Thank you for supporting Economic Order! As a paid subscriber, you’re getting this post 48 hours before it becomes open access.

On August 26, Argentina’s Chamber of Deputies approved a sweeping rewrite of the BCRA’s charter, 144 votes to 102, with 9 abstentions. The bill now moves to the Senate. It would bar the central bank from financing the Treasury, narrow its mandate to a single goal, “preserving the value of the currency,” raise the threshold for removing its president to two-thirds of both chambers, and eliminate the non-transferable bonds the Treasury has used for decades to draw down reserves.

President Javier Milei called it foundational to ending inflation. The diagnosis behind the bill is correct: Argentina’s central bank has spent ninety years as a tool of whichever government controls it. But the proposed fix has a problem no drafting can solve. It assumes the obstacle to sound money is the wording of a law. It isn’t.

Read more

Thank you for supporting Economic Order! As a paid subscriber, you’re getting this post 48 hours before it becomes open access.

An entrepreneur and an economist looking at the same phenomenon can easily draw different conclusions. A firm raises wages for its warehouse staff. The plant manager sees a cost line moving in the wrong direction and starts looking for ways to trim it elsewhere. An economist looking at the same wage increase, spread across an industry, sees a potential early sign of inflation to come. Both are looking at the same number. Neither is wrong. And neither would necessarily do well in the other’s job: the instincts that make someone a sharp economist are not, in general, the instincts that make someone a sharp operator, and the reverse holds just as often.

Two types of individuals who are experts at analyzing markets can easily differ in their interpretations of the same information.

Subscribe now

The View from One Firm

Start with the aggregation problem. What is true for one firm or one industry is not automatically true for the economy as a whole, and treating the two as interchangeable is committing the fallacy of composition.

Consider a domestic industry facing competition from cheaper imports. It lobbies for a tariff, and the argument is straightforward: protection preserves jobs in the industry, and preserved jobs are good for the economy. Within the industry’s own frame, this is simply true. Fewer imports mean more domestic production, and more domestic production means more domestic jobs.

The economist looking at the same tariff traces the effects the industry’s frame does not include. Protecting jobs in the protected industry comes at the cost of jobs elsewhere: downstream firms that use the protected good as an input now pay more for it and become less competitive, consumers who pay higher prices have less to spend elsewhere in the economy, and trading partners who retaliate cost export industries their own sales. The jobs “created” in the protected industry are visible and easy to count. The jobs lost or never created elsewhere are dispersed across the economy and much harder to trace back to the tariff that caused them. Whether the policy is a net gain or a net loss for total employment is an empirical question that the industry’s own accounting was never built to answer, because that accounting only had to account for what happens inside the industry or is directly visible.

This is not a defect in the industry’s reasoning. A trade association that tried to model economy-wide employment effects rather than make the case for its own members would be failing at its job. The tools are paradigm-specific: the industry reasons correctly in partial equilibrium, and the economist reasons correctly in general equilibrium. The first step in understanding the disagreement is recognizing that both tools are doing exactly what they were designed to do.

Subscribe now

Sunk Costs, and the Costs That Aren’t Actually Sunk

The textbook instruction on sunk costs is unambiguous: money already spent is gone, and a rational decision-maker should ignore it and evaluate only the path forward. When a firm keeps funding a failing project because of what has already been spent, economists have a name for the error, and it is not a flattering one: the sunk cost fallacy.

But looking inside the firm reveals a more complicated picture. The dollar cost of the failed project is sunk. The reputational cost of the executive who championed it is not — that is, a forward-looking cost that keeps accruing as long as the project’s failure remains associated with a name inside the org chart. The political capital spent building internal support for the project is not sunk either; abandoning the project can mean spending that capital a second time, this round, on managing the fallout. And the signal sent to future partners and investors about whether the firm follows through on its commitments is very much a live, forward-looking cost, not a historical one.

None of this means the firm is right to keep funding a bad project — it may still be the wrong call. But “irrational sunk-cost fallacy” is often too quick a verdict. What an economist might see as irrational behavior could be a manager correctly pricing a set of real, ongoing costs that the clean textbook model does not include. The dollar figure is sunk. The total cost rarely is.

Subscribe now

Two Paradigms, Not Two Levels of Rigor

The businessperson reasons “first” in partial equilibrium: this firm, this project, this quarter, holding the rest of the world fixed. The economist reasons “first” in general equilibrium: the whole system, the counterfactual, the effects that ripple out once other actors respond. Neither framework is a degraded version of the other. They are different tools built for different questions, and each one is rigorous on its own terms.

This is why the disagreement between a sharp economist and a sharp entrepreneur is not a failure of intelligence on either side — it is what happens when two well-built models, aimed at different objects, are pointed at the same event. The economist’s training rewards tracing consequences across the system and through the counterfactual. The businessperson’s training rewards managing the specific, immediate reality of one firm’s cash flows, one firm’s reputation, one firm’s relationships. Getting good at one does not make someone good at the other, and often makes them worse, because the habits of mind that serve one paradigm can actively mislead in the other.

Subscribe now

Why This Matters Beyond the Disagreement Itself

The useful conclusion here is not that one paradigm should defer to the other. It is that the two are answering different questions, and confusing them produces bad advice in both directions. “Just think like an economist” is often poor counsel for running a firm, because a firm that ignores its own reputational and political costs in the name of textbook purity will make decisions that are correct in the aggregate and ruinous in the particular. “Just be practical” is often poor counsel for setting policy, because a policy built entirely from what makes sense to one firm, one industry, or one interest group at a time will miss the effects that only show up once the whole system responds.

The economist and the businessperson are not failing to understand each other’s world. They are each doing careful work inside their own — and the discipline worth cultivating, whichever chair you happen to be sitting in, is knowing which paradigm a given claim was reasoned in before judging it by the standards of the other.

I use Claude (Anthropic) to assist with drafting and editing. All analysis and conclusions are my own and reviewed before publication.

Thank you for supporting Economic Order! As a paid subscriber, you’re getting this post 48 hours before it becomes open access.

On June 23, MSCI released the results of its 2026 Market Classification Review and, once again, declined to open a consultation on Argentina. This was neither a downgrade nor new restrictions. It was simply a refusal to start the conversation that would eventually be required to move the country out of the Standalone category it has occupied since 2021.

The timing is interesting, since S&P and Fitch had both recently upgraded Argentina’s sovereign credit rating. The Merval was trading near a 17-month high in dollar terms. The country has seen fiscal improvements, falling inflation, and partially lifted capital controls. By most conventional measures, Argentina in mid-2026 is in much better shape than in 2021.

And yet the index provider whose classification would unlock an estimated one billion dollars in passive investment flows, according to JPMorgan's 2024 analysis, looked at that same record and decided there was nothing yet worth discussing formally. Why?

Subscribe now

What MSCI Actually Evaluates

The reasoning is laid out in MSCI's own 2026 Global Market Accessibility Review, which assesses every market it covers against the same five criteria: openness to foreign ownership, ease of capital flows, efficiency of the operational framework, availability of investment instruments, and stability of the institutional framework, regardless of a market's current classification. It’s worth being precise about scope here: MSCI's classification concerns equity market access specifically, not Argentina’s capital account as a whole. The relevant question isn’t whether capital can move in and out of the country in general, but whether a foreign institutional investor can efficiently buy, hold, and repatriate proceeds from Argentine stocks, the mechanics that determine whether index funds can hold the market at all.

On capital flows, MSCI notes that the April 2025 easing of controls “allowed foreign investors to repatriate new proceeds from equity investments,” but that this “remains subject to documentary conditions,” and that “prior earnings remain subject to restrictions and may not be freely repatriated” (p. 56). On the currency side, the report states plainly that “there is no offshore currency market” and that onshore transactions still “must be linked to security transactions.” On market infrastructure, MSCI records that “there is no nominee status in the market” and that “overdraft facilities remain prohibited.” And under the criterion of institutional stability, the report states that “there have been instances of government interventions that challenged the stability of the ‘free-market’ economy, including with respect to investment activities of foreign investors.”

MSCI does not imply that the reforms are cosmetic or that the direction of travel is wrong. The same report credits the April 2025 liberalization as a real change from the prior regime. The point is narrower and, for that reason, more useful: a reform’s existence today says little about how markets will price it until it has demonstrated an ability to survive.

Subscribe now

The Thing Being Priced is not the Policy

MSCI’s decision might be disappointing for some, but its analysis is informative. One could look at the list of remaining frictions and conclude that MSCI is simply being bureaucratic, ticking boxes that have little bearing on the substance of the reform program.

This doesn’t seem to be the case. What Argentina’s criteria have in common is that nearly all of them describe discretion that, in practice, remains reversible by executive decision. A documentation requirement can be reinstated. A restriction on offshore FX can be reimposed. None of these frictions require legislation to bring back; most were created and eased by decree in the first place, which means they can be recreated the same way.

This is not a hypothetical concern about a pro-market reform government. In February 2025, when the Senate did not act on his nominees, Milei tried to appoint two Supreme Court justices by decree rather than through the ordinary confirmation process: Ariel Lijo, a controversial federal judge, and Manuel García-Mansilla, a constitutional law scholar. A federal court later ruled the appointments unconstitutional. García-Mansilla, who had been sworn in, resigned the seat after roughly forty days; Lijo never assumed his, after the Court itself rejected his request for leave from his existing post.

The pattern is not confined to the judiciary. The president spent months this year defending his chief of staff, Manuel Adorni, after Adorni admitted on live television to concealing more than half a million dollars in assets from his own financial disclosures and to evading the corresponding taxes, an admission that directly contradicted sworn testimony he had given Congress weeks earlier and that eventually forced his resignation. And FOPEA, the Argentine press freedom monitor, has documented a sustained pattern of stigmatizing rhetoric from the president directed at journalists and critics, averaging more than two such statements a day throughout 2025.

The point of listing these episodes is not to relitigate any one of them. It is that this is the most economically liberal government Argentina has had in decades, one whose stated project is precisely to build durable, rule-based institutions after years of populist improvisation. And even this government still reaches for decree over process, concealment over disclosure, and confrontation over accountability when it is convenient.

If those habits persist under a government ideologically committed to changing them, the honest question is what happens to the same weak institutional muscle once a government less committed to it, whether Peronist or otherwise, inherits it. MSCI’s institutional stability criterion is not really asking whether this particular president is well-intentioned. It is asking whether Argentina’s institutions constrain whoever holds power, and on that question, the answer has not obviously changed.

This is a distinction that matters more than it might first appear, and one worth stating plainly: the classification is not a verdict on whether the reforms are good policy. Almost nobody disputes that eliminating capital controls, unifying the exchange rate, and ending fiscal deficits financed by the printing press represent genuine improvements over what preceded them.

What the classification is measuring is something else entirely: whether the current policy set has been made durable enough that an institutional investor building a position with a multi-year horizon can treat it as a standing feature of the Argentine market rather than a contingent one, subject to reversal by the next administration or, for that matter, the same administration under different pressure. This is clear in Appendix B, where the MSCI report classifies Argentina’s “stability of institutional framework” as “improvement needed.”

That is a question about institutional design, not about the merits of the reform. A country can have excellent current policy and still fail this test, if the policy’s survival depends entirely on the discretion of whoever currently holds office. This is precisely the distinction that separated, for instance, Argentina’s own convertibility regime of the 1990s from its later and more fragile monetary arrangements, and it is the same distinction that runs through the argument for formal dollarization.

Dollarization would not resolve MSCI’s checklist directly; its concerns run to documentation requirements and custodial infrastructure as much as to monetary policy, but it illustrates the same underlying principle. Markets discount policy that persists at the pleasure of whoever is currently in charge. They reward policy that has been made costly to reverse, structurally, constitutionally, or through the elimination of the tools that would be needed to reverse it.

This is also, incidentally, the more useful way for a reader sympathetic to the current reform program to interpret the MSCI decision. The fact that inflation has fallen and the overall economy is clearly better than in 2021 is not, by itself, evidence that these results will still be in place in five years. Good policies and sustainable reforms are different claims, and collapsing them into one is exactly the kind of forecasting error that ideological priors tend to produce, in either direction. A market participant evaluating a well-run company still wants to see governance structures that would let it survive a change in leadership. The same logic applies to a stabilization program..

Subscribe now

The General Lesson

Argentina will likely remain in Standalone status through at least 2027, and probably longer, given that market analysts now describe 2028 as the more realistic horizon for any reclassification. That timeline outlasts the current presidential term, which is itself the point. What MSCI is pricing, whether or not its own staff would frame it this way, is the same variable that has appeared repeatedly in Argentina’s monetary history: not the quality of the policy in the room today, but the credibility of its surviving the room changing.

A good first act is not the same thing as a finished film, and it is an analytical error, common on both sides of Argentina’s political divide, to treat a favorable set of current results as proof that the underlying reform is now permanent. That distinction generalizes well beyond this particular index decision. Good policy, sustained by discretion, is not the same asset as good policy locked in by design. Investors know this. So, eventually, does everyone else who has watched Argentina cycle through this pattern before.

I use Claude (Anthropic) to assist with drafting and editing. All analysis and conclusions are my own and reviewed before publication.

Thank you for supporting Economic Order! As a paid subscriber, you’re getting this post 48 hours before it becomes open access.

Elections end governments. They do not always end what those governments built. A previous post documented how populist rhetoric falls sharply when a populist government leaves office, while the economic and institutional policies it created tend to persist. That finding raises a harder question: under what conditions can those legacies actually be reversed?

The answer, it turns out, has less to do with policy design than with political structure — and it requires confronting an uncomfortable distinction. Populism is not, at its core, an economic problem. It is an institutional one. The bad policies follow from the institutional damage; reversing the policies without rebuilding the institutions is treating symptoms rather than causes.

