According to Krugman at the global level, we are focusing too much on Brazil's politics and not on its macroeconomic course and its recent crisis. Unlike other crises, Brazil has experienced a significant decline in its GDP, but it does not have a large amount of foreign currency debt so they cannot play with the depreciation of the currency to solve the problems. The economy of Brazil depends to a large extent on commodity exports and China is its main customer, at this moment Brazil finds that this same country is reducing its imports and, therefore, the economy looks strongly affected If it were not enough, domestic consumption was reduced in relation to an increase in household debt in recent years.
We believe that this article needs to highlight other important issues that have affected the crisis in Brazil, such as corruption, poverty, etc. We see that Brazil has long-term solvency problems that require solutions and, at the same time, we do not believe that the election of an ultra-right president is, contrary to what Krugman says, a fact that must be ignored. If the world speaks about Bolsonaro, it is because it is important to talk about it, as it is a fact that affects the social environment, but especially the country's economy.
1
Some points to add to your list:
- a highly interventionist industrial policy, which promoted failed and corrupt “champions” while inhibited the investment of serious entrepreneurs
- complete fiscal irresponsibility, including arbitrary tax exemptions and large sums loaned to projects in other countries (Venezuela, Cuba, Angola, Bolivia), now delinquent etc.
- huge, huge corruption.
1
@William Grava
Mr Bolsonaro is not as proved fascist. He's less rightist than Trump. And so gross as. Brazilians were frustred by center-leftists administrations and wanted top try the opposite. Very natural. It was the Dilma Rousseff's government who broke Brazil's economy with stupid and populist politics.
2
Fiscal policy in Brazil is always expansionary, on booms and busts. Our fiscal tightening started after the recession occurred. It possibly worsened it, although the efforts were not that large. But anyway, we are not in the zero lower bound, with an awful long run fiscal problem, why not just use monetary policy?
On monetary policy, what happened is that inflation expectations were unanchored, because of both demand side and supply side issues. Dilma forced the Central Bank to operate more loose in 2012, and then supply shocks hit. It is truly a hard choice to put inflation back on track, but we didn't need to be in this position if Dilma had not artificially held energy and gas prices, plus the experimentation on loose monetary policy. We did not had a normal recession, but more of a recession accompanied by a disinflation. That explains the sharp plunge.
1
Last week at a conference, I was on a panel with a Brazilian academic. Truly, she feared for her country's future. In comparing Brazil to the US, she claimed that they don't have the institutional structures to withstand the coming onslaught. It gave me momentary hope that America will survive 45 and still resemble a democratic republic.
3
We don't have a political crisis in America
1
I lived in Brazil for 13 years and had my own small manufacturing company.
Over and over the New York Times does not get what happened in Brazil.
As bad as Bolsonaro is, the Workers Party was the most corrupt party Brazil has ever seen. Lula and the Workers Party (PT) took corruption way beyond even what was even normal for Brazil.
They were able to do it because Lula entered into power in 2003 and the Workers Party had the advantage of Petrobras, the state oil company, and oil at $100 / barrel.
Now Brazil has Sergio Moro, their equivalent of Mueller, who started investigating in 2014. I have read that 80 politicians have been indicted, unheard of and giving Brazilians hope for the first time that politicians will go to jail.
There are a few Trump like supporters who get all the attention in the US news but they are a small minority.
All of my friends voted for Bolsonaro not wanting to but knowing it was the lesser of two evils.
They are hoping Bolsonaro will not be allowed to do all the terrible things and will vote him out in four years if he doesn't do some good.
Do an Internet search on Operation Car Wash and Lava Jato. There are articles from the New York Times and The Guardian and the BBC.
https://www.theguardian.com/world/2017/jun/01/brazil-operation-car-wash-is-this-the-biggest-corruption-scandal-in-history
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@Independent
lol, Brazil between 2004-2011 was one big boom. Your new party is corrupt and another economic recession is coming. You will have a military dictatorship by the 2020's.
1
@Independent For someone who lived in Brasil 13 years you seem to know very little about the country. Perhaps you only lived there during PT governments, so you don't know about previous governments' corruption. To make a long story short, the high PT corruption was just the standard Brazil corruption. Corruption was not the main or only cause of Brazil's fall. Both Temer and Bolsonaro are at least as corrupt as PT. Check your facts.
