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Deep State

March 23, 2017 3:51 pm A+ / A-

 

LyP’s economist Iván Carrino analysis how interests created around public spending can drive an expansion of the State and can affect a country’s government.

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Who really controls Argentina’s future? I’ll give you a clue: it’s not the government chosen by citizens in the elections.

Argentines elected three different presidents over the last 34 years. These leaders had differences that may seem evident and very straightforward. However, sometimes we get the feeling that almost nothing has changed in such a long time.

We went from crisis to crisis, trying what were supposed to be diametrically different recipes for success.

Was it really like this?

In a recent article, Bill Bonner, founder of US-based financial publishers Agora Inc, wrote that we should welcome a new government office: the “Deep State” office. The Deep State does not appear in the Constitution and operates behind the elected government and on top of it.

Argentines elected Kirchner to solve the problems created by Menem, and had elected Menem to solve the problems created by Alfonsin. However, we ended in the same place: fiscal crisis, corruption, devaluation and poverty.

What happened? The Deep State was working 24/7.

Bonner explains that in every society there are members that are willing to abuse, steal and ridicule other members of society. William Godwin considers that, if the government has at least a modicum of legitimacy, it is because it prevents these people from hurting others.

However, over time things change. If at first the government fights these plagues, it usually ends up legitimizing them and giving them authority and respectability.

In the United States, former president Eisenhower called this hidden interests the “military industrial complex”. With this phrase, he denounced the minority that benefitted from the sorrows of the majority. Of the small circle of power that rips the benefits of war and the bottomless increase in military spending.

Industrial businessmen and providers of weapons for the army that benefited directly from the arms race between the Soviet Union and the US. Meanwhile, foreign military conflicts took lives and, inside the United States, debt and inflation destroyed live hoods.

The movie War Dogs is a realistic portrayal of this. The film, starring Jonah Hill, tells the real-life story of Ephraim Diveroli and David Packouz, two young Americans who get rich overnight selling a wide variety of products to the Pentagon thanks to out of control public spending.s a

Our readers can understand that when money is present interests are created around it, and they are working to keep increasing the budget allocated to them.

  The Deep State is not limited to spending in defense and armament. Public spending has grown around the world in every area, stimulating a thriving lobby industry.

In his book “Capitalism for the People” University of Chicago professor Luigi Zingales describes this situation:

“The first and most obvious reason for lobbying is that it has a big reward. A larger State means it can distribute a bigger amount of money. In 1900, federal spending not allocated to defense represented only 1,8% of the American GDP, while defense spending ascended to 1%. In 2005, even before the recession produced a spike in public spending, public spending not allocated to defense represented 16% of the GDP and defense spending had increased to 4%. In less than a century, the slice of the government over production had multiplied by 7.”

Our country suffered through a similar process. Between the signing of the first Constitution, in 1953, and the outbreak of the Second World War federal spending remained, on average, at around 8% of the GDP.

However, in 2016 that number had increased to 40% of the American GDP. Government spending had increased 5 times.

Now it is not only about the size of public spending. Like Milton Friedman explained, comparing spending and taxes to the GDP is a measure that underestimates the government’s influence because “interventions that have considerable effects over the economy can be insignificant in terms of spending”. Examples of these interventions can be several regulations like tariffs, establishing a minimum salary, price controls, export records or municipal permits.

   What we have to understand is that each regulation benefits some in favor of others. When the government imposes a maximum prize, in the short term it is benefiting the consumer at the expense of the producer. When it imposes a minimum wage it benefits the worker at the expense of the employer.

Knowing this, the logical response of interest groups is to try to co-opt government officials to rule in their favor. Hence, lobbying is a natural consequence of a big state and the essence of the deep state we were referring to.

THE THREE ELEMENTS OF DEEP STATE

In our country, the deep state is composed of three main actors: businessmen that want to avoid competition, unions that are opposed to productivity and politicians that only care about the short term.

These three groups constitute the real insiders in Argentina’s society. As you can see, the government is part of this circle but corporatist businesses and unions are also members and, without having been elected, take it upon themselves to represent the people.

Throughout history, these three groups have decided the destiny of our country with scandalous results. Argentina has to get away from this spiral of permanent crisis but to do it has to face the deep state that is consuming our country.

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