Subscribe now

Three Paths to Reform

There are three drivers of policy change. The first is demand-side reform: the electorate itself pushes for change, and politicians respond. The second is supply-side reform: a leader drives change that the electorate did not explicitly request. The third is historical accident — a crisis, a war, an external shock that reshuffles the political deck and creates a window for change that would otherwise remain closed.

Historical accidents are real, and their institutional consequences can be transformative precisely because they are exogenous — they sweep away existing arrangements rather than merely creating pressure to adjust them. Postwar Japan is the paradigmatic case: military defeat and Allied occupation did not just change Japanese economic policy; they dismantled the institutional order that had produced militarism, rewrote the constitutional framework, and rebuilt horizontal accountability from the ground up. The economic transformation that followed was downstream of that institutional reconstruction. Note that this approach doesn’t always work, as the new formal institutional framework must be consistent with the pre-existing informal culture and institutions. Still, the case of Japan is an illustrative example of the “accident” way of re-shaping the economic fate of a country. But such moments cannot be engineered, and they are defined by the very exogeneity that makes them effective. A government cannot manufacture its own occupation. Waiting for the equivalent of 1945 is not a reform strategy.

That leaves demand and supply — and in post-populist societies, the demand side faces a structural problem.

Subscribe now

The Median Voter Problem

Mancur Olson’s logic of collective action explains why concentrated beneficiaries of populist policies — subsidy recipients, state enterprise employees, protected industries — organize effectively to defend those benefits while the diffuse majority bearing the costs remains politically inert. But the problem runs deeper than interest group politics. It reaches into the preferences of the median voter itself.

Consider Argentina. Néstor Kirchner assumed office in 2003. By the time Mauricio Macri won the presidency in 2015, twelve years of Kirchnerism had passed. A young Argentine who was eighteen when Kirchner took office was thirty when Macri won — having spent their entire adult life in an economy defined by rising inflation, expanding subsidies, capital controls, and state intervention as the baseline of normality. Not as a deviation from some remembered standard, but as the only economic reality they had ever experienced as adults. The demand for reform requires knowing, at least roughly, what one is reforming toward. When an entire generation’s economic intuitions have been formed inside a populist system, that experiential reference point simply does not exist.

This is not a peripheral observation. It is the central obstacle to demand-side reform in post-populist societies, and it is why waiting for the electorate to drive change can be waiting for something that will not come.

Subscribe now

The Supply-Side Leader — and His Risks

If demand-side reform is structurally unlikely, the burden falls on the supply side: a political leader willing to pursue reforms that the median voter did not request and may actively resist. There are two types of political leadership. Transactional leaders respond to existing preferences, and transformational leaders attempt to reshape them. Post-populist reform, when it happens, tends to require the latter.

But this is an analytical category, not a normative one. A leader willing to go against the median voter can be a reformer or a new authoritarian. The direction of the conviction matters.

This brings us to the contemporary Latin American right. Nayib Bukele in El Salvador, Jair Bolsonaro in Brazil, and Javier Milei in Argentina are frequently discussed as reform-oriented alternatives to the left-leaning populism that dominated the region for two decades. They share the willingness to defy conventional political wisdom and the appetite for confrontation with established interests. But their electoral mandates deserve scrutiny. Milei won in 2023 not primarily on a libertarian mandate but on a wave of anti-caste sentiment — a generalized fury at the political class largely independent of his specific policy program. Kurt Weyland’s concept of neoliberal populism, developed to describe Fujimori’s Peru, applies here: market reform packaged in populist form, using anti-establishment rhetoric to sustain changes that a conventional technocratic government could never push through. The conviction may be genuine. The electoral vehicle was disruption, not a reform mandate — and those are not the same thing.

Subscribe now

Populism Is an Institutional Problem First

It is important to be careful with the narrative during a post-populism period. Changing the policy is necessary but not sufficient. Populist governments produce bad policies because they first dismantle the institutional constraints that would otherwise prevent them: independent courts are packed or intimidated, legislative oversight is bypassed, regulatory agencies are captured, and checks on executive power are progressively eroded. Guillermo O’Donnell called this the failure of horizontal accountability — the institutional mechanisms that constrain executive power between elections, as distinct from the vertical accountability of elections themselves.

Rebuilding republican institutions is harder than changing policies. Policies can be reversed by decree. Courts, norms of executive restraint, and the informal rules that make institutions function cannot. And this is why the new Latin American right, despite its different ideological content, does not automatically represent a genuine reversal of populism. Bukele dismissed El Salvador’s Supreme Court and packed it with loyalists. Milei governs frequently by executive decree and has shown open contempt for congressional constraints. The policy content differs from Kirchnerism or Correísmo — but the institutional signature is recognizable. A government that concentrates executive power, marginalizes horizontal accountability, and personalizes the state is reproducing the institutional pathology of populism regardless of whether the economic program is libertarian or socialist.

The test of whether a post-populist government is genuinely reversing populism is therefore not whether its policies are better — they may well be — but whether the institutional framework it builds is more or less republican than the one it replaced. By that standard, the picture across the contemporary Latin American right is more ambiguous than its most enthusiastic supporters acknowledge.

Subscribe now

What Genuine Reform Requires

Reform, in the end, is less a problem of policy than of institutional reconstruction. Acemoglu and Robinson’s work on institutional persistence makes clear that extractive institutions generate the political coalitions needed to defend themselves. Breaking that cycle requires not just political will but a deliberate effort to rebuild the constraints on power that populism spent years dismantling — independent judiciary, rule-bound fiscal policy, free press, and genuine legislative oversight.

The conviction leader may be a necessary condition for initiating that process. But without the institutional framework to constrain and channel that conviction, the medicine risks becoming a new version of the disease. Populism, left or right, is defined not by its economic preferences but by its relationship to republican self-government. That is the standard against which post-populist reform should be judged — and it is a considerably higher bar than simply pointing to a different set of policies.

This post was written with the assistance of Claude (Anthropic).

Thank you for supporting Economic Order! As a paid subscriber, you’re getting this post 48 hours before it becomes open access.

When the Populist Leaves, the Policies Stay

Elections are supposed to change things. And in one sense, they do: when a populist government loses power, the rhetoric changes almost overnight. The speeches shift in tone, the enemy-of-the-people framing disappears, and international observers breathe a collective sigh of relief. But rhetoric is not policy. And policy, it turns out, is far stickier than the governments that created it.

This pattern has consequences for how we evaluate political transitions, assess reform prospects, and understand why economic recovery in post-populist countries is almost always slower and harder than it looks from the outside.

Subscribe now

Measuring Populism Beyond the Rhetoric

To see the pattern clearly, it helps to have a tool that separates what governments say from what they do. The Latin American Left-Leaning Populism Index (LALLPI) is designed for exactly that purpose. Rather than measuring populism solely through rhetoric — as most existing indices do — LALLPI distinguishes between three components: populist rhetoric (POP_R), economic populist policies (EP), and institutional populist policies (IP).

Rhetoric captures the degree to which a governing party uses populist language — anti-elitism, people-centrism, us-versus-them framing. Economic populism captures the concrete policy environment: business and labor market regulations, government interference in the economy, monetary and financial freedom, and trade openness. Institutional populism captures the health of democratic institutions: rule of law, judicial and legislative constraints on the executive, corruption, freedom of expression, and property rights. Each component moves independently. A government can have high rhetoric and moderate policy. A successor government can inherit high policy scores with virtually no rhetoric at all.

That last scenario is not hypothetical. It is what the data shows when populist governments leave office.

Subscribe now

Argentina: The Kirchnerist Legacy Under Macri

Argentina’s transition from Kirchnerism to Macri’s Cambiemos coalition in December 2015 is one of the clearest natural experiments in recent Latin American political history. For over a decade, the Kirchnerist governments of Néstor and Cristina Fernández de Kirchner pursued an aggressive program of economic nationalism: energy and utility subsidies on an enormous scale, expanding state intervention, capital controls, manipulation of official statistics, and a steady erosion of institutional checks on executive power. LALLPI captures this trajectory — both EP and IP rising through the Kirchner years as the economic and institutional landscape deteriorated.

Macri’s election represented an unambiguous rhetorical break. Cambiemos was a centrist, market-oriented coalition that campaigned explicitly on institutional normalization and economic reform. POP_R falls sharply at the 2015 transition — exactly what one would expect. What does not fall, at least not immediately or substantially, is the policy environment. Energy subsidies could not simply be eliminated without a phased adjustment that still generated significant political conflict. The central bank had been hollowed out institutionally and could not recover its credibility by decree. The regulatory apparatus built over twelve years of Kirchnerism remained in place. Property rights and judicial independence do not automatically strengthen when a new government stops attacking them — the damage is structural, and reconstruction is slow.

By 2018, the last year of available LALLPI data, Argentina’s EP and IP components remain elevated relative to the pre-Kirchner baseline, even as POP_R sits at levels reflecting a non-populist governing coalition. The chart tells the story in a single image: rhetoric and policy diverge at the transition and do not converge within Macri’s term.

Subscribe now

Ecuador: When the Successor Comes from Within

If Argentina’s case is compelling, Ecuador’s is even more striking — because the rhetorical shift there cannot be attributed to ideological opposition winning an election. When Lenín Moreno succeeded Rafael Correa in May 2017, he did so as Correa’s chosen successor, running on the same political platform that had governed Ecuador for a decade. And yet within months of taking office, Moreno began distancing himself from Correa’s style, abandoning the confrontational anti-elite rhetoric that had defined Correísmo, and eventually breaking with his predecessor entirely.

The rhetorical shift is visible in the data. POP_R declines at the 2017 transition in a way that reflects Moreno’s genuine repositioning. What the LALLPI data reveals next is more nuanced — and more instructive. Ecuador’s institutional populism index (IP) shows a meaningful recovery after 2017, even though Correa’s rewritten constitution remained formally in place. The institutional damage, it turns out, was more elastic than it appeared: once the political pressure driving it was removed, judicial behavior, constraints on the executive, and related indicators began to recover. Formal constitutional changes are sticky by design, but the informal norms and practices that animate those institutions responded to the change in political environment more quickly than one might expect.

The economic legacy is another story. Ecuador’s EP component remains elevated after the transition, and here the public choice logic bites hard. Correa’s decade had created dense economic constituencies: state enterprise employees, subsidy beneficiaries, and regulated industries that had reorganized their operations around the existing framework. Reversing those arrangements meant concentrating immediate losses on organized groups while spreading the gains of reform diffusely across the economy over the long run — a politically losing trade that even a willing reformer finds difficult to execute. Moreno inherited not just the policies but the incentive structure that made them durable. The rhetorical break was clean; the economic break was not.

Subscribe now

Why Policies Outlast the Governments That Made Them

The Argentina and Ecuador cases are not anomalies. They illustrate a general mechanism that public choice economics has long identified but that political commentary tends to underweight. Populist policies are not just bad economics — they are durable bad economics, because they are designed, intentionally or not, to create the conditions for their own persistence.

The economic dimension is the most familiar — and, as the Ecuador case suggests, potentially the most durable. Subsidies, price controls, trade restrictions, and state ownership all generate beneficiaries who become organized constituencies for maintaining those policies. The costs of reversal are immediate and concentrated — specific groups lose specific benefits — while the gains are diffuse and long-run. No political coalition has strong incentives to absorb those concentrated losses on behalf of benefits that accrue broadly and gradually. This asymmetry does not require bad faith on the part of successor governments. It is simply the political economy of reform, and it operates regardless of who wins the election.

The institutional dimension is less straightforward. The conventional wisdom holds that institutional damage is the harder problem — that weakened courts, compromised regulatory agencies, and eroded norms of executive constraint outlast everything else. Ecuador complicates that story. Despite Correa’s decade-long effort to redesign the constitutional architecture of the state, the institutional populism index shows meaningful recovery after Moreno’s transition. Once the political pressure driving institutional erosion was removed, judicial behavior and executive constraints began to normalize — even with the formal constitutional changes still on the books. Informal norms, it turns out, can be more elastic than formal rules in both directions: they deteriorate under sustained political assault, but they can also recover when that assault stops.

What this suggests is that the two components of populist legacy do not move in lockstep. Rhetoric falls first and fastest. Institutional damage can recover with political will. Economic entrenchment — the web of subsidies, regulations, and state structures that creates organized constituencies — is the last to yield, and often outlasts both.

Subscribe now

What This Means for Reform — and for How We Watch Latin America

The practical implication is uncomfortable but important: transitions of government are not the same as transitions of economic regime. Watching the rhetoric change and concluding that a country has turned the corner is the analytical equivalent of judging a patient’s recovery by whether they stopped complaining. The underlying condition may persist long after the symptoms become less visible.

This matters for how investors assess country risk, how international institutions design conditionality, and how citizens in post-populist countries calibrate their expectations. Reform takes longer than electoral cycles. Institutional recovery is measured in decades, not terms. The governments that succeed populists inherit not just the policies but the political economy surrounding them — the constituencies, the distorted incentives, the damaged institutions — and navigating that inheritance is often the central challenge of their tenure.

Bolivia and Nicaragua present potentially even starker cases of policy entrenchment, but the current LALLPI data window does not extend far enough past their respective political transitions to support the same analysis. That is a limitation worth acknowledging — and a direction for future work as the index is extended.

For now, the Argentina and Ecuador data make the core pattern visible. Populist governments end. Their legacy, measured in the economic and institutional terrain they leave behind, does not.

This post was written with the assistance of Claude (Anthropic).

Thank you for supporting Economic Order! As a paid subscriber, you're getting this post 48 hours before it becomes open access.

What would have happened without the populist regime?

There are fundamental questions underneath the topic of populism in Latin America: do populist leaders cause institutional damage, or do they simply emerge in countries already suffering from weak institutions? The distinction matters. If populists merely reflect pre-existing dysfunction, then replacing them solves little. But if populism itself degrades institutional quality, then the path to recovery requires more than just electoral change: it demands institutional reconstruction.

