Thread by @canokar

Gather around for a story about how one country manipulated its inflation data for years and ended up destroying its economy. It all started when the populist President fired the head of the stats agency and replaced them with a friend.

That country is, of course.... Argentina.

This parable of self-defeating deceit actually starts a few years before. After a severe economic crisis in 2001-2, the Argentine economy started recovering but then inflation reared its ugly head, reaching double digits by 2005.

Something had to be done.

The President of the day, the male Kirchner, tried to impose limited price controls and even called out and threatened retailers who wouldn’t comply. Unsurprisingly, this was a terrible idea and inflation stubbornly continued its upward rise, metronomically marching on.

So the male Kirchner tried a different approach, increasingly meddling with the official stats agency INDEC throughout 2006. He tried and tried to get access to their confidential micro data but alas, he had no luck.

It was time for desperate measures.

At the start of 2007, with inflation still refusing to go down, the head of the pricing department at INDEC, Graciela Bevacqua, was persuaded to go “on holiday”. By the time she returned, she was very much fired.

But don’t worry, she’ll appear again later in this story.

The broader statistics teams were decimated, says the Economist. If they weren’t fired, independent-minded statisticians “just resigned and left” or were banished to back rooms without equipment. Harsh, right?

Link here: economist.com/the-americas/2…

The President started stuffing INDEC with political allies and, lo and behold, the monthly inflation rate that had been 1.1% in January collapsed to 0.4% in February. It was a modern-day miracle, a sudden turnaround in fortunes worthy of celebration!

Fue magico!

But that wasn’t enough for the male Kirchner and inflation continued to fall, eventually finding a warm and comfortable spot hovering always below 10%.

But there were problems with this magical inflationary decline: reality chose to be awkward and wouldn’t go away.

Bevacqua and other independent statisticians kept on compiling inflation data and it showed that prices were, in fact, rising at 20%, 30%, sometimes more.

But the male Kirchner had a plan for that too: he would sue alternative statisticians or otherwise discredit them.

When the male Kirchner stepped down in favour of his wife (the female Kirchner), the stats manipulation only got worse. Who would have thought running a country like a family business could lead to such nefarious and counterproductive meddling?

But it did.

Soon, Argentina was playing around with GDP numbers and poverty numbers and just about anything you could do with a pliable statistics agency. And this is where reality really started to become the enemy.

You see, inflation manipulation has some serious unintended consequences.

It turns out economic actors are quite good at telling the difference between official stats and the prices they experience in their everyday lives. But it was actually worse than just a disjunct between official prices and real prices. You see, inaccurate data leads to guessing.

Bayesian learning models tell us that economic actors will account for biased statistics in surprisingly sophisticated ways. They will find unofficial sources for inflation or make their own calculations and then make predictions accordingly.

Paper here: nber.org/papers/w22103

Debiasing the data, whether by companies or individuals, would often lead to actors overestimating the actual inflation rate, leading to investment and savings decisions that actually exacerbated real inflation and made the difference between official and real ever larger.

This wasn’t helped by government behaviour, where government spending (and therefore obviously tax income) was rising in line with real and not official inflation. Public sector wages, particularly for political allies, also went up in line with real inflation.

Curious.

And in the internet age, creating unofficial inflation models was maddeningly easy and both national and international actors (including PriceStats) started showing inflation was multiples higher than the official government data. This inevitably impacted on investment decisions.

Soon enough, the IMF and the Economist were openly decrying the official data and by 2012, the IMF was moving to censure Argentina whilst the Economist just stopped publishing official statistics.

International investors watched on shaking heads, money firmly in pockets.

It all came crashing down in 2014, when the female Kirchner (the male Kirchner had tragically died in 2010 before he could regain power, presumably planning a job-swap to side-step term limits) had to finally admit that the stats were basically all just made up, a fairy tale.

New CPI calculations were put in place, which more closely resembled unofficial inflation data but soon enough, the data started to diverge again. One imagines a stats agency bereft of actual statisticians starts to put in its own bias after a while with just a wink and a nod.

When finally in 2015 the Kirchner dynasty came to an abrupt end, the new President Macri found a statistical wasteland.

Bevacqua came back to INDEC and its Technical Director, Todesca said that INDEC was like a “scorched earth”. It was in ruins and in no way fit for purpose.

It would take months, if not years, to rebuild INDEC but by then the damage was done and since then, Argentina has lurched from economic crisis to economic crisis.

Even under new leadership, how can anyone trust the data from a country that likes to just make things up?

And so we come to the end of this cautionary tale. Argentina’s currency, the peso, is basically like a Shitcoin, inexorably sinking towards a destination of which no-one can be certain. It will presumably take years to try to rebuild credibility and the journey will be torturous.

But at least Argentina can be proud that it has delivered an example to the rest of the world about what not to do.

We can be certain that no country will ever again try to stack its statistics agency with political allies and start manipulating data for short term gains.

No country would ever again think that it was appropriate to fight inflation by cherry-picking data and then getting angry at economists who pointed out that the numbers might be off. Right?

For that, we can be thankful to the Kirchner clan and to Argentina. Muchos gracias!

A belated addendum (from an Argentinian friend): after the INDEC debacle, Argentina was seriously diminished in its capacity to issue debt in local currency. And that created a bigger problem with foreign denominated debt.

Other countries would obviously want to avoid that...

Whilst other countries are undoubtedly taking the cautionary lesson to heart, it seems Argentina is going to try to disprove the maxim that trying the same thing twice and expecting different results is not, in fact, utter madness:

https://twitter.com/InsaNQN/status/1192071445347733505?s=20