1
Dear Dr. Krugman,
I am a sincere admirer of your texts, in academia or in articles of opinion. In my view, your analysis is essentially correct with respect to the external economic environment and with regard to monetary policy (although it should be remembered as Dr. Gustavo Franco, former president of Brazilian Central Bank, said: "Inflation is like alcoholism, there is no cure, only control." The translation is mine, he said it in Portuguese and logically referring to the Brazilian case).
However, in fiscal policy, I believe that this part: "what happened instead was the Rousseff government decided to impose sharp spending cuts in the middle of a slump" is Incorrect.
For this, please, look to this brief graph of Miriam Leitão's Blog, an experienced economics journalist, she shows that the Dilma's government raised expenses, even with a drop in revenues.
https://blogs.oglobo.globo.com/miriam-leitao/post/governo-dilma-elevou-gastos-mesmo-com-queda-nas-receitas.html
This situation was confirmed even for later years we are now. Temer's government has attempted some regulation of accounts beginning in 2017, with results that need to be further analyzed.
2
I lived in Brazil for 13 years and had my own small manufacturing company.
What seems to be missing from all the Brazil election coverage I see in the US newspapers is the history or corruption of Lula and the Workers Party (PT).
Lula took office in 2003 and people thought of him as the Lech Walesa of Brazil and had a lot of hope.
Instead, Lula took corruption to a whole new level. We are probably talking billions of dollars.
Sergio Moro is Brazil’s Robert Mueller.
Over 100 politicians of all parties have been indicted. So far they have only been able to prove a minor corruption charge against Lula but nobody doubts Lula is behind all of it.
So all the people I know voted for Bolsonaro in spite of his authoritarian views because they see Bolsonaro as the lesser of two evils.
I have never met anyone who is a Bolsonaro enthusiast like they show in the US articles and photos. Of course they exist but they are a small minority.
And if Bolsanaro doesn’t accomplish anything good for Brazil, people will vote him out and try someone else.
They only know that the Workers Party can not get back in power.
This is from a 2015 New York Times article:
“What has stunned Brazilians isn’t the novelty of this fraud but its epic scale.”
https://www.nytimes.com/2015/08/09/business/international/effects-of-petrobras-scandal-leave-brazilians-lamenting-a-lost-dream.html
This is a very good and thorough article with lots of details.
Thanks for the article. I am glad that someone is paying attention.
In the boom days of the early 2000s Brazil benefited greatly from the Chinese economic growth. When that ended, Brazil was not prepared to sustain growth. Further, Public spending in the last 5 to 6 years has climbed to about 70% GDP, mostly in one area - social security benefits. Without reforms, it will go over 100% in 3 to 5 years. Unlike other countries, Brazil has not implemented a min retirement age. And even though you have berated the incoming President as a extreme right winger, his economic team and policies are very free market, fiscal responsible oriented. Which is what Brazil needs now. The US is heading for this was well, but no one is talking about it.
In regard to the interest rates in Brazil, this is mostly driven fear - inflation, government debt, political corruption/turmoil. I was in Brazil when there was over 1% inflation per day. I was also here when the Central Bank Interest Rate was over 30% a year. Now the Interest Rate is around 6% (annual) and inflation is around 4%. That is not great by developed country standards but shows that Brazil is developing.
In regard to jobs and growth, the taxation and bureaucracy have done more to impede growth in Brazil than any government spending slowdown. I have first hand knowledge of this. My company would invest in Brazil if the taxation and labor laws were more in line with developed countries. This would create sustainable growth.
@Blaise If you know Bolsonaro's economic policies, please do tell us! He didn't participate in any presidential debates to outline his plans for the economy. Judging by the initial transition days, he's disoriented, backpedaling every other decision.
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There is an excelent, empirical work diagnosing Brazilian economic crisis, made by the phd Laura Carvalho, currently Professor at the Department of Economics of University of São Paulo. The best university on the country. She goes trought a detailed diagnosis of many theories about the slump, comparing which one has the cullprint behind the crisis, she arrives at a similar conclusion.
The book where she publshed her thesis is called, "Valsa brasileira: Do boom ao caos econômico". Sadly, this book never was translated to english.
2
Dr Krugman, when is austerity a good policy? I agree it seems very stupid when going through crunches like those we’ve experienced in the past decade or so, but are there some circumstances when it makes sense?
@Lisa
Logically, austerity is good policy when there's unnecessary spending and a high debt to pay off.