Countries that elect populist leaders aren’t random draws from a hat. They tend to share characteristics that make populism attractive: weak institutions, political polarization, economic frustration, and distributional conflict. Any observed correlation between populism and institutional decline could simply reflect these underlying conditions rather than the populist regime itself. What we need is a counterfactual: what would have happened to these same countries if the populist leader had not come to power?

This is the topic of one of my latest papers with JP Bastos, Alex Padilla, and Karla C. Hernández. We use a synthetic control to build counterfactuals for five iconic cases of 21st-century left-leaning populism in Latin America. The findings are interesting. On average, these populist regimes caused a 25-point decline in V-Dem’s Liberal Democracy Index (LDI); which is equivalent to a full standard deviation in the sample. More remarkably, the counterfactual analysis reveals that without populism, these countries would have experienced institutional improvement, not mere stagnation. The damage wasn’t inevitable. It was caused.

Subscribe now

Creating the Counterfactual

The study examines five cases recognized in the literature as left-leaning populist regimes: Néstor and Cristina Kirchner in Argentina (2003-2015), Evo Morales in Bolivia (2006-2019), Rafael Correa in Ecuador (2007-2017), Daniel Ortega in Nicaragua (2007-present), and Hugo Chávez and Nicolás Maduro in Venezuela (1999-present). These aren’t contested classifications. They represent the consensus cases.

For each country, the synthetic control tracks liberal democracy indices for at least a decade before the populist regime takes power. The pre-treatment fit is remarkably good. The synthetic counterfactual closely mirrors the actual institutional path until the moment the populist assumes office. Then the paths diverge sharply.

The institutional measure used is the V-Dem Liberal Democracy Index, which captures precisely what populism threatens: constitutionally protected civil liberties, strong rule of law, an independent judiciary, and effective checks and balances that limit executive power. A populist regime that attacks these institutions should register a measurable decline. And it does.

Subscribe now

The Institutional Damage

Across all five cases, the effect is statistically significant and economically large. Venezuela shows the most dramatic collapse—a 52-point decline from its counterfactual by 2009. Nicaragua follows with a 28-point gap, Ecuador with 25 points, Bolivia with 14 points, and Argentina with 11 points. The average effect across all five countries reaches 25 points on the 0-100 scale, representing the difference between Argentina and Norway in institutional quality.

Three patterns stand out. First, populist regimes don’t emerge exclusively in the weakest institutional environments. Argentina’s liberal democracy score stood at 66 when the Kirchners took power—well above the regional average. Venezuela’s was 59, also relatively strong. These weren’t failed states experiencing further decay. They were functional democracies that populism actively degraded.

Second, the counterfactual paths trend upward, not flat. Without populism, Bolivia would have improved from 54 to 58 over the period analyzed. Ecuador would have risen from 47 to 51. Even Venezuela, starting from a respectable 59, would have reached 68 rather than collapsing to 16. The institutional trajectory for these countries, absent populism, was improvement, not decline. Populism didn’t just slow progress—it reversed it.

Third, the damage accelerates over time. The institutional decline isn’t immediate. It builds as populist leaders consolidate power, pack courts, undermine electoral institutions, and attack press freedom. In Ecuador, the gap between actual and counterfactual reaches its maximum after seven years of Correa’s presidency. In Bolivia, the divergence widens continuously throughout Morales’ tenure. The longer populists stay in power, the greater the institutional cost.

The mechanisms are familiar from the case studies. Constitutional reforms that eliminate term limits and expand executive power. Supreme Court packing that destroys judicial independence. Electoral manipulation through partisan appointment of electoral authorities. Media harassment through legal persecution and financial pressure. Opposition criminalization through fabricated corruption or terrorism charges. The playbook repeats across countries because it works—each step weakens the institutional constraints that could check further executive aggrandizement.

Subscribe now

Why Institutional Damage Matters

The institutional cost of populism carries implications that extend well beyond the tenure of any particular leader. Constitutional-level institutions resist change precisely because they’re designed to provide stability. Packing the Supreme Court creates a judiciary beholden to executive power that persists long after the executive changes. Destroying electoral credibility through partisan appointment erodes trust that takes years to rebuild. Concentrating power in the presidency creates expectations and precedents that future leaders inherit.

This helps explain why Latin American countries struggle to achieve sustained economic growth even after populist regimes end. Institutional quality is a fundamental determinant of long-term development. Countries with weak property rights protection, poor rule of law, and ineffective checks on executive power face higher costs of capital, lower investment, and persistent macroeconomic instability. The economic damage from populism doesn’t end when the populist leaves office—it continues through the degraded institutional environment the next government inherits. The populist legacy.

Consider Argentina post-Kirchner or Bolivia post-Morales. The successor governments face the dual challenge of correcting macroeconomic imbalances and rebuilding institutional credibility. The former is difficult; the latter may be impossible within a single presidential term. Courts still staffed with partisan appointees won’t suddenly become independent. Electoral authorities compromised by previous manipulation don’t instantly regain public trust. Media outlets intimidated by years of legal harassment don’t immediately resume aggressive investigative reporting.

Subscribe now

The Reform Challenge

For policymakers in countries recovering from populist episodes, these findings carry an uncomfortable implication. Macroeconomic stabilization, while necessary, is insufficient. Argentina under Milei, for instance, faces not just the challenge of controlling inflation and restoring fiscal balance, but also of rebuilding judicial independence, restoring electoral credibility, and reestablishing media freedom. These institutional repairs cannot be accomplished through decree or executive action—they require exactly the kind of broad political consensus that populism destroys.

The pattern extends beyond Latin America. Any country experiencing frequent regime changes between governments with fundamentally different approaches to institutional constraints will exhibit persistent instability. When one side views independent courts as obstacles to “the will of the people,” and the other views them as essential checks on tyranny, constitutional institutions become political footballs rather than stable frameworks. The back-and-forth produces exactly the kind of uncertainty that undermines investment, erodes trust, and perpetuates underdevelopment.

One might object that this analysis overlooks the reasons populations elect populist leaders in the first place. Perhaps the institutional frameworks being “damaged” were themselves serving elite interests and blocking necessary reforms. Perhaps attacking “checks and balances” was actually attacking entrenched privilege. This argument has some surface appeal but misses a crucial distinction: liberal democracy isn’t about preventing change, it’s about ensuring change happens through contestation rather than concentration of power. Weakening courts doesn’t help the poor unless those weakened courts somehow make better decisions—and courts beholden to executive power rarely do.

The evidence suggests that countries prone to electing populist leaders would have improved their institutional quality absent those regimes. This matters for current policy debates. It suggests that the path to sustainable development in institutionally weak countries runs through strengthening constitutional constraints, not circumventing them for short-term policy gains. The populist promise—that concentrating power in the hands of “the right leader” will finally allow necessary reforms—produces the opposite result. It doesn’t accelerate improvement; it reverses it.

This post was written with the assistance of Claude (Anthropic).

Thank you for supporting Economic Order! As a paid subscriber, you’re getting this post 48 hours before it becomes open access.

Argentina has had more IMF programs than almost any country in history. The count depends on how one tallies arrangements, waivers, and extensions, but the number exceeds twenty. The pattern is consistent: a crisis, a program, initial stabilization, eventual collapse, and a return to the Fund. The standard explanations cycle through familiar territory — too much austerity, too little political commitment, bad timing, weak institutions. Each explanation contains some truth. None of them fully accounts for why the pattern repeats so reliably across different governments, different program designs, and different external conditions.

A more systematic answer requires looking not at the content of the programs but at the incentives of the institutions involved. When you do, the failure pattern stops looking like a streak of bad luck and starts looking like exactly what the incentives predict.

Subscribe now

Two Institutions, Two Sets of Incentives

The IMF is an international bureaucracy whose primary output is lending programs. If all IMF programs were successful, there would eventually be little to no need for the IMF. An outcome that goes against a bureaucracy's self-survival instinct. This creates a bias toward program approval even when the probability of success is low. Refusing to lend — declaring a country unready for a program — is institutionally costly: it generates political pressure from large shareholders, accusations of abandoning vulnerable populations, and risks to the Fund’s own financial position if the country deteriorates without a program. Approving a program that later fails distributes those costs across time and shifts the visible blame to the borrowing government. The asymmetry is built into the structure, not into anyone’s bad intentions.

Borrowing governments face the mirror-image problem. They approach the IMF not because they want structural reform but because they need financing. The short-term benefit — bridge financing that averts an immediate crisis — is highly concentrated and politically valuable. The costs of conditionality — fiscal adjustment, subsidy removal, exchange rate liberalization — are immediate, politically painful, and fall on organized constituencies. This is Mancur Olson’s concentrated-benefits logic applied to sovereign borrowing: the political incentives systematically favor access to financing while minimizing reform.

The game that follows is predictable. Governments signal commitment to access the program, implement the most visible conditions while slowing structural reforms that require sustained political will, and either exit early when market conditions improve or slide toward non-compliance. The IMF, facing the institutional cost of declaring a program failed, grants waivers and restructures rather than cutting disbursements. Both sides have more to gain from keeping the program alive than from stopping it — until the underlying imbalances reassert themselves and the cycle begins again. Previous posts on Argentina’s IMF tango and the US Treasury bailout document specific episodes of this dynamic.

Argentina’s case adds a further dimension that is rarely acknowledged openly. By the time of the 2018 program — the largest in IMF history — Argentina’s outstanding debt to the Fund had reached a scale where a default would have constituted a material hit to the IMF’s own finances. This created a specific financial trap on top of the general institutional bias: the IMF had become too exposed to Argentina to credibly threaten non-renewal or program termination. The leverage that conditionality is supposed to provide — the implicit threat of cutting off financing — was substantially undermined by the Fund's own balance sheet exposure. A lender that cannot afford to stop lending has already lost its most important disciplinary tool. The result was a program that both sides knew was fragile, sustained by a mutual interest in avoiding the immediate consequences of its failure.

Subscribe now

A Defense That Doesn’t Hold

When the question of dollarization arises — as it has repeatedly in Argentina — the IMF (mirroring most economists who oppose the idea) invokes two standard objections: a dollarized country cannot adjust its exchange rate in response to external shocks, and it loses its central bank as a lender of last resort (LOLR). Both arguments are theoretically sound. Both are also deeply conditional — and in the cases where they matter most, the conditions are not met.

The shock absorption argument assumes a central bank that is credibly independent and technically capable of executing countercyclical policy. Argentina’s central bank has been one of the most politically subordinated in the world, cycling through exchange rate regimes — fixed, floating, dual markets, capital controls — each of which failed for the same underlying reason: fiscal dominance meant the central bank was transmitting political instability into monetary instability rather than buffering the economy against external shocks. The textbook argument defends a theoretical institution that does not exist in practice.

The LOLR argument fails on different grounds — and more directly. A LOLR works by supplying the currency that the banking system and the public demand during a confidence crisis. In Argentina, as in Ecuador before dollarization, what the public demands during a crisis is not the domestic currency. It is dollars. When deposit holders run to convert pesos or sucres into dollars, the central bank cannot satisfy that demand because it cannot print dollars. Printing more domestic currency in that environment accelerates the panic rather than arresting it.

There is also a simpler point. A country that has gone to the IMF more than twenty times does not have a functioning domestic LOLS. It has the IMF as its LOLR — the very institution whose repeated interventions have failed to produce durable stability. The argument against dollarization on LOLR grounds proves too much: it defends an institution that is not delivering the function being cited in its defense. Dollarization does not mean giving up a LOLR. You cannot give up what you do not have.

Subscribe now

The Ecuador Exception

In January 2000, Ecuador dollarized. The country was in the middle of a severe financial crisis — the sucre had collapsed, the banking system was effectively insolvent, and inflation was approaching 100 percent annually. The IMF was skeptical. The Fund’s preference was for a conventional stabilization program that preserved exchange rate flexibility. Ecuador moved ahead anyway, largely without IMF endorsement, and eliminated the central bank’s money-printing capacity unilaterally.

The reform worked. Inflation collapsed rapidly. The banking system stabilized. The economy recovered. There is something worth pausing on here: Ecuador found its most durable monetary reform precisely by stepping outside the IMF framework rather than working within it. The irony is sharp without needing to be overstated — a country that achieved what decades of conventional programs could not, by going around the institution whose job it was to help.

The mechanism explains why it worked. Dollarization did not just change the exchange rate regime — it removed the option of monetary financing of the fiscal deficit almost entirely. That removal eliminated erratic exchange rate policies, depreciation premia on interest rates, and inflation expectations. Ecuador’s real exchange rate has been less volatile under dollarization than Argentina’s has been under its own central bank — the opposite of what the standard argument predicts.

If Ecuador’s experience demonstrated the viability of dollarization for a chronically unstable monetary regime, why has the IMF not incorporated it more openly into its toolkit? The public choice answer is uncomfortable but traceable. A dollarized country no longer needs the IMF in the same way — it cannot have a balance of payments crisis in the traditional sense and does not need the Fund’s monetary policy guidance. Dollarization, in countries where the Fund is most active, reduces demand for the Fund’s core services. Organizations do not enthusiastically promote solutions that make themselves less necessary.

Subscribe now

The Diagnosis Is Easier Than the Cure

Identifying the incentive structure does not automatically generate a solution. Reforming the IMF would require changing the interests of the large shareholders who control it — a political problem as much as an economic one. And dollarization, as Ecuador’s subsequent fiscal difficulties demonstrate, resolves the monetary problem without resolving the underlying political economy of public spending. Countries can still accumulate unsustainable debt in dollars; they just cannot inflate their way out of it.

