Macri Imposed Capital Controls: When Will Argentina Learn Its Lesson?

To say that the Argentinian economy is not performing well is an understatement. Peso depreciation began in 2018, and ever since, Argentina has been on a downward spiral with no end in sight. Earlier this month, Argentinian President Mauricio Macri reinstated capital controls as a short-term emergency measure in the hopes that it will improve the deteriorating state of the Argentinian economy.

Before continuing, it would be prudent to define what a capital control is. A capital control is a measure taken by a government or central bank to limit the flow of foreign capital in or out of a country. They can take the form of tariffs, transaction taxes, volume restrictions, or outright bans. I had to consult my macroeconomic policy textbook from graduate school (Caves et al., 2007, p. 516), but capital controls have four possible aims:

• To discourage capital outflows in the even of a balance-of-payment crisis
• To discourage capital inflows in the aggregate, before a crisis
• To modify the composition of capital inflows, in particular to discourage short-term banking inflows, relative to other inflows
• To decouple domestic interest rates from foreign rates, with the aim of restoring some monetary independence

Let's jump back to capital controls in an Argentinian context. Prior to Macri getting elected, the capital controls were bad enough where 10 percent of Argentinian adults were buying dollars on the black market. About half of educated, middle-class adults were doing so (Schiumerini and Steinberg, 2019). Macri made a big deal of it during his 2015 presidential campaign. When he removed the capital controls shortly after his election, his decision to do so was very popular (Steinberg and Nelson, 2019). What happened Macri's election and now that he would change his mind?

Macri's initial removal of capital controls showed a break from the previous administration and a push for reform. While it provided a short-term boost of investor confidence, the Argentinian government was still borrowing a lot of money to finance its debts. Budgetary shortfalls combined with inflation and a drought that messed with Argentina's agricultural sector made matters worse, which is why the peso devalued as much as it did. The IMF-backed loan plan was not enough to stabilize the economy. As such, Macri lost the primary election (PASO) on August 11, which triggered another round of peso-selloffs because people weren't exactly confident in a Peronist government led by the leadership that got Argentina into this mess in the first place. Even if the capital controls could stabilize the peso, it does not look good for Macri's reelection chances. Macri's choice is based on his perception of stabilizing the economy along with politics.

Now that we understand the political calculus behind the decision, I have a more policy-focused question: do capital controls work? This is not a debate you see in economically developed countries because they do not need those controls. After, the globalization and integration of financial markets diminishes the need to use them. Conversely, capital controls are more common among developing countries, such as Argentina, precisely because their capital reserves are lower and their economies are more susceptible to volatility.

There are some who think capital controls succeed (Landy and Schiavone, 2018; Levy Yevati, 2011), some who think they fail (e.g., Alfaro et al., 2017; Pasricha et al., 2015; Alfaro, 2015; Carvalho and Garcia, 2006; Forbes, 2005), some who think that it depends on it being implemented short-term (e.g., Davis and Presno, 2014) or the level of short-term capital flows (Magud et al., 2011), and those at the OECD found contradictory results (OECD, 2016). The Federal Reserve Bank of San Francisco found that capital controls work better on capital inflows than outflows (Magud et al., 2007, p. 21). As for foreign exchange liquidity specifically, the Bank for International Settlements conducted some research. While capital controls reduce the cost component of FX market liquidity, they also make the market more vulnerable to order flow imbalances (Cantú García, 2017).

In the vein of the research being more ambiguous, I feel a certain ambivalence about capital controls. On the one hand, I know a country such as Argentina has not reached the level of economic maturity to do away with capital controls. Perhaps removing them suddenly as opposed to gradually was a mistake for Argentina. It is disconcerting because Argentina has cooperated with the IMF and has used other standard policy instruments to try to abate the peso devaluation.

On the other hand, not needing them shows a maturity of a given economy. I worry that capital controls are like putting a Band-Aid on a cold in that it is a short-term fix to a long-term, structural problem. As we saw with Malaysia, capital controls were used to cover up corruption and ineffective monetary policy. By limiting convertibility, the value of assets is diminished. Viewing the economy as a zero-sum game is as erroneous when discussing goods and services as it is when discussing capital.

There is an argument to be made that the success is conditional and situational, especially if implemented as a short-term solution. Even if a theoretically successful capital control could be implemented in practice, I worry that Argentina's monetary history and how Argentinians have turned to the underground market in the past would diminish the argument. At best, Macri's capital controls are going to be a temporary stop-gap that won't do too much if he cannot get a handle of the macroeconomic fundamentals.

Should We Brush Aside Worries About Amazon Rainforest Fires?

In recent weeks, I have noticed a flurry of articles about the Amazon rainforest. The cluster of wildfires were worrisome enough that the G-7 countries offered Brazil $22 million to fight the fires, an offer that Brazilian President Jair Bolsonaro summarily rejected. When environmentalists frame it in terms of the Amazon being the planet's lungs, it is bound to turn some heads. What I am curious about is the context of these fires and the extent to which we should worry.

Is the Amazon Rainforest Earth's Lungs?
In short, not really. Yes, the Amazon produces a significant amount of oxygen. The reality is that a majority of the oxygen that the Amazon produces is also consumed by the Amazon vis-à-vis respiration, whether it is wildlife or microorganisms that decompose dead leaves, twigs, or other materials. When this processing is factored in, net oxygen production is near net zero. When considering breathable oxygen, oceans are responsible for about 50-85 percent of the world's breathable oxygen. In short, the entire Amazon rainforest could be destroyed, G-d forbid, and we could still breathe. National Geographic recently released an article explaining in detail why this "Amazon's are the Earth's lungs" claim is a myth.

