to the free market.

Though Argentina attracted the usual opportunists, I'm pretty sure that both the creators of its monetary system and many of its admirers sincerely believed that they were working in everyone's interest. Alas, these particular good intentions paved the road to hell.

In the last few weeks, the bitter irony of Argentina's situation has become almost too much to bear. The country's monetary system was introduced in the name of laissez-faire. Now, in its desperate efforts to save that system from imminent collapse, the Argentine government has imposed drastic restrictions on economic freedom.

Now don't get me wrong. I'm not one of those people who think that markets are evil, that the profit motive is always wrong. On the contrary, I believe that markets are very good things indeed. But the great economic lesson of the 20th century was that to work, a market system needs a little help from the government: regulations to prevent abuses, active monetary policy to fight recessions. The twin debacles in Houston and Buenos Aires demonstrate that this great lesson has not lost its relevance.

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