But the first step toward better outcomes is recognizing that the failure pattern in Latin America is not accidental. It is structural. The programs keep failing for the same reason: the institution that designs them has incentives to approve them, the governments that sign them have incentives to simulate compliance, and the monetary arrangements the Fund defends rest on arguments that do not apply to the institutions that actually exist. Until those incentives change, the tango continues.

This post was written with the assistance of Claude (Anthropic).

Thank you for supporting Economic Order! As a paid subscriber, you’re getting this post 48 hours before it becomes open access.

The IMF's Board recently approved $1 billion in new disbursements to Argentina. The accompanying Staff Report and Selected Issues Paper are worth reading carefully — they are technically sophisticated, broadly fair to the Milei government’s achievements, and candid about the risks ahead. But they are also worth reading for a different reason: at several points, the documents’ own analysis points toward conclusions their authors appear unwilling to draw. Read carefully, the IMF's case for gradualism quietly makes a stronger case for something else.

Subscribe now

What the Comparators Actually Show

The Selected Issues Paper’s chapter on stabilization lessons (pages 8–15) compares Argentina’s current disinflation to historical episodes in Peru, Uruguay, Israel, Chile, Colombia, and Mexico — countries that achieved sustained disinflation under managed exchange rate regimes or inflation targeting frameworks. The implicit argument is that gradual disinflation works, that it takes time, and that Argentina’s current trajectory is broadly consistent with successful historical precedent.

The document is candid about the time dimension. Bringing inflation down to single digits takes an average of three to four additional years in successful cases — and closer to five years in Peru and seven in Uruguay. These are the success stories. But the document’s candor about the timeline stops short of following that candor to its logical conclusion.

If Peru and Uruguay are the benchmarks, Argentina needs roughly a decade of consistent monetary and fiscal discipline to reach price stability. Argentina’s political calendar volatility does not offer a decade. The 2027 presidential election is already visible on the horizon, and the credible threat of policy reversal — what the Milei government itself calls the riesgo kuka — is not a peripheral risk. It is the central structural constraint on any gradualist approach. Argentina has never sustained a disinflation program through a government transition. The Staff Report acknowledges “political uncertainties ahead of the 2027 Presidential elections” as a downside risk, which is accurate. But acknowledging a risk is different from confronting what it implies for the preferred framework. If the gradualist path requires ten years and Argentina’s political economy reliably provides two, the arithmetic does not work — and the IMF’s own comparative evidence makes that problem visible to anyone who runs the numbers.

Subscribe now

The Cases That Didn't Make the Table

Text Table 1 on page 12 lists the successful stabilization comparators: Chile (1978), Colombia (2000s), Israel (1985), Mexico (1994), and Peru (1990s). Ecuador’s 2000 dollarization does not appear. Argentina’s own convertibility experiment of the 1990s does not appear either. Both exclusions follow the same pattern as the timeline arithmetic — the document sidesteps the cases where its own logic would be most inconvenient.

Ecuador’s exclusion is the more instructive of the two. Ecuador dollarized in January 2000 against IMF advice, in the middle of a severe financial crisis, with the sucre having already collapsed and inflation approaching 100% annually. The reform worked: inflation fell rapidly, the banking system stabilized, and Ecuador’s real exchange rate has since been considerably less volatile than Argentina’s under its own central bank. The mechanism was straightforward — dollarization removed the option of monetary financing of the fiscal deficit entirely, forcing the kind of adjustment that conventional programs have repeatedly failed to deliver. The public choice reading is uncomfortable but traceable: a dollarized Argentina requires considerably less ongoing IMF engagement, and organizations rarely champion solutions that structurally reduce demand for their own services.

Argentina’s convertibility exclusion creates a different problem — a contradiction internal to the document’s own logic. The Fund sets convertibility aside because it followed a hyperinflation episode, implying that extreme monetary distress makes any credible nominal anchor effective quickly. But if a hard monetary constraint succeeded in eliminating hyperinflation rapidly, one may reasonably ask why a softer constraint is better suited to the current problem of inertial, expectations-driven inflation. The remaining 30% is not hyperinflation; it is precisely the kind of entrenched persistence that resists incremental approaches. Convertibility worked by making the monetary commitment structurally irreversible. Full dollarization goes further still — it eliminates even the residual option of abandoning the peg, which is why it would be more durable than convertibility, not less. The footnote intended to justify setting aside an inconvenient comparator instead surfaces a question the document does not answer.

Subscribe now

The Dog That Didn't Bark

Formal dollarization was Milei’s most distinctive campaign commitment on monetary policy — and the one proposal that would have made the stabilization structurally irreversible and immune to the riesgo kuka. The Selected Issues Paper discusses the need for “transitioning to a more robust monetary policy framework” at some length, ultimately calling for “interest-rate-based operational frameworks with inflation targets.” Inflation targeting is explicitly named as the preferred endgame. This framework requires economic agents to respond to peso interest-rate signals. In an economy with no genuine demand for the peso, where monetary policy transmission is structurally compromised by decades of de facto dollarization, that is a significant assumption to leave unexamined.

What the document does not do — anywhere in either report — is discuss formal dollarization as an option. Not to endorse it, not to dismiss it, not even to acknowledge it as the framework its own analysis most naturally points toward. For a technical review published in May 2026, eighteen months after a president campaigned explicitly on dollarization and won, the silence is the most notable thing on those pages.

Subscribe now

A Friendly Reading With One Honest Conclusion

The IMF’s documents on Argentina are, on balance, good work. The tax reform chapter is analytically sharp. The NIR waiver is acknowledged transparently. The overall assessment — real progress, genuine risks, more work required — is fair.

But the same documents, read against the grain, tell a more complicated story. The timeline arithmetic points toward a political horizon that the gradualist framework cannot clear — and the document declines to follow that arithmetic to its conclusion. The comparator selection excludes precisely the cases where structural monetary commitment outperformed gradualism — and the document declines to explain why. The framework discussion describes dollarization’s logic without naming dollarization, and the document declines to acknowledge the gap.

None of this means the current program will fail. It means the IMF’s own analysis, read carefully, makes a stronger case for a structural monetary solution than the document’s authors appear willing to acknowledge. Argentina has been here before — patient gradualism, credible fiscal commitments, and a political clock running faster than the disinflation. The question is not whether the Fund’s preferred framework is reasonable in theory. It is whether Argentina has the institutional runway to make it work in practice. The documents themselves suggest the answer is genuinely uncertain.

This post was written with the assistance of Claude (Anthropic).

Thank you for supporting Economic Order! As a paid subscriber, you're getting this post 48 hours before it becomes open access.

In February 2026, the Supreme Court struck down the sweeping tariffs the Trump administration had imposed under the International Emergency Economic Powers Act, ruling that IEEPA does not authorize import duties of that scope. The 6-3 decision, authored by Chief Justice Roberts, was widely celebrated as a reassertion of congressional authority over trade policy — a genuine institutional check on executive overreach. Standard commentary treated it as a significant constitutional moment.

Without demerit of said “celebration”, public choice calls for caution. The ruling changed the legal instrument. It did not change the political demand.

Subscribe now

What the Court Actually Decided

The IEEPA tariffs were an exercise of executive unilateralism on trade policy at an unprecedented scale. By invoking emergency economic powers, the Trump administration bypassed the normal congressional trade process — the one that requires hearings, lobbying disclosure, and legislative votes — and imposed tariffs affecting trillions of dollars in trade through executive action alone. The Supreme Court’s ruling held that this exceeded the statute’s authorization: IEEPA’s grant of authority to “regulate importation” does not include the power to impose tariffs. Congress, the court effectively said, retains the taxing power over trade.

The problem is that the court ruling may not be enough to stop the White House’s tariff policy.

Subscribe now

The Substitution Effect

The industries that lobbied for tariff protection did not disappear when the court ruled. The steel manufacturers, the semiconductor producers, the agricultural interests that benefit from retaliatory leverage against Chinese competition — all of them still want protection, and they retain the same organized lobbying infrastructure they had before February 2026. The political demand for protection is entirely intact. What changed is the legal channel through which that demand can be satisfied.

The executive branch responded immediately. Within hours of the ruling, President Trump signed a proclamation imposing a new 10% global tariff under Section 122 of the Trade Act of 1974. Section 301 investigations — which authorize tariffs based on unfair trade practices findings after a mandatory investigation period — are now underway targeting China on industrial overcapacity and forced labor grounds. Section 232 national security tariffs, which survived the ruling because they rest on a different statutory basis, remain in place. Treasury Secretary Bessent stated publicly that combining these instruments “will result in virtually unchanged tariff revenue in 2026” — a frank acknowledgment that the administration views the ruling as a routing problem, not a policy defeat.

When one instrument for satisfying organized interest group pressure is blocked, the political system finds another. This is the substitution effect: the constraint redirects rather than eliminates, and the policy objective is achieved through a different channel.

Congress, which theoretically reclaimed its authority, has shown no particular appetite for using that authority to reduce protection. This is not surprising. The same concentrated beneficiaries who lobbied the executive lobby Congress even more directly — through campaign contributions, through industry associations, through the promise of investment in swing districts. Reasserting congressional authority over trade does not change the fact that Congress, when it exercises that authority, responds to the same political incentives as the executive. The form of the protection changes; the equilibrium level does not.

Subscribe now

Madison’s Incomplete Solution

James Madison’s constitutional design rests on the assumption that ambition counteracts ambition — that institutional competition between branches creates a self-regulating system of checks. Federalist No. 51 is the classic statement of this logic. What Madison’s framework handles less well is the case where all three branches face similar incentives toward a particular policy outcome.

Trade protection is such a case. The concentrated beneficiaries of protection — industries facing import competition — have strong, focused, and well-organized incentives to lobby for tariffs regardless of which branch imposes them. The diffuse majority of consumers bearing higher prices through tariffs are individually harmed by small amounts, individually rational to remain uninformed, and politically inert. This asymmetry — what Mancur Olson identified as the logic of collective action — operates on Congress, on the executive, and on the administrative agencies that implement trade law. It does not go away because the Supreme Court reassigns jurisdiction.

This is why the substitution effect is so reliable. The political economy of trade protection is not primarily a constitutional phenomenon. It is an interest group phenomenon. Constitutional rules determine which institution satisfies the demand; they do not change the demand itself.

Subscribe now

What Genuine Constraint Would Require

If the substitution effect is structural, then genuine institutional constraint on trade protection requires more than a court ruling. It requires changing the political economy that generates the demand in the first place.

The most direct mechanism is transparency — making the costs of protection visible to the consumers who bear them. Tariffs are an exceptionally opaque tax. Unlike an income tax or a sales tax, consumers never see a line item for tariff costs. They experience them as higher prices with no obvious attribution. If tariff costs were itemized at the point of sale — “this product costs $X more due to import duties” — the diffuse majority bearing those costs would face a very different informational environment. Whether that is feasible is a separate question. It is the kind of structural change that would actually alter the collective action problem, rather than simply reassigning which institution manages it.

Short of that, the substitution effect will continue. Section 301 may rebuild what IEEPA imposed. And Section 232 may expand where the political demand warrants. And the next administration, of whichever party, will find its own legal instruments for satisfying the organized interests that make protection politically durable — because those interests exist on both sides of the aisle and in every electoral coalition.

The Supreme Court did something real in February 2026. It held the executive to the limits of its statutory authority. That matters for the rule of law. What it did not do — what courts cannot do — is change the incentive structure that makes protection the equilibrium outcome of American trade politics. For that, you need a different kind of institution. And building one has proven considerably harder than winning a lawsuit.

This post was written with the assistance of Claude (Anthropic).

I was recently a guest on El Cato Podcast, joining Gabriela Calderón, Ian Vásquez, and Marcos Falcone for a conversation on dollarization as a means to end a century of inflation in Argentina. If you have been following EO’s recent posts on Argentina’s monetary framework, the trimonetary economy, and the IMF’s structural incentive problems, this episode goes deeper on the institutional case for dollarization and what a credible transition would require in practice.

If you missed it, or if you are new to EO, this is my latest post on Argentina’s inflation problems.

Thank you for supporting Economic Order! As a paid subscriber, you’re getting this post 48 hours before it becomes open access.

Ask a room of MBA students what they expect from a course on managerial economics, and the reactions tend to cluster around polite skepticism. Supply and demand curves? Marginal cost? These sound like things you memorize for an exam, not tools you reach for when managing a team, closing a deal, or deciding whether to launch a new product line. The course description does not obviously scream “career-changing.” So why is it there?

The easy cynical answer is institutional inertia — economics departments lobbying for a seat at the table, business schools checking a box. But that answer is wrong. Managerial economics is not, at its core, a course about markets. It is a course about decision-making under constraints. Every manager faces them: budget constraints, time constraints, informational constraints, competitive constraints. The economic way of thinking is, in essence, a disciplined method for reasoning through those constraints — identifying trade-offs, anticipating responses, and asking what happens at the margin when conditions change. That is not a niche skill for economists. It is the core of what managers do every day, whether they recognize it or not.

Subscribe now

Learning to Think in Trade-offs

Consider one of the most common managerial mistakes: evaluating a decision by its direct costs while ignoring what else those resources could have done. Economists call this opportunity cost, but the concept extends far beyond classroom examples. A company that ties up capital in a low-return project is not just leaving money on the table — it is actively choosing that outcome over every alternative use of those funds. Good managers internalize this logic automatically. They ask not just “is this worthwhile?” but “is this the best use of what we have?” The course trains exactly that habit of mind.

Or consider incentives. One of the most robust findings in economics is that people respond to incentive structures in ways that are predictable, self-interested, and often at odds with what their employers or regulators intended. This is not cynicism — it is a design principle. Organizations that ignore incentive compatibility tend to build systems that work on paper and fail in practice. Those that take it seriously build systems that channel individual behavior toward collective goals. Learning to ask “what does this policy actually reward?” is a transferable analytical skill that applies equally to compensation design, regulatory compliance, and vendor contracts.