"Unnecessary" is in part a purely pragmatic standard (like any big company, governments can go through periods where they aren't organized in a very efficient way, for instance because of lack of computerization or lack of communication between departments on issues that touch upon the competencies of more than one department, etc.).
It is also in part a political standard. Is increasing military spending in the way the GOP is doing now really necessary or not? Opinions may vary, and both sides may have good arguments, so in that case, deciding to increase this kind of spending or to reduce it is mainly a political choice (= choice based on philosophical premisses which cannot be proven to be false or true).
Reading the comment here, combined with Krugman's op-ed, you'd apparently have to say that austerity in Brazil was a political choice, just as it was for the GOP after 2008.
In both cases, it was neither a political nor pragmatic choice, but a decision imposed by the opposition in order to make people turn against a sitting government and start voting for them instead...
A political crisis preceded the economic crisis and helped to create the perfect storm. When Rousseff won the 2014 elections, her opponent didn’t accept the results and started a campaign in Congress to boycott her government. She couldn’t pass any legislation to help the economy and was forced to bring in Joaquim Levy as her Finance Minister, which implemented the array of bad economic policies described in this article. The political crisis was a backlash against the social inclusion policies of Lula and later Dilma governments. The Brazilian elite and middle class resented the government policies that they thought helped only the poor during the Workers Party years. The rest is history.
5
How often, starting with the Great Depression, are we going to continue to hear about government policies exacerbating economic crises. When will they ever learn.
2
At least soybean futures with China should be going up.
4
Dr Krugman is right to remind us that apart from obvious political and structural problems in Brazil, there were also some more mundane causes of the deep Brazil recession. Terms of trade (prices of export versus import goods) Is destiny in Brazil, and consumer debt and spending matter everywhere. So does monetary policy. I believe that metals prices were a bigger driver of the recession than “operation car wash”.
However I disagree that raising rates as the economy deteriorated was an obvious blunder. The BCB is not stupid.
Dr Krugman, are you aware of your friend Olivier Blanchard’s brilliant paper on the subject, a version of which is here:
http://sites-final.uclouvain.be/econ/DW/DOCTORALWS2004/bruno/fiscal2003.pdf
1
Fascists thrive in a struggling economy. The U.S. may be looking at similar issues in the future as the federal deficit soars in relation to GDP and Mr. Trump, aided and abetted by right-wing economists and Fox propaganda, launch a new wave of austerity politics. The Democratic Party is too disorganized and leaderless to resist Republican demands to cut spending in the face of massive federal deficits. The fact that the deficits resulted from GOP tax cuts for their wealthy political donors will be utterly ignored.
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Corruption. Brazil has experienced perhaps the worst government corruption of any country. All government spending comes with payoffs, from the top down to local officials. Many public highways have been privatized with tolls to chosen companies. In São Paulo you are allowed to drive every other day, and readily have your license suspended.
The spending on Olympic stadiums was breathtaking, and now sit idle. It’s a case where the government overspent on foolish things to line their own pockets.
It is a country that is highly educated, and it’s citizen have zero confidence in the government. Our family friends are constantly talking about moving to the US.
8
"Brazil, as the saying goes, is not for amateurs," says Laura Carvalho, from the article that Mr Krugman references. It's well worth reading.
This is also really worth reading: https://www.vox.com/world/2016/12/15/13957284/brazil-spending-cap-austerity.
Things do seem marginally better (macroeconomically speaking) since then, but not enough to answer Mr Krugman's question (politically speaking) .
3
Very good article from Vox, @Henry, but it did not mention how Brasil got in this terrible situation. Brasil have round 33% of its GDP in tax burden (Tax revenues as percentage of GDP), that's more than USA, Canada, Switzerland and others well developed countries and it is very close OECD percentage.
So, what they are calling austerity should be understood with a diagnosis of how Brasil spends its resources. The conclusion of a lot of specialists is that Brasil spends it very badly. And that mentioned "austerity" amendment try to correct that tax burden to level of development that the country have, somewhat like 28.5%. Note that this should take time, specially for those who understand Brazilian expending.
Everyone interested in understand the Brasil's economy and the underpins of this "austerity" plan should read this Team Force document, prepared with the help of experts from the World Bank:
http://documents.worldbank.org/curated/en/643471520429223428/pdf/121480-WP-PUBLIC-BrazilPublicExpenditureReviewOverviewEnglishFinal.pdf
I have the impression that my personal views should be considered moderately progressive in US or in Canada, but in Brazil a balanced document like this one above is considered conservative. As you may see, is quite balanced.
