What is the anti-austerity recommendation for Brazil?

by on January 3, 2016 at 12:48 am in Current Affairs, Economics | Permalink

At 70% of GDP, public debt is worryingly large for a middle-income country and rising fast. Because of high interest rates, the cost of servicing it is a crushing 7% of GDP. The Central Bank cannot easily use monetary policy to fight inflation, currently 10.5%, as higher rates risk destabilising the public finances even more by adding to the interest bill. Brazil therefore has little choice but to raise taxes and cut spending.

Too often, at the popular level, there is a confusion between “austerity is bad” and “the consequences of running out of money are bad.”

Sophisticated analysts of fiscal policy do not make this mistake.

By the way, here is a long study of how Brazilian fiscal policy has been excessively pro-cyclical (pdf).

And how is Brazilian output doing you may wonder?:

By the end of 2016 Brazil’s economy may be 8% smaller than it was in the first quarter of 2014, when it last saw growth; GDP per person could be down by a fifth since its peak in 2010, which is not as bad as the situation in Greece, but not far off. Two ratings agencies have demoted Brazilian debt to junk status. Joaquim Levy, who was appointed as finance minister last January with a mandate to cut the deficit, quit in December. Any country where it is hard to tell the difference between the inflation rate—which has edged into double digits—and the president’s approval rating—currently 12%, having dipped into single figures—has serious problems.

Don’t forget this:

Since the constitution’s enactment, federal outlays have nearly doubled to 18% of GDP; total public spending is over 40%. Some 90% of the federal budget is ring-fenced either by the constitution or by legislation. Constitutionally protected pensions alone now swallow 11.6% of GDP, a higher proportion than in Japan, whose citizens are a great deal older. By 2014 the government was running a primary deficit (ie, before interest payments) of 32.5 billion reais ($13.9 billion) (see chart).

Brazilian commodity prices have fallen 41% since their 2011 peak, so I say Ed Prescott has earned his Nobel Prize right there.

The first underlying article/op-Ed also is from The Economist.  Without intending any slight to their other recent issues, the January 2-8 issue is one of their best in a long time.  I am very pleased to have bought it in advance at the airport rather than waiting to get to my copy back at home.

1 Brett January 3, 2016 at 1:21 am

Aside from austerity, Brazil needs a lot more domestic savings and investment – simply getting more FDI risks driving up their currency even more as well as adding to the country’s debt burden.

2 Barkley Rosser January 3, 2016 at 1:44 am

Oh dear, this is complicated, but, frankly, I am not sure what your point here is, Tyler. OK, they have been carelessly running a counter-cyclical fiscal policy, let us all slap their hands, but beyond that, and the Petrobras corruption scandals (yes, a serious business), just what exactly are you suggesting they do? Will some minor adjustment help them in the face of declining Chinese demands for their commodity exports, already aggravatingly diminished in revenue terms by the fall in commodity prices?

Hey, Tyler, you are one of the people touting negative stories about what is going on in China, and I am largely sympathetic to your claims on that front. So why are you picking on the Brazilians so hard, arguably the worst victims of the Chinese deceleration and outright decline in sector directly importing from Brazil?

3 Ray Lopez January 3, 2016 at 7:59 am

Brazil should diversify their economy by using import tariffs to promote industry, and they should pick industries to excel in, such as, for example, aviation. Further they should export their lifestyle brands such as beach flip-flops and even soccer themes.

BTW Brazil is a good country to show that money is neutral: they have had high teens inflation for 40 years after WWII but people adjusted and the inflation did not keep them from growing, proving that money is largely neutral.

4 Bill January 3, 2016 at 9:40 am

Ray, They already have high tariffs and a protectionist economy.

5 Jody January 3, 2016 at 10:21 am

Bill – Ray obviously knows that given his choice of industries

http://www.wsj.com/articles/SB10001424052748704896104575140151650091716

6 Jan January 3, 2016 at 10:36 am

Ah, the Asian development model. Unfortunately, it’s no longer an effective strategy.