Subscribe now

Uncertainty is not an Excuse to Stop Thinking

A second thing the course teaches — and this one tends to surprise students — is how to reason rigorously under uncertainty. Business decisions rarely come with complete information. The temptation is either to wait for certainty that never arrives or to treat uncertainty as a reason to rely on intuition alone. Economics offers a middle path: probabilistic thinking, expected value reasoning, and the disciplined identification of what you actually need to know to make a good decision versus what is merely nice to have.

This connects to a broader lesson about models. A model is not a perfect description of reality — it is a simplification that highlights the relationships most relevant to the question at hand. Managers who understand this use models as tools. Those who do not either dismiss them as too abstract or, worse, treat them as oracles. The course does not teach students to trust economic models blindly; it teaches them to use them carefully and to understand their limits.

Subscribe now

The Only Economic Class in the Room

In most MBA programs, this course tends to be the only formal exposure students have to economic reasoning. That is worth pausing on. It means the course carries an unusual responsibility: not just to cover the standard topics in managerial economics, but to leave students with a durable way of thinking that persists after the final exam.

That is a high bar. But it is also what makes the course worthwhile. The MBA curriculum is full of courses that teach what to do in various functional areas — finance, marketing, operations, strategy. This course is different. It teaches how to think about trade-offs, incentives, constraints, and uncertainty in a way that is useful in all of those functional areas simultaneously. In that sense, it is not one course among many. It is the underlying grammar that makes the rest of the curriculum more coherent.

Students who come in skeptical and leave thinking like economists — even a little — are better equipped for the decisions that actually define managerial careers: the ones that do not fit neatly into a single framework, where the data is incomplete and the stakes are real. That is the case for economics in the MBA. Not as a courtesy to the economics department, but as the one course that teaches you how to think before it teaches you what to decide.

This post was written with the assistance of Claude (Anthropic).

Thank you for supporting Economic Order! As a paid subscriber, you're getting this post 48 hours before it becomes open access.

The Puzzle That Keeps Repeating

Argentina has tried to stabilize its economy before. It has done so under military governments and democratic ones, under heterodox programs and orthodox ones, under economists who believed in markets and politicians who did not. Each episode produced a period of relative calm. Each period eventually ended the same way. If the problem were simply bad policy or incompetent technocrats, one would expect at least one of these attempts to stick. The fact that none has should prompt a harder question: what if the obstacle is not the policy, but the institutional environment in which any policy must operate?

This question is not new. The Argentine legal theorist Carlos Santiago Nino asked a version of it decades ago, and his answer remains unsettling. In Un País al Margen de la Ley (1992), Nino argued that Argentina’s deepest problem is what he called anomia—a civilizational disconnect between formal rules and actual behavior. Laws are passed but not internalized as binding. Constitutions are written and then rewritten, but neither version is treated as a genuine constraint on power. Contracts are signed with one eye already on the escape clause. This is not, Nino insisted, a feature of any particular government or ideology. It is a property of Argentine society as a whole, embedded across decades of experience in which rule-breaking was routinely rewarded, and rule-following was often punished. The anomie is so deep that not even the government follows its own laws. This institutional sickness has important implications for monetary policy.

Subscribe now

Why Credibility Is the Key Variable

A central bank can only deliver lasting price stability if economic agents genuinely believe it will do so. This is not a trivial requirement. It means that households setting wages, firms setting prices, and investors allocating capital must all form the expectation that the monetary authority will resist political pressure to inflate—not just today, but over the relevant planning horizon. When that expectation is present, the central bank’s job is easier: inflation expectations anchor, wage-price spirals become less likely, and the real cost of disinflation falls. When it is absent, the central bank must fight not only current inflation but also the widespread anticipation of future inflation baked into every contract and every asset price in the economy.

Building that credibility requires more than a well-designed central bank statute. It requires that agents believe the statute will actually be respected—that when a future government faces a financing crisis, it will not simply override the monetary authority, as Argentine governments have repeatedly done. That belief, in turn, depends on the broader institutional environment. A country where formal rules are routinely bent to accommodate political necessity cannot manufacture monetary credibility through institutional design alone. The credibility of any peso-based regime is ultimately only as strong as Argentina’s political institutions, and the country’s reality offers little comfort on that front.

Subscribe now

The Currency Board as Confirming Evidence

The most instructive episode in Argentina’s recent monetary history is the one that actually worked… for a while. The Convertibility Plan of 1991 pegged the peso one-to-one to the dollar and backed it with a currency board arrangement that severely restricted the central bank’s ability to print money. Inflation, which had reached hyperinflationary levels, collapsed. For most of the 1990s, Argentina enjoyed price stability that would have seemed unimaginable just years earlier.

Why did it work when so many other programs had not? The answer is precisely that convertibility substituted an external credible currency for domestic institutional credibility. Economic agents did not need to trust Argentine policymakers or Argentine institutions—they needed to trust the dollar, which they did. The peso inherited credibility it could not have generated on its own, as long as the convertibility plan was credible itself. The currency board was, in Nino’s terms, a workaround for anomie: it took the question of monetary discretion largely off the table by importing a credible constraint from outside the domestic institutional environment.

What the 2001 crisis then demonstrated is equally instructive. The collapse of convertibility did not merely end the convertibility regime. It destroyed whatever residual credibility the peso might have carried into future arrangements. The images of bank runs, frozen deposits, and a government unilaterally breaking its own contracts—the corralito, the pesification of dollar-denominated savings—became part of Argentina’s institutional memory in a way that cannot simply be legislated away. Any future peso-based regime inherits not only the general problem of anomie but the specific, living memory of what happened last time Argentines trusted a domestic monetary arrangement.

Subscribe now

The Current Episode and the Carry Trade Trap

This institutional background helps make sense of what is happening right now—and why the current disinflation, whatever its eventual trajectory, faces a structural ceiling that monetary policy alone cannot raise.

The Milei administration’s disinflation effort has been more serious and more technically disciplined than many of its predecessors. The fiscal adjustment has been genuine and substantial, even though questions about its accounting accuracy are serious. As much as inflation rates fell, they still have a significant way to go before reaching “standard” levels. Yet inflation rose for the last nine consecutive months. This is a troubling reversal as the new electoral cycle approaches. None of this is surprising from an institutional perspective. But there is a more specific mechanism worth understanding, one that connects Nino’s anomie thesis to the concrete vulnerabilities of the current arrangement.

A currency with no genuine demand—meaning one that agents hold only because it is temporarily profitable to do so, not because they trust it as a store of value—cannot sustain disinflation through normal channels. In Argentina’s case, the current exchange rate stability reflects in significant part a carry trade dynamic: investors borrow in dollars, convert to pesos, and earn high peso-denominated returns while the crawling peg keeps the exchange rate predictable. This generates dollar inflows, which support the exchange rate and make the inflation numbers look better in the short run. The problem is the logic of the exit. When carry trade conditions shift—when returns fall, when risk appetite changes, or when electoral uncertainty rises—the reversal can be sharp. The very stability that the carry trade produces is a form of borrowed time, not a reflection of genuine monetary credibility. Argentina has been here before. The sequencing—apparent calm, capital inflow, growing vulnerability, sudden correction—is a recurring feature of its monetary history, not an accident.

A currency that agents hold only for yield, never for trust, offers no escape from this dynamic — and for a country whose institutional history makes credibility so difficult to manufacture, that trap is not a temporary condition.

Subscribe now

Why the Case for Dollarization Survives

A common critique against official dollarization of Argentina runs something like this: inflation is coming down, the program is working, and adopting the dollar would mean permanently surrendering monetary policy flexibility for a problem that is already being solved. The objection, in other words, treats a lower inflation rate as evidence that the underlying credibility problem has been solved — a conclusion that does not follow from the data and that Nino’s analysis would reject on institutional grounds. The argument in favor of dollarization is deeper than dollarization being a better second-best monetary policy than what the Argentine central bank can deliver. The case for dollarization was never primarily that Argentina’s central bank was technically incompetent, or that disinflation was impossible. It was that durable price stability requires a level of institutional credibility that Argentina cannot generate endogenously, and that dollarization is the only monetary arrangement capable of substituting for that missing credibility.

Nothing in the current disinflation resolves that underlying problem. A successful reduction in inflation from its recent peak would be a genuine achievement. It would not rebuild the institutional trust destroyed in 2001. It would not alter the anomie dynamic Nino described. It would not eliminate the carry trade vulnerability or insulate the next government from the same political incentives that have undermined previous stabilization programs. The case for dollarization survives not because the current effort is failing, but because the problem it addresses is structural rather than conjunctural. A lower inflation rate is not the same thing as a credible monetary regime.

This post was written with the assistance of Claude (Anthropic).

Thank you for supporting Economic Order! As a paid subscriber, you're getting this post 48 hours before it becomes open access.

The recent armed conflict with Iran has generated predictable reactions. Hawks argue for decisive military action. Doves call for restraint and diplomacy. And, of course, others fall somewhere in between.

But step back from this particular case and notice a pattern: armed conflicts seem to start more easily than they should and persist far longer than makes sense. Iraq was supposed to be quick and decisive. It lasted nearly a decade and cost over $2 trillion. Afghanistan was framed as limited counter-terrorism. It became a 20-year nation-building project costing another $2 trillion. The Russian invasion of Ukraine started more than four years ago.

Rather than debate the merits of this particular conflict, this post is about why political incentives systematically push us toward more armed conflicts and longer engagements than economic efficiency would recommend. Once you see the incentive structure, what looks like repeated “unreasonable” decisions starts to look quite rational from the perspective of decision-makers, even if not from society as a whole.

Subscribe now

The Public Choice Problem

Public choice theory’s core insight applies as clearly to military intervention as to agricultural subsidies: benefits concentrate while costs disperse.

Benefits concentrate in specific places. Defense contractors receive billions in contracts. Congressional districts with military production gain thousands of jobs. Politicians demonstrate “strength” and national pride to their base. Military leaders gain budget justification. Media outlets get ratings-driving content.

Costs disperse across everyone. A $2 billion military operation costs the average taxpayer roughly $6. The price of a caffe latte. Future debt spreads invisibly across the population. Opportunity costs remain abstract. No single person has a strong incentive to oppose.

Economists Christopher Coyne and Abigail Hall have extensively documented this dynamic. As Hall notes: defense contractors have billions of reasons to encourage intervention; taxpayers have $6 reasons to oppose. Guess which interest prevails.

This isn’t conspiracy. It’s Economics 101. When benefits concentrate, and costs disperse, we predictably get too much of the activity. Coyne and Hall show this plays out whether we’re talking about sugar subsidies or cruise missiles.

The time-horizon mismatch intensifies the problem. Politicians face electoral cycles; wars span decades. Approval ratings spike when military action begins. But costs, budget deficits, veteran care, and forgone infrastructure materialize years or decades later, often under different leadership.

As Coyne documents in After War, political pressures favor announcing nation-building initiatives that show immediate “progress.” But successful reconstruction requires decades of sustained commitment. By the time initiatives predictably fail, original decision-makers have left office. The result: systematically optimistic promises, predictable disappointment.

Information asymmetry compounds these problems. Governments possess better information about capabilities and intelligence. Yet Coyne and Hall emphasize the “knowledge problem.” Political incentives reward confident predictions over honest uncertainty.

The pattern repeats: Iraq would cost $1.7 billion, officials testified (actual: $2 trillion). Afghanistan would be 'months, not years’ (actual: 20 years). Projections are simultaneously too optimistic and genuinely uncertain because the knowledge to forecast accurately doesn't exist.

Subscribe now

Why This Means More Than Optimal

Modern media amplifies benefits. Cable news and social media reward dramatic action, punish perceived weakness. “Restraint” generates no headlines. “Decisive action” goes viral. Political rewards for intervention increase while costs decrease.

Deficit financing hides costs. Wars are funded entirely through borrowing. No tax increases, no war bonds, no direct fiscal pain. When World War II required war taxes, citizens felt the connection between conflict and personal sacrifice. Now costs are pushed to future generations, making already-dispersed costs even more abstract.

Institutional stickiness prevents reversal. Coyne and Hall document how interventionist policies become remarkably difficult to reverse. Agencies created for intervention develop interests in continuation—the Department of Homeland Security now employs 240,000 people with a $60 billion budget. Initial commitments create infrastructure, making continued engagement easier than withdrawal. Politicians advocating withdrawal face “weak on defense” attacks. The political system penalizes reversal more than continuation.

Subscribe now

Making Sense of “Unreasonable” Conflicts

Behavior that looks “unreasonable” from a social welfare perspective makes perfect sense from individual decision-makers’ perspective.

Understanding these incentives doesn’t require attributing malicious motives. Defense contractors maximize profit, as any firm does. Politicians maximize electoral success; this is how democracy works. Military leaders seek organizational resources; this is standard bureaucratic behavior.

The problem isn’t the people, it’s institutional structures channeling ordinary self-interest toward excessive intervention.

When you observe conflicts starting on thin justification, continuing past the point where costs exceed benefits, optimistic projections proving wildly wrong, and escalating commitments to failing strategies, don’t assume stupidity or bloodlust. Recognize rational responses to incentives: short electoral time horizons, political rewards for “strength,” concentrated supporting coalitions, dispersed opposition, information advantages enabling optimistic framing, and commitment dynamics making reversal costly.

Subscribe now

Conclusion

When you combine concentrated benefits, dispersed costs, knowledge problems, information asymmetries, institutional stickiness, and misaligned time horizons, you get exactly what we observe: more conflicts starting more easily, persisting longer, and costing more than honest cost-benefit analysis would justify.

This isn’t pessimism or cynicism. It’s institutional analysis. Public choice economics teaches that when decision-makers’ incentives diverge from social welfare, we get too much of what they’re deciding. In this case: armed conflict.