Unfortunately, I couldn't find a shortest version, but like Brazilian Maestro Tom Jobim had said: "Brasil is not for beginners" ("Brasil não é para principiantes").
https://pt.wikiquote.org/wiki/Ant%C3%B4nio_Carlos_Jobim
And when does the United States experience the same?
3
Krugman wonders why Roussef tried to nip inflation in the bud.
But Brazilians have memories. Those memories include bouts of hyperinflation, not as bad as Germany's hyperinflation of 1923, but bad.
I visited Brazil in 1985 when hyperinflation was rampant.
When I got on a bus in Rio I had to put in handfuls of cruzeiro notes. Then I got an invitation to speak at a university some distance from Rio and my expenses were paid. Imagine my surprise when the payment came in the form of a stack of bank notes that were inflating away at a high daily rate.
There was no possibility of changing the cruzeiros into dollars and the money was becoming worthless by the hour. I would not be in Brazil for long, with no chance to spend the money on meals or entertainment. So I simply bought a pair of emerald earrings.
I came away with a realization. Hyperinflation is a disaster to those who live through it. The German hyperinflation of 1923 essentially destroyed all savings denominated in Marks and rendered many of the middle class instantly poor.
Want to start a revolution? Or the rise of an extremist like Hitler? Hyperinflation can be an ingredient. Indeed, Hitler's Beer Hall Putsch first brought him to the national stage in 1923.
Economists cackle and laugh when doomsayers talk of hyperinflation. But remember. We have an army to back the dollar. Yes it has lost several wars. But it is the best in the world.
That is how the US can be profligate yet avoid disaster.
3
Well I will say nively about the last 10 years was from de point o view of people expectation inicialy some transfomation because the left wing wow the election and the world even if the crises for brazil have been nice moment.But the promise never fullfield the poor was better for little while but only the economic side, the rates for education, employment and other keppt lower. The Inletarcy is huge and the funcional literacy is higher. People could many things but was not i personal growth only somehow mone wise.And some people say the corruption did the rest and i have been for the left side for personal choice but i haved get like everbody else disseponted and only became bigger and bigger was a sad and still moment of brazilian life.
Bolsonaro now is there is not his fault because the left party give the change and opportunity. I need remember first PT us second the rigth wing Comunista and later became for a lot people pink and bank rich. Now Bolsonaro is the bad guy i dont belive I did not vote on him. But for myself his has the rigth to trying and did not desserve be hurted by the kill knife.Personaly Im if Moliere " I dont belive your belive but I will defend IT." his campaing was voted and win democraticaly for now Im just wait for one better tomorow.
mauriciopartyguy - social work.
"Maybe we’re all too distracted by the political crisis in the West"
Mr Krugman is either too myopic or doesn't even know enough the realize that Brazil is in the Western Hemisphere.
4
The very first sentence: "I think I can now take some time off from the U.S. political crisis ... " In fact, just the first phrase,
tells all about Dr. Krugman.
There is no political crisis in the US. None at all. Its not a crisis.
Its not even an event. Its just the system working EXACTLY as it was designed to.
Sure, we have our nasty, anti-democratic people here, like most democracies do, but they (i.e. Dr. Krugman, the NYT Editiorial Board, and the left side of the US House and Senate), can't make significant inroads into our prosperity since they have only the House. There are the sane President, Senate, and Supreme Court to act as the Founders designed.
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@Doug McDonald
“There are the sane President......”
Sorry, Mr. McDonald, oxymorons regarding our stable genius, adult child, and purveyor of false facts fit better in other “fair & balanced” publications.
1
See, https://en.wikipedia.org/wiki/Economy_of_Nazi_Germany, one thing causing a Fascist to come to power in Brazil is the extremely bad economic conditions. Ditto for Italy. No surprise Bolsonaro coming to power under similar internal conditions.Likely in all these cases is a weak middle class. Similar is what is going in the U.S.A. Liberal democracy is not a rock solid socio-economic-entity and should it fail in significant ways like Brasil, fascism is a likely result. Comparisons to Trump here are also relevant although I don't think the situations are the same.