7 TMC January 3, 2016 at 9:15 am

“I am not sure what your point here is” That, once again, the idiots decrying austerity are wrong.

8 Jan January 3, 2016 at 9:48 am

Austerity is usually a stupid policy. This is a borderline situation.

9 Cliff January 3, 2016 at 11:23 am

Austerity is never a stupid policy as long as you cut spending and have accommodating monetary policy

10 Jan January 3, 2016 at 3:56 pm

It’s almost always a bad policy, because all things being equal, it typically sends economies into retraction mode.

11 TMC January 3, 2016 at 7:21 pm

Yeah, living within your means is stupid. Piss away more than you earn is a sustainable plan.

Nice imitation of prior or mulp.

12 Thomas January 3, 2016 at 1:57 pm

“I am not sure what your point here is, Tyler.”

Isn’t his point obvious? Your ideological answers don’t work, so you have to actually think. What are the non-austerity solutions that don’t result in the same equilibrium that exists? You don’t have any answers because there aren’t any.

13 Jordan January 5, 2016 at 12:18 pm

They have been running a PRO-cyclical fiscal policy, that spent more in the boom times, not a counter-cyclical one as you state. Tyler is implying they implement traditional austerity policies, unless better options exist, read the title. Why can we not pick on a country with a structural primary fiscal deficit and 11% inflation. Structural. Does that sound like prudent management to you? The Chinese deceleration and the commodity boom ending is a compounding factor, and a large one, but not the entire factor. Moreover, true spending cuts and deficit reduction is likely to have its best results when the government and economy face relatively high real interest rates, as Brazil does.

14 Harun January 3, 2016 at 1:55 am

“Since the constitution’s enactment, federal outlays have nearly doubled to 18% of GDP; total public spending is over 40%. Some 90% of the federal budget is ring-fenced either by the constitution or by legislation. Constitutionally protected pensions alone now swallow 11.6% of GDP, a higher proportion than in Japan, whose citizens are a great deal older. By 2014 the government was running a primary deficit (ie, before interest payments) of 32.5 billion reais ($13.9 billion)”

I was just listening to Econtalk where Noah Smith (sp?) was explaining that rich countries all spend a lot on government, so we should be careful about cutting spending and limiting government, because it might be the reason we’re rich.

This would suggest that its not the case at all, and that you its just correlation and not causation.

(or is it a form of ‘causation’ that once you’re rich you can afford more government?)

Then again, maybe its all low commodity prices.

15 Careless January 4, 2016 at 1:27 am

Yeah, Noah Smith has a talent for being smart and stupid at the same time

16 So Much For Subtlety January 3, 2016 at 2:27 am

Chalk one more up to Max Weber. I think that the safe way to bet is whatever Max Weber said. So Catholic countries remain fiscally and economically incompetent. Protestant ones are doing fine. The further away you stand from the upright Calvinist, the more economic problems you will have.

So the solution for Brazil is simple: become Presbyterians. Canada and Australia manage being primary producers well. In fact Australia is probably more exposed to the Chinese economy’s cycles than Brazil’s is. How are they doing?

17 Adrian Ratnapala January 3, 2016 at 3:20 am

“How are they (Australia) doing?”

Fielding, 6/207 at stumps. http://www.espncricinfo.com/australia-v-west-indies-2015-16/content/story/957411.html

18 dearieme January 3, 2016 at 8:42 am

And there are lots of Calvinists in South Africa and they are being hammered. As I write they are one down, facing 629 – 6 declared.

19 Adrian Ratnapala January 3, 2016 at 11:22 am

Don’t speak too soon. SA is in poor form partly because the two best batsmen in the world have not been doing their magic. But they are at the crease right now and seem to be doing OK.

Besides, I am sure Weber would have counted England as Protestant.

20 Dmitri Helios January 3, 2016 at 11:38 am

Please, this is a North America focused weblog. No cricket-talk.

21 prior_test January 3, 2016 at 3:22 am

‘So Catholic countries remain fiscally and economically incompetent.’