Understanding this doesn’t tell you whether any specific action is justified. Reasonable people can disagree about particular threats and responses. But it does tell you to expect, systematically, more conflict than optimal. And to approach official justifications with informed skepticism.

This post was written with the assistance of Claude (Anthropic).

Thank you for supporting Economic Order! As a paid subscriber, you’re getting this post 48 hours before it becomes open access.

The recent public clash between President Javier Milei and businessmen such as Paolo Rocca over a pipeline contract exposes a deeper question that every market-oriented government must eventually confront: How do you actually get from here to there? When Techint lost a USD 203 million gas pipeline contract to Indian firm Welspun—with a bid 40% higher—Milei didn’t just defend the decision. He took to social media to call Rocca “Don Chatarrín de los tubitos caros” (Mr. Scrap Metal of the expensive little tubes) and suggested that journalists, economists, and politicians defending the steel industry know “who fills their envelopes.”

Whatever the merits of Milei’s position on this specific contract, the public ridicule of a major employer by a head of state is troubling as this is not the way to rebuild institutional respect.

Subscribe now

When Theory Confronts Reality

It’s worth revisiting what Ludwig von Mises—arguably one of the most principled defenders of free markets in the 20th century—actually recommended when asked to design a reform program for a developing economy. In 1943, Mises wrote an economic policy proposal for Mexico at the request of a Mexican business association. The document, which remained unpublished for over 50 years, reveals how even the most doctrinaire free-market thinker recognized that transitions matter.

Mises was uncompromising in his critique of protectionism. He called import-substitution policies (what he termed “the closed door method of industrialization”) economically disastrous, arguing they made people poorer by forcing them to buy expensive, inferior domestic products while reducing their export capacity. He understood that Mexico’s competitive advantage in labor-intensive production required lower labor costs than capital-rich countries—an uncomfortable truth, but an economic reality.

Now, when it came to implementation, Mises combined a sharp shift in expectations with a phased execution. Despite his theoretical commitment to free trade, he proposed an expectation shock coupled with gradual implementation (p. 221, bolds added):

A sound industrialization program for Mexico has to repeal all import duties. But as far as products that are already produced within existing factories are concerned, the tariffs have to be abolished only by a gradual process. Every year, a tariff reduction of 10 percent has to take place. Thus the enterprises will be in a position to adjust their operations to the new system of free trade.

Ten years. That’s what Mises, the uncompromising advocate of laissez-faire capitalism, recommended for Mexico’s transition to free trade. Note that this isn’t “let’s see how it goes” gradualism. It’s an announced, predictable schedule. Firms know on day one that tariffs will decline 10% annually until they reach zero. A proper shock therapy is a shock to expectations; it doesn’t have to be an immediate transition from here to there. There is a conceptual distinction to be made between naive and savvy shock therapy. With a shock to expectations, everyone immediately knows that the economy is moving toward free trade and at what pace.

This distinction matters. A “wait and see” approach preserves uncertainty and encourages rent-seeking as firms lobby to slow or stop each phase due to alleged unexpected events. A credible, announced schedule creates certainty and shifts expectations: the protection is ending, the only question is how you’ll adapt. Mises wasn’t being soft on protectionism—he was being realistic about how to make a transition stick politically while giving firms the adjustment time that prevents a backlash from destroying the entire reform.

More importantly, Mises’s proposal reveals that the credibility and sequence of reforms matter. The case for free trade presupposes that domestic companies operate in a comparable environment to their foreign competitors—that they can compete because they’re working on a level playing field.

As Mises framed it: “The distinctive mark of a sound economic policy is that it aims at the establishment of a durable system resulting in a continuous improvement of the nation’s well-being.” Not a spectacular reform that collapses under its own weight. A durable system.

Yes, Milei’s government has achieved important wins: significant fiscal improvements, deregulation of numerous sectors, reduction in monetary emission, and elimination of many bureaucratic barriers. These are genuine improvements that deserve recognition.

But the deeper structural reforms remain largely untouched. The tax burden remains confiscatory for businesses trying to compete internationally. Exchange rate policy continues to generate uncertainty about the real cost structure facing exporters and import-competing firms. The legal system’s enforcement of contracts and property rights, while improved, still falls far short of what would inspire large-scale domestic and foreign investment. The recent personal attack on Rocca actively undermines the investment climate the government claims to want.

Consider Techint’s position (which, to be clear, doesn’t make their specific bid competitive). Argentine steel producers face tax rates that foreign competitors don’t. They manage exchange rate risk that adds uncertainty to every calculation. They deal with an energy cost structure shaped by years of price controls and infrastructure underinvestment.

None of this justifies protectionism. But it does raise the question Mises grappled with: How do you transition from a distorted economy to a market economy without the transition itself becoming impossible to sustain politically?

Subscribe now

The Pragmatism of Principle

Mises’s ten-year tariff reduction schedule wasn’t a betrayal of free-market principles; it was an acknowledgment that principles have to work in the real world. But crucially, it was also an example of how to structure reform: clear commitment (free trade is coming), predictable path (10% reduction each year), sufficient time (a decade for adjustment). First-best solutions (immediate reform) are not always feasible. In that case, second bests can be better than maintaining the status quo.

This credible announcement approach is fundamentally different from “gradualism” as usually practiced. A typical gradualist approach would say: “We’ll liberalize when conditions permit,” which really means “we’ll liberalize when politically convenient,” which in practice means “probably never.” Mises’s approach says: “Free trade is happening on this exact schedule. Plan accordingly.”

If immediate trade opening triggers a political reaction that brings back protectionists who entrench even worse policies, you haven’t advanced economic freedom; you’ve set it back. But if you announce gradualism without credibility—without a clear schedule and commitment mechanism—you get the worst of both worlds: continuing protection plus continuing uncertainty about when it will end.

This is where Milei’s approach becomes more complex to evaluate. On one hand, his government has made credible commitments on some fronts (at least while he is the president). On the other hand, the lack of a clear institutional framework for deeper reforms creates uncertainty. Publicly attacking individual business leaders doesn’t signal credible rules of the game—it signals that outcomes depend on the president’s personal favor or displeasure.

Subscribe now

The Path Forward

Argentina needs deeper structural reform, not less. But precisely because these reforms are so important, they need credible commitment mechanisms. The sequence of reforms matters. Argentina needs to build credibility through institutions and law, not presidential tweets and personal attacks.

The transition to the ideal economic policy is not a detail. It’s the whole game. Market reformers need both the courage to commit to the destination and the wisdom to structure a credible path. Reformers who confuse ideological purity with effective reform risk discrediting the project.

And no amount of calling people “Don Chatarrín” changes that reality.

This post was written with the assistance of Claude (Anthropic).

Thank you for supporting Economic Order! As a paid subscriber, you’re getting this post 48 hours before it becomes open access.

In early 2025, revelations emerged that Argentine President Javier Milei had promoted $LIBRA, a cryptocurrency that subsequently collapsed and left thousands of investors with significant losses. The evidence that came to light over the last few days points to a knowingly and voluntarily participation by the president and his closest staff. For many outside observers, the episode seemed like exactly the kind of scandal that should seriously damage a government. For a meaningful share of Milei’s supporters, it barely registered as a reason for second thoughts. This reaction — frustrating to critics, puzzling to outside observers — is not unique to Argentina, to Milei, or to the political right. It is a recurring pattern across democracies, and it has a rational explanation.

The puzzle isn’t really why voters don’t punish their leaders. The puzzle is why we keep expecting them to.

Subscribe now

An Implicit Contract

Think of the relationship between voters and politicians as a long-run game rather than a single transaction. In any repeated interaction, players develop informal rules — understandings that aren’t written anywhere but that everyone knows govern the relationship. Voters understand, at some level, that politicians engage in rent-seeking: they extract benefits, reward allies, cut corners. This is not a secret. What voters implicitly negotiate is a threshold — a level of self-dealing they are willing to tolerate in exchange for the policies, identity, and coalition benefits their preferred party provides.

This is not naïveté. It is a rational calculation. The relevant comparison for a voter is never “this politician versus a perfectly clean alternative.” It is “this politician versus the opposition.” When that comparison is sufficiently unfavorable to the opposition — when the other side is seen as more corrupt, more threatening, or simply representing the wrong values — the implicit threshold rises. Voters extend more tolerance precisely because the cost of defection feels high.

The contract breaks when a violation is so egregious that it exceeds even the elevated threshold. What looks from the outside like inexplicable loyalty is often, from the inside, a rational assessment that the implicit terms have not yet been violated.

Subscribe now

Rational Hypocrisy

Bryan Caplan’s The Myth of the Rational Voter helps illuminate this behavior. Caplan’s central insight is that voters face almost no cost to holding mistaken beliefs. In a market, believing the wrong thing about prices gets you punished quickly and directly. In a voting booth, your individual ballot changes nothing — so the incentive to update carefully on new information is essentially zero. What voters do get from their political beliefs is something more immediate: a sense of identity, community, and belonging. Politics functions partly as tribal membership.

This means voters are not simply failing to process information correctly. They are, in a meaningful sense, rationally motivated to avoid processing it in ways that would threaten group membership. Call it rational hypocrisy: behavior that appears inconsistent or self-serving from the outside, but that is utility-maximizing from the inside, given the voter’s actual objective function. The voter who dismisses the $LIBRA scandal is not necessarily uninformed. They may have calculated — not always consciously — that the psychic cost of abandoning their political identity outweighs the moral cost of tolerating the scandal.

This dynamic is strongest for voters who have publicly and enthusiastically supported a politician, since they face higher reputational costs. To turn against that politician now is to admit poor judgment retroactively. The more vocal the prior support, the higher the cost of reversal. This means that when a scandal becomes public, supporters who were loudest in their endorsements are paradoxically the least likely to defect.

This is why it is part of the populist playbook to provide a sense of award, or prize, to those who signal belonging. The group is morally or intellectually superior; it receives benefits, and so on. Part of the same playbook is to expel, or ostracize, those who dare to show dissent, signaling that the implicit threshold might have been crossed.

Subscribe now

Why the Opposition Gets Judged Differently

The asymmetric application of standards that follows from all this is not, strictly speaking, hypocrisy in the morally loaded sense. It is a predictable output of the model. Voters hold their own side to the implicit contract threshold they have negotiated; they hold the opposition to a much stricter standard because they have no stake in extending the opposition any benefit of the doubt. Rational irrationality, in Caplan’s sense, actively reinforces this: voters who are motivated to see their side favorably will consume information selectively, weight evidence asymmetrically, and rationalize inconsistencies fluently.

The result is a political equilibrium that is quite stable — more stable than it perhaps should be. Governments can sustain a significant level of corruption without triggering meaningful accountability, as long as they do not so dramatically exceed the implicit threshold that even loyal voters cannot rationalize the gap. Political survival, in this model, is partly a matter of staying just below the tolerance ceiling.

Subscribe now

The One Enforcer That Isn’t Playing Along

Here is where independent institutions enter the picture. Courts, non-partisan academics, audit bodies, and a free press all share a critical structural property: they are not party to the implicit contract between voters and politicians. They have no coalition to protect, no threshold to defend, no sunk costs of prior endorsement. The focus here is on independent media in particular because it is the enforcement mechanism that operates continuously, publicly, and at precisely the point where voters form their beliefs — in real time, at scale, and in direct contact with the daily information diet of citizens. But the broader category matters: any institution that sits outside the contract can, in principle, perform this function.

Journalists and editors at genuinely independent outlets are not party to the implicit contract. They have no group belonging at stake in the outcome. They carry no sunk costs from prior endorsements of the government or the opposition. They have no implicit threshold to defend. Their professional incentives — reputation, credibility, the story itself — run in exactly the opposite direction from the voter’s rational hypocrisy.

This is not a romantic claim about the nobility of the press. It is a structural point. Independent media functions as an external enforcement mechanism precisely because it does not share the incentive structure that makes voter accountability so fragile. It applies — or should apply, in the absence of capture — the same standard to all sides. As I have argued before, the double standard that voters apply is a feature of their rational position; the single standard that professional media should apply is a feature of its rational position.

Governments that find themselves exposed by independent reporting rarely respond by engaging the facts. The more common playbook is to attack the messenger: accuse journalists of fabricating stories, claim the press is politically motivated, and frame the government as the real victim of a coordinated smear campaign. This is not accidental. It is a rational strategy that appeals directly to the voter base’s rational hypocrisy, designed to reinforce distrust of the external enforcer so that its findings can be rationalized away without requiring engagement with the evidence itself. When the strategy works, the implicit contract holds even as the facts pile up.

This is also why capturing the media is such a high-value political strategy. Even so, for self-described libertarian governments. Media capture, or intimidation, is not primarily about suppressing individual stories — though it does that. It is about bringing the press inside the contract, transforming an external enforcer into a partisan one. A captured media outlet applies the same asymmetric logic as the voter base it serves: strict scrutiny of the opposition, tolerance, and rationalization for the governing coalition. Once that happens, the last institutional check that does not depend on voter consistency has been neutralized.

Subscribe now

The Institutional Lesson

The $LIBRA episode will not be the last of its kind, in Argentina or elsewhere. Every democratic system produces scandals that loyal voters absorb without consequence for the government, and scandals that topple governments seemingly overnight. The difference is rarely the severity of the offense. It is whether the implicit threshold has been crossed — and whether there exists a credible external enforcer capable of making the case clearly enough that even rational hypocrites cannot fully look away.

Democratic accountability does not fail because voters are irrational in the traditional sense. It fails because they are rational in exactly the right way for their private interests, and in exactly the wrong way for collective governance. The remedy is not to demand that voters be better people — they are responding sensibly to the incentives they face. The remedy is to protect and strengthen the institutions that do not share those incentives: courts with genuine independence, audit bodies with real teeth, and above all, a press that has no seat at the table of the implicit contract, and no interest in acquiring one.