Historical Context of Amazon Rainforest Fires
Listening to the media, I would have thought that these fires were at an unprecedented level. Let us take a look at the data from Brazil's Instituto de Pesquisas Espaciais (INPE), which is Brazil's space research agency.

Source: FEE (dated September 5)

I do notice that we are not complete with the 2019 calendar year, and fires are already higher than 2018. However, I notice two other things. One, Amazon rainforest fires are not new. Two, they are still lower than they were in the early- and mid-2000s. While useful, these data have limits because they say nothing about the size of the data (i.e., unlike Brazil, the U.S. tracks the size of the fires).

Shouldn't We Still Worry? 
Even if the fires are not anything new or if the levels are not unprecedented, we should still worry, argue environmentalists. After all, these fires are bound to have detrimental effects on the biodiversity of the region. The New York Times and Smithsonian Magazine confirm most of the fires are being burned on agricultural land where the forest has already been cleared.

This is not to say that there are no issues whatsoever. One has to be concerned with increased carbon monoxide emissions and how that will most immediately affect the indigenous tribes living in the Amazon.

Second, there is concern that we will reach a tipping point (called a dieback scenario) if we reach 20-25 percent deforestation levels (Lovejoy and Nobre, 2018). We are currently at 17 percent, according to the World Wildlife Fund. While deforestation rates have slightly increased under Bolsonaro, those rates are much higher than they were in the early- and mid-2000s. There was actually a 70 percent decline in deforestation between 2004 and 2012 (Nepstad et al., 2014).

Source: Ministério do Meio Ambiente

There is also expressed concern about how deregulation has contributed to the uptick. I would contend that Brazil being a developing country has something to do with it. Research suggests that there is a U-shaped relationship between environmental degradation and economic growth (Chiu, 2012). The process to get a permit for scheduled clears and burns is onerous enough that Brazilians are resorting to illegal burns, which like so much in the underground market, is more problematic. As an economist from University of Colorado hypothesizes, the economic development that results in rule of law and greater voice translates into better forest management (Barbier, 2019). This better forest management, of course, assumes that Brazil can get past crony capitalism and become a developed nation.

When I take a look at this, I do not this that it is the dire situation that many environmentalists are depicting. I also do not this that the situation is free of concern. Ultimately, it is something we should see an eye on while making sure that the Amazon tree canopy cover is growing, much like we see happening on the global level (Song et al., 2019). Fortunately, there are ways to ameliorate the situation (Lapola et al., 2018). Ultimately, this is another example of how we should let facts inform our emotions, and not the other way around.

Red Flag Laws With Constitutional Protections Should Be Given the Green Light

El Paso, Thousand Oaks, Pittsburgh, and the mass shooting in Midland-Odessa last week. These are just some of the places where there have been mass shootings in the past year. It seems like a never-ending nightmare, especially by those who are victims of such tragedies. Mass shootings are sadly not anything new, but the response to mass shootings is getting more intense. Recent rhetoric has surrounded white nationalism and mental health. In addition to such rhetoric, there has been a policy alternative that has emerged: red flag laws.

A red flag law, also known as an extreme risk protection order, is a petition for a temporary order of removal of firearms from an individual who would be proven to be a danger to themselves or others. While this could be in response to gun suicides, red flag laws have primarily been in response to preventing further mass shootings, especially since 51 percent of mass shooters exhibit a warning sign of some sort.

One thing that red flag laws already have going for them is their popularity. A Washington Post poll from last year shows that 85 percent of Americans are in support of red flag laws. The argument for red flag laws is stronger than citizen support. One study shows that red flag laws to prevent suicides reduced suicide rates in Indiana and Connecticut by 7.5% and 13.7%, respectively (Kivisto and Phalen, 2018; also see Swanson et al., 2019). It is trickier to say whether they would help with preventing mass shootings because they are statistically rare occurrences. Even so, a study preliminarily suggests that an intervention as urgent and individualized as the red flag law could help reduce mass shootings (Wintemute et al., 2019).

Proponents of the Second Amendment are concerned that red flag laws would be used as a backdoor to eroding gun ownership. I share those concerns because I could see red flag laws being abused. At the same time, I also see the public safety concerns of those who support red flag laws. Similar to the positions of libertarian think-tank Cato Institute and the National Rifle Association (NRA), I would want red flag carefully written to include protections of Second Amendment and due process rights, as well as have a narrower definition of "dangerousness." The last thing we need is for the slippery slope to become a reality.

I also have reservations about red flag laws working even if they are implemented with such constitutional protections. One is the assumption that most or all dangerous individuals are reported in time to prevent such an act. The second concern is one I brought up after the Las Vegas shooting in 2017, which had been the deadliest mass shooting on U.S. soil. The correlation between mental illness and mass shootings is low enough that it lacks a coherent risk-identification strategy. I would rather see improvement in mental health services than further stigmatization of those who require mental health services.

My bottom line is this: Red flag laws with the proper constitutional protections would be fine. However, don't expect it to perform miracles in preventing mass shootings.