You are aware that the richest parts of Germany at this point are Baden-Württemberg and Bayern, right? And that these two predominantly Catholic Bundesländer finance a number of Protestant Bundesländer (including Max Weber’s birthplace Thuringia)? https://de.wikipedia.org/wiki/Länderfinanzausgleich

And that the governments of both these notably Catholic Bundesländer (even the Green Party Ministerpräsident of Baden-Württemberg is a practicing Catholic) are considerably less ‘fiscally and economically incompetent.’

Luckily, this is anything but a subtle reality, easily checked by anyone with any interest in facts at all.

22 msgkings January 3, 2016 at 3:06 pm

Facts like emissions levels from diesel engines? Facts like those?

23 Thiago Ribeiro January 3, 2016 at 5:48 am

“So the solution for Brazil is simple: become Presbyterians.”
Calvinists made their religion, their religion didn’t make them. Anyone who can be a Presbyterian probably doesn’t need to become one.
“Protestant ones are doing fine. The further away you stand from the upright Calvinist, the more economic problems you will have.” Well, for what is worth, we are having a Prosperity Gospel/Televangelism Great Awakening. Are we sure that what is good for Pat Robertson is good for the American GDP?

24 chuck martel January 3, 2016 at 1:23 pm

“Calvinists made their religion, their religion didn’t make them.”

Maybe on day the first but not anymore. Most people are born into their faith, a small percentage shop around later on. But that’s not really the point. The Puritan/Protestant mindset, reaching its zenith in Harvard Yard during the late 17th and early 18th centuries, dominates US morality even today, though the trappings of it have faded from the scene. Pilgrim’s Progress is no longer required reading and Christmas is a holiday. Even so, equating work with virtue is more important than ever. Lazy people, or people that simply can’t direct their activities efficiently, are bad, if not in the eyes of God, for sure in the opinion of the collective.

25 Thiago Ribeiro January 3, 2016 at 2:13 pm

“Maybe on day the first but not anymore. Most people are born into their faith.”
Yes, sure, but I would say that the mindset created the religion, not the other way around. Same Bible (mostly) as Catholics have, same God, very different behaviors. If one can bring himself to act as a Calvinist would, he probably doesn’t need to be a Calvinist, and if one can’t (as Christians hadn’t for 15 Centuries) he will just give up (unless Calvin is around killing the recalcitrant guys), Anyway, as impossible religious coversions go, Brazil should as well adopt Shinto (we could at least have safe and clean streets and fast and timely trains) or Confucianism or Islam (Arab countries are much more safe than Brazil). Nothing like that will happen, of course. Father Vieira, Catholic priest and the greatest writer Portugal ever had, lived in Colonial Brazil and said that St. Thomas must have been condemned to preach in Brazil as a punishment for his disbelief.

26 Aaron J January 3, 2016 at 7:53 am

Brazil has become more and more Protestant.

27 Ray Lopez January 3, 2016 at 8:01 am

The Weber thesis has been thoroughly debunked. The only way it works is if you torture the definition of “Catholic” and “Protestant” into “Good Catholics” and “Bad Catholics” and likewise for Protestant (BTW northern Thailand and Laos, relative basket cases, have a somewhat sizable Protestant population).

28 Kyle McKenna January 3, 2016 at 11:18 pm

Yep, Thailand and Laos are well known as hotbeds of Christian Protestantism.

29 Axa January 3, 2016 at 10:17 am

@SMFS: it’s not the religion, the unintended outcome from the Reformation was that lots of peasants learned to read. Ideas could travel and technological development exploded. Indeed, Max Weber said precisely that.

30 Justin Kelly January 3, 2016 at 1:29 pm

> unintended outcome from the Reformation was that lots of peasants learned to read

not to torture the causality and correlation arguments form elsewhere in this thread any more, but it sounds more likely the reformation was the unintended consequence of increased literacy, both supply and demand.

31 sambov January 3, 2016 at 3:29 am

Harding, you are correct, Brasil must change. The central banksters take most of the money leaving the so called Politicians to fight over the rest. Need real change here. Lot of the Business here change their name every few months. We need more free trade here and open the doors, please.