This post was written with the assistance of Claude (Anthropic).

Political debate has a remarkable capacity to produce mirror-image errors. Thinkers on opposite ends of the spectrum, convinced they have nothing in common with their opponents, often reach for the same flawed reasoning to make their case. One of the most durable examples is the fallacy of guilt by association: the move from “some members of group X do Y” to “X causes Y.” Applied consistently, this fallacy does real damage to public argument. Applied selectively — invoked against one’s opponents while invisible in one’s own reasoning — it reveals something more troubling about how ideology shapes what we are willing to see.

Two cases illustrate this with unusual clarity. The left has long argued that capitalism produces corruption, pointing to the cozy relationships between business and government as evidence that free markets and cronyism go hand in hand. The right, particularly in its populist wing, has long argued that immigration raises crime, pointing to crimes committed by foreign nationals as evidence that open borders and public safety are fundamentally in tension. Both arguments follow the same logical structure. And both are mistaken for the same reason.

Subscribe now

The Problem Is Cronyism, Not Capitalism

The left-wing critique of capitalism often begins with a real phenomenon. Regulatory capture, corporate lobbying, preferential tax treatment, government bailouts of politically connected firms — these are genuine features of contemporary economies, and they do cause real harm. Concentrated interests secure favorable treatment at the expense of dispersed majorities. Public resources flow toward private beneficiaries. The playing field tilts. None of this is imaginary.

Troubling facts are then followed by a logical leap. Because these pathologies occur within economies that call themselves capitalist, the argument runs, capitalism is the source. Crony capitalism, in this framing, is simply capitalism in its mature or revealed form — not an aberration but the natural destination of market systems left to their own devices. The word “crony” becomes decorative, and “capitalism” carries the full weight of the indictment.

But this is precisely the guilt-by-association move. Cronyism — the substitution of political connections for market competition — is not a product of free markets. It is their negation. It flourishes where government has the discretionary power to pick winners: to grant licenses, award contracts, set tariffs, and regulate entry. The more such power exists, the larger the prize for capturing it. What the left describes as capitalism’s dark fruit is, on closer inspection, a consequence of the state power that markets properly understood are supposed to constrain.

The evidence bears this out. There is no positive correlation between the Fraser Institute’s Economic Freedom of the World index and perceived corruption. Additionally, countries with more genuine market freedom — where political discretion over economic outcomes is limited — tend to score better on transparency and rule of law. Countries where the government pervasively intervenes tend to be more corrupt. This is not a coincidence. When governments have more to hand out, there is more to be gained from influencing them.

The implication is straightforward: if one’s concern is genuinely with cronyism, the solution is less discretionary state power, not less capitalism. To blame capitalism for cronyism is to identify the wrong cause and, almost inevitably, to prescribe interventions that worsen the underlying problem.

Subscribe now

The Problem Is Crime, Not Immigration

The right-wing critique of immigration often begins with a real phenomenon, too. Some immigrants commit crimes. In some localities, specific crimes have been linked to individuals who entered illegally. Cases are real, victims are real, and grief is real. None of this is in dispute.

The logical leap, again, comes next. Because some immigrants commit crimes, immigration itself becomes the problem. The crime is treated not as the act of an individual who happens to be foreign-born, but as evidence of something inherent to immigration as such — a vector through which violence enters communities that would otherwise be safer. The crime is nationalized, and the nationality becomes the explanation.

This is the same fallacy. Crime is a behavior committed by individuals, not a property of demographic categories. What makes someone a criminal is not their country of origin but their choices and circumstances. To treat immigration as the causal variable is to commit precisely the associative error that one would readily identify in any other context. One would not argue, for instance, that car ownership causes drunk driving, simply because drunk drivers own cars.

Here, too, the evidence cuts against the argument. Research consistently finds that immigrants — including undocumented immigrants — commit crimes at lower rates than native-born citizens. This has been documented across multiple studies using different methodologies and data sources, including nonpublic data from Immigration and Customs Enforcement (ICE) leaked to the Cato Institute.

The implication is equally straightforward: if one’s concern is genuinely with crime, the focus should be on criminal behavior and the conditions that produce it, not on national origin. To blame immigration for crime is, again, to identify the wrong cause — and to direct enforcement resources toward a characteristic rather than a conduct.

Subscribe now

The Structure of the Error

Both arguments share a common form. A genuinely bad thing exists — corruption, crime. That bad thing is observed in proximity to a broader category — markets, immigration. The broader category is then blamed for the bad thing. The association does the work that evidence and argument cannot.

There is also something worth noting about the selectivity with which this fallacy is deployed. Left critics who would immediately recognize guilt by association in arguments about, say, welfare recipients and fraud are often less quick to apply the same scrutiny to arguments about markets and corruption. Right critics who would immediately recognize the fallacy in arguments about gun owners and mass shootings are often less quick to apply it to arguments about immigrants and crime. The error is visible when it is used against one’s preferred group; it becomes invisible when it serves one’s preferred narrative.

This asymmetry is not a minor rhetorical failing. It is an epistemic one. If the standard of argument one applies depends on the conclusion one prefers, then one is not really reasoning about evidence — one is selectively deploying the appearance of reasoning to conclusions already reached by other means.

This post was written with the assistance of Claude (Anthropic).

Thank you for supporting Economic Order! As a paid subscriber, you’re getting this post 48 hours before it becomes open access.

A curious pattern has emerged among non-left governments in recent years. From Donald Trump’s lawsuits against media outlets to Nayib Bukele’s confrontations with El Salvador’s press, from Javier Milei’s verbal attacks on Argentine journalists to Viktor Orbán’s systematic media takeover in Hungary, hostility toward the press has become a defining feature of contemporary right-wing politics. The arguments behind these moves are familiar: mainstream media is biased, narratives are controlled by elites, coverage is unfair, and “fake news” pervades the information landscape.

Many of these complaints have merit. Media bias is real in some outlets, editorial choices reflect ideological preferences, and coverage patterns often favor certain perspectives over others.

Ironically for some contemporary political movements, free-market intellectuals and advocates of limited government were among the strongest defenders of press freedom, even while fully recognizing that the press could be hostile, biased, or downright wrong.

Subscribe now

The Classical Liberal Case for Free Press

For thinkers like Ludwig von Mises, Friedrich Hayek, Milton Friedman, and Karl Popper, a free press wasn’t merely a nice-to-have feature of a liberal democracy. It was an essential component of a free society, intimately connected to the same principles that justified free markets.

Mises put it bluntly: “A free press can exist only where there is private control of the means of production.” His argument was institutional: When government controls the means of communication, dissenting voices must seek permission from the very authority they wish to criticize. In Omnipotent Government (1944, p.14), he emphasized that “freedom can only be won by men unconditionally committed to the principles of freedom. The first requisite for a better social order is the return to unrestricted freedom of thought and speech” (bolds added).

Hayek elaborated this point in The Road to Serfdom, particularly in his chapter “The End of Truth.” He warned that when “all the sources of current information are effectively under one single control, it is no longer a question of merely persuading the people of this or that. The skillful propagandist then has power to mold their minds in any direction he chooses.” The coordination of all propaganda toward a single goal, Hayek argued, destroys something fundamental: “the sense of and the respect for truth.”

Subscribe now

Private Property as Protection

Friedman’s contribution in Capitalism and Freedom (1962) was to show how economic freedom created space for dissent. In a socialist system where the government owns the means of production, he asked readers to imagine a dissident trying to spread unpopular ideas. That person “must not only have money, he must also be able to buy paper, print his material, distribute it, hold meetings, and the like.” Each step requires dealing with government-controlled entities. “The seller of paper in a capitalist society doesn’t care or indeed know whether the paper he’s selling is going to be used to print the Wall Street Journal or the Worker,” Friedman noted. But in a centralized system, every transaction becomes a political negotiation.

Years later, in a 1977 Newsweek column titled “Fair versus Free,” Friedman observed that American discourse had begun shifting from freedom of the press to fairness of the press, revealing “how far we have moved from the initial conception of the Founding Fathers.” The distinction matters: fairness requires someone to judge what is fair, inevitably involving government power in determining acceptable coverage.

Karl Popper, writing in The Open Society and Its Enemies (1945), acknowledged that “freedom of the press, for instance, is demanded because of the aim that the public should be given correct information; but viewed from this standpoint, it is a very insufficient institutional guarantee that this aim will be achieved.” The press fails, he admitted. Yet the alternative to tolerating these failures was worse: allowing government to control what counts as correct information transforms the pursuit of truth into the enforcement of orthodoxy.

Subscribe now

The Bias Objection

Today’s critics of media might read these thinkers and respond similarly to the left-populist regimes they oppose: delegitimize critical coverage as “fake news,” then use government power to reward friendly outlets and punish hostile ones through advertising, licensing, access, or outright takeover. It’s not a solution to media bias; it is the imposition of a new bias.

This is where classical liberals parted ways with authoritarians. They recognized media failures but rejected government intervention as the solution. They understood something that contemporary critics often miss: the alternative to a flawed, biased, privately-owned press isn’t a fair, neutral, government-controlled press. It’s propaganda.

When Viktor Orbán, the first EU leader named a “press freedom predator” by Reporters Without Borders and whose government controls roughly 80% of Hungary’s media market, speaks of fighting “media maintained by foreign groups and domestic oligarchs,” he’s not defending press pluralism. He’s describing his own project of consolidation. During the COVID-19 pandemic, when independent Hungarian media demanded access to hospitals, Orbán dismissed them: “This is not the moment to go into hospitals in order to produce staged videos or spread fake news.” This is the populist playbook at work: delegitimize critical coverage, then use state power to reshape the media landscape in your favor.

Subscribe now

The Stakes

Governments of any ideology should not have the power to determine what the press may say. Once that principle is conceded, no clever institutional design will constrain its abuse.

Political movements claiming to champion free markets and individual liberty are increasingly comfortable expanding state control over information or eroding the status of reputable media that do their job by questioning the government’s narrative. They treat critical coverage as grounds for government action, inverting the very logic that free-market thinkers used to defend both economic and press freedom. The principles Mises, Hayek, Friedman, and Popper defended point in one direction: the solution to media dissatisfaction is not less press freedom, but more; not because the press is perfect, but because the alternative is far worse.

This post was written with the assistance of Claude (Anthropic).

The nomination of Kevin Warsh to replace Jerome Powell as Federal Reserve Chair has many people wondering: What makes a good Fed chair? The answer, it turns out, depends on the environment in which the chair will operate.

The characteristics that matter most for running an independent central bank differ from those for a central bank under pressure from political actors. Understanding this distinction is important for evaluating the president’s nominee.

The Case for Technical Competence

In an environment of genuine central bank independence, technical competence matters most. A qualified chair is a reputable monetary economist with strong academic credentials, someone who commands respect in financial markets and the economics profession.

Independent central banks with technically competent leadership achieve measurably better outcomes. They deliver lower inflation rates and more stable inflation expectations. When markets believe the Fed will respond appropriately to economic data, inflation expectations remain anchored even during temporary price shocks. This anchoring effect makes the Fed’s job easier and prevents above-target inflation from becoming entrenched in wage negotiations and pricing decisions.

When a chair’s analysis carries weight in the economics profession, its policy explanations are more persuasive to market participants. This credibility is a form of capital that takes years to accumulate and can be spent during crises when the Fed needs public trust most.

If the central bank is left to conduct monetary policy as it sees fit, a technically competent Fed chair is crucial.

Subscribe now

The Case for Character

If the Fed lacks independence, the strength of character and a willingness to resist political pressure are more important traits. Technical competence is of little use when the central bank is not able to do what its members think it should. Indeed, it might be worth trading some technical competence for a strong spine in such a case.

History provides clear examples. Fed Chair Arthur Burns was technically competent. Prior to becoming Fed chair, he was a well-respected economics professor at Columbia University, where he taught Milton Friedman. He did pioneering work on business cycles with Wesley Clair Mitchell, which has been carried on by the National Bureau of Economic Research. Few economists possessed the technical expertise of Burns at the time. But all that expertise was of little consequence: Burns gave in to President Nixon’s pressure campaign before the 1972 election, lowering interest rates when economic conditions didn’t warrant it. His decision contributed to the high inflation of the 1970s and damaged the Fed’s credibility for years.

Paul Volcker was a sharp economist, to be sure. But he was not as technically competent as Burns. He did not hold a prestigious professorship. He had not done pioneering work in macroeconomics or monetary economics. But he had a strong spine. When President Reagan urged Volcker to commit to not raising interest rates ahead of the 1984 election, Volcker refused. In doing so, he preserved the principle that the Fed chair doesn’t make policy commitments to the White House. His unwillingness to compromise on institutional boundaries helped restore price stability and solidified the Fed’s reputation for independence.

When political pressure threatens independence, the chair’s character matters more.

Subscribe now

The Independence Dilemma

When independence is in doubt, credibility and good policy choices may be at odds with each other. Consider a scenario where White House pressure happens to align with the economically correct policy decision. Perhaps the administration wants rate cuts, and economic data genuinely support easing. The Fed then faces a difficult choice.

If the Fed cuts rates, the public may view the decision as capitulation to political demands. If the Fed refuses to cut rates to signal its independence, it makes the wrong economic decision to preserve the appearance of autonomy. Either way, the Fed’s reputation suffers. The public will come to believe the Fed responds to political factors rather than economic data, regardless of which choice the institution makes.

The first-best solution in such a situation is clear: restore independence. An independent Fed can focus on conducting policy well, without risk to its credibility due to perceived political capitulation. But first-best solutions are not always possible.