32 Kyle McKenna January 3, 2016 at 11:19 pm

Having over 200 million people–we dare not mention that.
There’s still more Amazon forest left to rape.

33 rayward January 3, 2016 at 6:09 am

“Brazil’s achievement has been to lift tens of millions of people out of rag-and-flip-flop poverty. Recession will halt that, or even begin to reverse it. The hope is that Brazil, which has achieved hard-won economic and democratic stability, does not lapse once again into chronic mismanagement and turmoil.” To austerians, no achievement is more important than cutting the size of government, even if, or because, it results in a recession. It’s like tax cuts for the wealthy, always the answer, no matter the problem. Of course, Brazil’s loss is Miami and NYC real estate’s gain. The view from up there is fantastic!

34 prior_test January 3, 2016 at 7:14 am

‘I am very pleased to have bought it in advance at the airport’

Yep, a true exemplar of a real thought leader in the ongoing digital revolution.

35 Thiago Ribeiro January 3, 2016 at 7:52 am

More like a one-marshmallow guy. Well, a two-magazines guy.

36 ibaien January 3, 2016 at 8:08 am

a sophisticated analyst of fiscal policy would advise Brazil to wait for the copy of the economist they had at home. paying airport newsstand prices for existing subscriptions sounds like something a catholic country would do.

37 Thiago Ribeiro January 3, 2016 at 9:24 am

But isn’t buying a copy we have no need of (or buying a ticket to someone go get it in a country that gets them first) a countercyclical measure, like filling old bottles with banknotes, burying them in coalmines and paying people to dig them up?
Maybe buying magazines is our comparative advantage (managing oil companies clearly is not it).

38 TMC January 3, 2016 at 9:24 am

Wise time management. If Tyler had a couple hours on the flight free, the $5 for the magazine both makes the flight more enjoyable (consumption), and frees time he would have spent reading it in the US (investment). A lot of bang for those bucks.

39 Thiago Ribeiro January 3, 2016 at 10:33 am

$ 5? When the Brazilian real had a decent purchasing power, was the Economist cheaper than the run-of-the-mill Brazilian magazines?
He didn’t know he was to find a specially interesting issue, he should have planned ahead what to do in his flight. If he did, it was not buying the magazine vs doing nothing, it was reading the magazine vs doing something somewhat less enjoyable/productive, I doubt the difference between the two options amounts to the price of an entire copy of The Economist. Failing to plan (is planning to fail) and ignoring opportunity costs is exactly what a “Catholic” country would do.

40 TMC January 3, 2016 at 7:25 pm

Magazine at home was a sunk cost. He had to make a decision while on the road. Still a good move.

( I have no idea if it’s $5 or not)

41 Thiago Ribeiro January 3, 2016 at 9:06 pm

The difference between reading the airport copy and doing the next best thing is not worth the whole $5 or whatever. How could the difference between a good The Economist issue and something else be worth as much as the entire price of one copy? Now that the FED is raising the interest rate again, he could have invested those five dollars– or whatever– and, by January 2017, he would have gotten an extra penny.

42 Aaron J January 3, 2016 at 7:55 am

Bill Gates reads hard copy, as do many other tech titans. Studies show reading comprehension is higher book/magazine in hand.

43 Kyle McKenna January 3, 2016 at 11:20 pm

What a bizarro cavil.

44 msgkings January 4, 2016 at 1:46 pm

Forget it, Jake. It’s prior_approval/test

45 Dulimbai January 3, 2016 at 7:30 am

I don’t see the issue. Just open the borders and let those Brazilians who have been let down by their corrupt government to flourish in the USA. Bryan Caplan can arrange their settlement all over the country with the exception of 100 miles surrounding GMU.

46 Kyle McKenna January 3, 2016 at 11:23 pm

Now you’re talking. And Africa is “planning” on having over 4 billion by the end of the century–they’ll be happier in America too.

47 msgkings January 4, 2016 at 1:47 pm

Nope, not gonna happen. African TFRs will plummet just like they have everywhere else. Already happening in fact.

48 Just Saying January 3, 2016 at 9:49 am

But this isn’t the Austerity people have been criticizing: “Brazil therefore has little choice but to **raise taxes** and cut spending.”

If you’re increasing revenue and decreasing spending equally, I think everyone agrees those are tough but necessary measures. “Austerity”, as it has been generally known, was only one side of that coin – cutting spending, typically spending that went to lower-middle class citizens, such as pensioners. If you’re raising taxes on the higher income earners, and cutting spending across the board – note, that means military too – then I think everyone recognizes that as basic common sense.

49 Cliff January 3, 2016 at 11:26 am

Pretty much the exact opposite of that. Austerity has typically been heavily weighted toward tax increases, which studies suggest is much more damaging

50 Boonton January 3, 2016 at 11:28 am

Austerity is both raising taxes and cutting spending. Whether you are doing it because you ‘have no choice’ or simply because you think it is the best thing to do doesn’t alter the definition of what austerity is.

51 Thomas January 3, 2016 at 2:09 pm

“Austerity is both raising taxes and cutting spending.”

Because you say it is? Laughable, Boonton. Austerity can be one, the other, or both. We all know that you oppose decreased spending unless it comes with the additional pain of increased taxation, for ideological reasons, but that doesn’t mean you should poison discussion with your lies.

52 John L. January 3, 2016 at 2:15 pm

“We all know that you oppose decreased spending unless it comes with the additional pain of increased taxation, for ideological reasons, but that doesn’t mean you should poison discussion with your lies.”
That is, “austerity” is just giving more money to the rich

53 Boonton January 3, 2016 at 6:08 pm

Again I think you believe you have some deep disagreement with me but you can’t seem to articulate what it is.

54 Kyle McKenna January 3, 2016 at 11:25 pm

People who say things slightly differently from how I say them are obviously liars. HTH

55 John L. January 3, 2016 at 10:16 am

Why not?

56 Tom January 3, 2016 at 11:27 am

What to do, what to do? Let’s ask Paul Krugman!

57 Tom Warner January 3, 2016 at 12:28 pm

Indeed Brazil is giving American and European Keynesians a lesson in why Greece didn’t want to leave the Euro, if they care to pay attention.

58 Art Deco January 3, 2016 at 1:15 pm

The statistics they quote are nonsense. While we’re at it, the inflation rate in Brazil is 10%, not a catastrophe.

59 Tom Warner January 3, 2016 at 2:21 pm

The point is not to make a score card of comparisons of every detail of Greece’s and Brazil’s crises and try to second guess whether Greece would have been better or worse if it had been able to devalue. The point is that devaluation and inflation are ways of implementing austerity, and the latter especially has deep and lasting negative effects. Chronic 10%-ish inflation creates very serious long-term problems for savings and investment rates that last long after the inflation is reduced.

60 Tom Warner January 3, 2016 at 2:25 pm

And of course older Greeks know all this from Greek experience, and from watching Turkey.

61 Art Deco January 3, 2016 at 3:12 pm

No, inflation at that rate does not have ‘deep and lasting effects’;. It’s an irritant which needs to be dealt with in due time (and sure beats deflation at that rate).

62 Boonton January 5, 2016 at 6:14 am

Accelerating inflation is a sign that your problem is no long Keynesian.

If you have an export heavy economy and all in the sudden the international prices of the commodities you export fall, your GDP is going to suffer not because of a demand shortfall but because of a decline in supply.

63 Art Deco January 3, 2016 at 1:13 pm

By the end of 2016 Brazil’s economy may be 8% smaller than it was in the first quarter of 2014, when it last saw growth; GDP per person could be down by a fifth since its peak in 2010, which is not as bad as the situation in Greece, but not far off. Two ratings agencies have demoted Brazilian debt to junk status. Joaquim Levy, who was appointed as finance minister last January with a mandate to cut the deficit, quit in December. Any country where it is hard to tell the difference between the inflation rate—which has edged into double digits—and the president’s approval rating—currently 12%, having dipped into single figures—has serious problems.