Recent events provide much support for the view that we need a second-best solution. The president has consistently called for lower interest rates. He has attempted to fire Fed Governor Lisa Cook. He nominated his CEA Chair, Stephen Miran, who is widely believed to be a Trump loyalist, to fill the balance of Adriana Kugler’s term. And, in January, his Department of Justice subpoenaed Chair Powell. The Fed, in other words, is under pressure.

Subscribe now

How Warsh Stacks Up

With all of this in mind, how should one evaluate Trump’s pick to replace Powell?

Although Kevin Warsh is not a traditional academic economist, he nonetheless possesses a high degree of technical competence. He previously served on the Fed Board from 2006 to 2011. He is currently the Shepard Family Distinguished Visiting Fellow in Economics at Stanford University’s Hoover Institution and lectures at Stanford’s Graduate School of Business. Before joining the Fed, Warsh also served as Vice President and Executive Director of Morgan Stanley & Co. in New York.

Warsh also has a strong spine. While initially on board with the Fed’s large-scale asset purchases as an emergency liquidity tool, he later came to oppose using the balance sheet as a permanent tool. Fed liquidity, he warned, is a “poor substitute” for functioning private markets. This view was decidedly out-of-fashion at the Fed. And yet, Warsh stuck to his guns. Today’s Fed, under political pressure as it is, would be well served by his strong character—provided that it is used to bolster the Fed’s independence.

How will Warsh use his strong spine? That’s an open question. If he pursues the facts as he sees them, he might deliver a much-needed dose of credibility to a struggling institution. If he does the president’s bidding — or is perceived to be doing the president’s bidding — he will further erode the Fed’s credibility.

Post originally published by The Daily Economy.

There’s been an ongoing debate in Argentina about the federal budget results under the Milei administration. I want to be very clear: the numbers show significant improvement, and Milei’s administration has been successful in putting the “deficit issue” on center stage. Yet, there are also good reasons why some Argentine economists point to potential problems and misleading fiscal reporting, notwithstanding the significant improvements.

Right now, the Argentine government issues instruments called LECAPs and BONCAPEs. When a LECAP matures, the government doesn’t pay you back. Instead, it rolls your principal plus accrued interest into a new LECAP. The debt grows automatically, compounding at rates that exceed those of a stagnant economy. This bond interest is not a coupon to be paid; it is capital (principal) to be paid.

None of this capitalized interest appears in the budget calculations. The monthly “deficit zero” figures exclude the very real, very substantial accumulation of obligations that will eventually come due. It’s the fiscal equivalent of paying your credit card bill by taking out a new credit card, and then celebrating that you haven’t spent more than you earned this month. In the process, you accumulate debt at a higher rate than the growth of the economy.

There is something economists understand but often get lost in political cheerleading: proper fiscal evaluation requires calculating the structural fiscal balance in present value terms, not on a month-to-month cash basis. Present value accounting discounts future obligations back to their equivalent cost today, showing the true burden on the taxpayers. Ignoring capitalized interest that compounds at 4.5% monthly while the economy grows near zero is not a measure of fiscal responsibility; it’s a measure of fiscal accounting creativity. We might be observing cyclical, not structural, surplus.

In fact, the IMF’s own assessment of Argentina’s fiscal position explicitly notes that the reported figures are “calculated based on the authorities’ reported cash interest payments, which exclude capitalized interest payments” (p. 8, fn. 5). The report further states that “including all capitalized interest payments to the private sector above the line would imply a cash overall deficit of about 1.2 percent of GDP“ (emphasis added). This represents a notable improvement from the 4% deficit Milei inherited.

To be fair. This is not just a Milei-Caputo accounting practice. Similar “tricks” can be found in other places (two examples below).

Subscribe now

Four Categories of Fiscal Illusion

1. The Present Value Blindspot

One fiscal illusion consists of reporting annual budget deficits (flow measures) while ignoring or downplaying the present value of future obligations (stock measures). This lets governments claim fiscal discipline based on this year’s numbers while simultaneously promising benefits or incurring obligations that dwarf those annual figures. This is the credit card analogy. Showing a positive cash flow by not paying my bills does not imply a structured, balanced budget.

2. Moving the Goalposts: What Counts as “The Budget”

Not all government spending appears in official budget deficits. Some obligations are “off-balance-sheet,” technically separate from the official accounts, but no less real for the taxpayers who will eventually fund them.

This category includes unfunded pension liabilities, loan guarantees, implicit bailout commitments, and, in Argentina’s case, debt capitalization schemes that don’t register as current expenditure. By defining “the budget” narrowly, governments can hit deficit targets while actual obligations grow unchecked.

3. The Timing Trick: When Do Obligations Count?

Governments can manipulate when they recognize expenses versus when they actually incur obligations. Cash accounting records transactions when money changes hands. Accrual accounting records them when the obligation is incurred, regardless of when cash flows.

The choice between these methods isn’t neutral. A government can promise generous pensions to employees, creating real future liabilities, but record zero expense in the current budget if it uses cash accounting. The debt grows invisibly until bills come due decades later.

4. The Derivative Disguise: Financial Engineering for Regulatory Compliance

The most sophisticated fiscal illusions use complex financial instruments to achieve technical compliance with fiscal rules while violating their spirit entirely. Cross-currency swaps, securitizations, and other derivatives can transform the accounting treatment of obligations without changing their economic substance.

These aren’t illegal. Often, they’re explicitly permitted by the relevant accounting standards. But they allow governments to meet deficit targets on paper while their true fiscal position deteriorates.

Now let’s see how these patterns appear in practice.

Subscribe now

The United States: Social Security’s $62.8 Trillion Question

Every year, the Social Security Administration publishes a report containing the infinite horizon unfunded obligation of the Old-Age, Survivors, and Disability Insurance. The latest report estimates a total of $62.8 trillion in present value terms.

Social Security is a pay-as-you-go system. Current workers’ payroll taxes fund current retirees’ benefits. The system has promised a specific formula for calculating future benefits, but it hasn’t set aside the funds to pay them. As demographics shift, the gap between promised benefits and projected tax revenue grows.

The $62.8 trillion figure represents the present value of this gap extending infinitely into the future. Using the government’s own discount rates and demographic projections, you would need to set aside $62.8 trillion today, invest it in Treasury bonds at projected rates, and use the principal and interest to cover the shortfall between payroll taxes and promised benefits forever.

To put this in perspective: closing this gap would require immediately raising the payroll tax from 12.4% to 17.0%, or cutting all current and future benefits by 26.5%. These aren’t fringe concerns raised by alarmists. These are the official numbers from the Social Security Administration’s own actuaries, published annually in the 2024 Trustees Report (Section VI.F).

Critics are correct to point this out. Unfunded liabilities represent a massive burden on future generations that is not reflected in official deficit statistics. By making unfunded promises, the government moves obligations off the official books while claiming to track government finances honestly.

Libertarians who point this out are performing a valuable service by insisting we look at the full picture, not just the convenient annual snapshot.

Subscribe now

Europe: How Greece “Legally” Hid $1 Billion in Debt

In 2001, Greece wanted to join the Eurozone. There was just one problem: the Maastricht Treaty required member countries to maintain budget deficits below 3% of GDP and total debt below 60% of GDP. Greece wasn’t quite there.

Enter Goldman Sachs and cross-currency swaps: “Cross-currency swap transactions with Goldman Sachs reportedly were designed to lead to up-front cash payments from Goldman Sachs to Greece along with favorable early-year results, in exchange for a large ‘balloon’ longer-term cash flow in the reverse direction.”

When the swaps eventually unwound, the hidden debt reappeared. Greece’s fiscal crisis in 2009-2010 revealed the full extent of obligations that had been kept off the books. The “legally compliant” accounting had masked a deteriorating fiscal reality, allowing Greece to avoid hard choices until they became catastrophic choices.

Subscribe now

Back to Argentina: Dissecting the “Deficit Zero” Illusion

Argentina’s use of LECAPs and BONCAPEs combines multiple elements of fiscal illusion into one elegant package.

Start with the present value blindspot. When Argentina issues a LECAP that capitalizes interest, the present value of that obligation is growing dramatically. In an economy with near-zero real growth, debt compounding at over 69% annually (assuming 4.5% monthly compounded) represents a potentially exploding burden if the primary surplus is not large enough. But the monthly deficit calculations ignore this entirely.

Add the timing trick. Because the interest is capitalized rather than paid in cash, it doesn’t appear as an expenditure in the current period. Under cash accounting, there’s no outflow. The government can claim it’s not spending more than it collects, even as its actual obligations surge.

Include some goalpost-moving. Whether these capitalized interest obligations should be counted in deficit measures is a question of how you define “the deficit.” The Milei government uses definitions that exclude them. Technically compliant with their stated metric, substantively misleading about the fiscal reality.

The result: “deficit zero” announcements that ignore the accumulating obligations, much like Greece’s compliance with Maastricht criteria ignored the derivatives-hidden debt, and much like US annual deficits ignore the growing Social Security unfunded liability.

Accounting principles don’t change based on whether we like the politician. Present value matters, or it doesn’t. Off-balance-sheet obligations matter, or they don’t. The timing of when you recognize expenses versus obligations matters, or it doesn’t. If the off-report debt capitalization grows faster than the economy, that is a yellow warning to be aware of.

This post was written with the assistance of Claude (Anthropic).

President Trump has nominated Kevin Warsh to succeed Jerome Powell, whose term as Federal Reserve Chair expires in May 2026. Trump has made no secret of his desire to influence monetary policy. He has consistently called for “Too Late” Powell to bring rates down and seems to believe the president should have a say in interest rate decisions. But the real problem goes beyond Mr. Trump: the next Fed chair will inherit far too much discretionary power.

The Fed has spent nearly two decades accumulating emergency authorities that never sunset and expanding its reach beyond its statutory mandate. It operates with little oversight from or accountability to Congress. The Fed’s ever-expanding powers, when combined with political pressure, is a recipe for disaster.

Three areas illustrate the pattern. First, consider the Fed’s standing overnight repurchase agreement (repo) facility. The Fed deployed a repo facility in 2008 and 2019 to deal with market disruption. But, in July 2021, it transformed this crisis tool into permanent market infrastructure. The Fed’s standing repo facility now provides up to $500 billion daily in liquidity. What began as emergency support became a permanent backstop with no sunset clause.

Second, consider the emergency lending powers authorized under Section 13(3). The Fed rolled out six emergency lending facilities in 2008: Primary Dealer Credit Facility (PDCF), Term Securities Lending Facility (TSLF), Asset-Backed Commercial Paper Money Market Mutual Fund Liquidity Facility (AMLF), Commercial Paper Funding Facility (CPFF), Money Market Investor Funding Facility (MMIFF), and Term Asset-Backed Securities Loan Facility (TALF).

The Fed’s emergency lending powers were purportedly constrained by Dodd-Frank (section 1101). The 2020 COVID-19 pandemic showed, however, how weak those constraints were. Four facilities (CPFF, PDCF, TALF, and the Money Market Mutual Fund Liquidity Facility (MMLF), which was just a slightly revised AMLF) were revived, and five new facilities were established.

These new facilities included the Primary Market Corporate Credit Facility (PMCCF), Secondary Market Corporate Credit Facility (SMCCF), Paycheck Protection Program Liquidity Facility (PPPLF), Main Street Lending Program (MSLP), Municipal Liquidity Facility (MLF) New. Whereas the older facilities might generally be reconciled with the Fed’s emergency lending facilities, the newer facilities permitted the Fed to extend credit to entities Congress never authorized it to support. What began as a crisis improvisation in 2008 became standard practice in 2020, with few constraints on what the Fed could do through its lending facilities.

Subscribe now

Third, consider the regulatory authority the Fed has asserted in recent years. It has denied master accounts to cryptocurrency-focused institutions like Custodia Bank. A master account provides access to the Fed’s payment rails and has traditionally been granted to regulated depository institutions. Yet, the Fed has repeatedly denied applications from crypto banks. These denials demonstrate how discretionary power enables the Fed to pursue policy goals beyond its statutory remit.

The Fed is not blind to its expanded discretionary powers. Federal Reserve officials have openly acknowledged the institution’s expanded role. Former Chair Ben Bernanke defended the Fed’s crisis interventions as “necessary” to prevent financial collapse because, at the time, “no federal entity could provide capital to stabilize AIG and no federal or state entity outside of a bankruptcy court could wind down AIG.” But perceived necessity doesn’t grant legitimacy.

The accumulation of discretionary power increases the risk of politicization. When the Fed wields significant power and discretion over credit allocation, market functioning, and financial access, the president’s appointments to the Fed’s Board of Governors are all the more important. It is also more tempting to apply political pressure. Politicians will find it difficult to resist if the Fed might be used to improve their re-election odds. The Fed’s independence and credibility suffer as a result.

The accumulation of discretionary power — and trillions of assets on the Fed’s balance sheet — also makes financial institutions more dependent on the Fed. If financial institutions come to expect support from a big, powerful Fed in times of stress, they will be encouraged to take on excessive risk. This moral hazard creates a positive feedback loop, where dependent financial institutions require a bigger, more powerful Fed. The end result is a Fed that continuously increases its regulatory reach.

Perhaps worst of all, the accountability mechanisms in place have generally failed to keep up with the Fed’s expanded powers. Congress checks in twice a year. But, unlike other major federal agencies, the Fed lacks an independent inspector general. It has gained abilities to influence corporate and municipal bond markets, but it still operates under an oversight structure designed for a much narrower scope.

The Fed’s power problem is not limited to a particular chair or administration. It is institutional. Over the last two decades, the Federal Reserve has accumulated vast discretionary powers that enable mission creep and invite political pressure. Whoever follows Powell will inherit this vast discretionary power — and, if history is any guide, will be tempted to expand it further. But the Fed’s credibility and independence will suffer until its discretionary power is reined in.

Post originally published by The Daily Economy.