You notice they don’t report the actual production and income figures, just speculation about what they will be a year from now. Trading Economics reports peak per capita product in Brazil as having been in 2013, not 2010. Trading Economics and Statia also suggest that per capita product in 2015 will be about 3.5% off the peak. Greece has seen a contraction in per capita product of 25% since its 2007 peak. Current unemployment rates in Brazil are 7.5% and the debt / GDP ratio is 66%. Why is The Economist trying to con its readers?

64 Justin Kelly January 3, 2016 at 1:46 pm

Austerity vs. Stimulus observations lead to a lot of tortured arguments. I see no one on the left cry “austerity” when a country raises its top tax margin (remember Britain’s 50p rate anyone?), I see no one on the right cry “stimulus” when a country raises military spending. What is one unit of “austerity” anyway? what is it measured in? Must it be measured in degrees of an average budget baseline? balanced budget baseline? nominally from last years spending/taxes? Until we hammer that down, we are always going to be tail-chasing. And when we do, when it becomes as simple as plugging the budget and gdp of every country into excel and producing a positive or negative quantity for each year, a lot of the common rationalizations produced by people like Krugman and others will fall apart.

I find it fun to go the the wikipedia page for austerity and stimulus and look at how much tweaking is done to the fundamental definition every year.

65 Boonton January 3, 2016 at 8:54 pm

Raising the top marginal tax rate would be austerity and increasing the military budget would be stimulus all else being held equal.

66 Justin Kelly January 3, 2016 at 9:26 pm

Absolutely, so can we conclude that the Republicans who have a record of cutting taxes while spending just as much as Democrats are the party of stimulus and that the democrats who tend to raise taxes (despite upping spending) are the closest we have to an austerity party? It goes against the popular political narrative, but it could certainly be argued. Ultimately it shows what bunk the whole austerity / stimulus debate is.

67 Boonton January 4, 2016 at 5:25 am

Except the Republicans refused to go along with extending the payroll tax cuts from both the stimulus bill and the previous Bush administration.

68 Kyle McKenna January 3, 2016 at 11:28 pm

I need to save your second sentence, at the very least, for future use.

69 The left January 3, 2016 at 2:11 pm

The answer is simple: make everyone else worse off in order that Brazil becomes better off in comparison. Either through global regulation to harm other national economies or global redistribution to improve Brazil’s economy, this is the only answer you’ll get from the left. Every single proposal will boil down to one of these two, because the only other option – improving Brazil’s economy internally, either through fiscal restraint or deregulation, is unthinkable.

70 HL January 3, 2016 at 3:54 pm

If American national debt was paid at historical interest rates of 5% we’d be paying $950 billion in interest. We take in $1.4 trillion in federal income taxes.

71 Prakash January 4, 2016 at 12:57 am

That’s quite an impressive set of constraints on Brazil that were listed in the article. I don’t see too many options, but one slightly lateral answer could be – greater transparency in government. Have cameras in every government office, with the feed going out to a public website. Let those who get regular pay increases justify their high salaries or leave for someone who is more inclined to be ok with being under constant surveillance.

Btw. I think India would greatly benefit from such a change as well.

72 Harun January 4, 2016 at 11:18 am

Better yet, have their computer screens be visible.

73 John Smith January 4, 2016 at 11:49 am

“Too often, at the popular level, there is a confusion between “austerity is bad” and “the consequences of running out of money are bad.”

Naomi Klein & Co collectively spin in their co-ops.

74 Cooper January 4, 2016 at 1:53 pm

Brazil needs to scrap its labor code and start over again from scratch.

They could also use a constitutional convention to rethink some of those protected pensions. At the very least, they need to raise the retirement age.

They should not cut the bolsa familia payments. Conditional cash transfers have significantly reduced extreme poverty in Brazil and cutting this program would be disastrous.

It would be a real shame if the world’s most successful anti-poverty program gets slashed to make room in the budget for pension payments to upper middle class bureaucrats.

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