3
Dr. Krugman,
Brazil is not for beginners, and you are a beginner. Let's take the macro wonk stuff first. Your placing the blame on Brazil's interest rate hikes for the ongoing malaise ignores the importance of managing inflationary expectations. The Central Banks targets inflation and not growth or employment and while that mandate might be misguided, there was no panic. The currency strengthed on relief that Brasil was not about to come the countries you cite - Turkey and Argentina. The obvious conclusion is that Brazil avoided a full blown economic crisis and the deep recession was well underway when the Central Bank kept rates high. Now, let's come to the real reason, sorry for the pun, the currency strengthed - national relief caused by the impeachment of the discredited President Dilma. It is not just about macrowonkics!
Finally and most importantly, tt is distressing to find yet another non-Brazilian who has the unmitigated gall to admit he has "no knowledge of Brazilian politics" but slanders (in the first line of his second paragraph) the President-Elect as an "actual fascist". A legimitate election in which the candidate won with more than ten million votes over his leftist labor Party candidate whose corruption of the closed economic system are what lead to the economic, political and moral malaise is as far from fascist as you can get. The real headline : "Confidence Crisis might be over as pro-market President Bolsonaro promises to open the economy."
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@david wolf
When you look at Bolsonaro's electoral platform, it is fascist. And whether he won an election or not is irrelevant. Fascism isn't about how governments are formed but about their ideologies and actions.
1
What hell happened? 14 years of PT at governo.
4
With close relatives in Brazil some of us pay attention. The Guardian and Haaretz also paid attention. Politics in Brazil saw the vast resources of American right-wing Evangelicals invest money and manpower to elect a Fascist President.
From Bloomberg
https://www.bloomberg.com/news/features/2018-10-04/from-jails-to-congress-brazil-evangelicals-could-swing-election
From Guardian
https://www.theguardian.com/world/2018/oct/08/bolsonaro-allies-ride-conservative-wave-in-brazil-elections
From Haaretz
https://www.haaretz.com/opinion/.premium-hitler-in-brasilia-the-u-s-evangelicals-and-nazi-political-theory-behind-bolsonaro-1.6581924
4
First, Bolsonaro and Temer are not fascist. This is a dumb story told by the most corrupt party (PT) to the rest of the world. Big corporations were paying bribes to congressmen so that they could approve legislations with huge tax exemptions; massive corruption and 63,000 people killed per year; 13 million people without jobs. 5 billion dollars stolen only from Petrobras , our biggest company; etc., etc., with all due respect, foreigns have no idea of what happens in Brazil, because everything that is done here is not taught in any literature or is very heterodox to be understood by books or articles. Spend 5 years here and you'll understand about the country and its mindset.
3
What has happened to Brazil has been Hell for African Brazilians ever since they arrived enslaved in Portuguese Roman Catholic slave ships.
Only Nigeria has more people of black African descent than Brazil. Based upon American color aka race classification over half of Brazil's 200 million people are black. About a third of the 12 million enslaved Africans who survived the Trans-Atlantic Slave Trade went to Brazil. By contrast a half million came to America.
Brazil did not abolish slavery until 1888. And there was no Reconstruction nor Civil Rights eras socioeconomic political and educational legislative and executive reforms. Brazil has no historic blsck collegs nor black church nor black civil rights organizations. Outside of arts, entertainment and sports black Brazilians are substantially separate and unequal.
4
"And the central bank panicked, fixating on the inflation issue at the expense of the real economy."
Inflation destroys wealth, so given the relatively low % of non-real denominated debt, what was really being avoided here was the potential harm to the upper centile in the wealth distribution. Not so surprising.
1
The remarkable and depressing story of Brazil has many parallels, every developing economy including India must take note that reliance on commodity exports whose prices are dampened due to the macro environment could spell some trouble when the currency depreciation alone cannot help exports, while loans denominated in dollars make the balance sheet look ominous.
The lessons for India is simple that an economy like Brazil, which is 10 times the size of Greece, which was growing in per capita income could suddenly slump by 9%. Although this is recoverable but the central banks take note that we have a similar problem here with a growing debt in the private sector and not too much of investments on the cards while the banks have a looming crisis with not enough strength in their balance sheet. The least we can expect is a tightening of sorts which leaves little room for an expansion whereas government spending is a sure recipe for inflation to move up.
The recent tapering of oil prices may be the only good news.
2
Unfortunately, what would surpise me about Brazil would be a story that wasn't bad news. No doubt some "jeito" was applied and here it is yet again. As Charle DeGalle said ages ago in discussing the cycle of promise quickly followed by disappointment, "Brazil is the country of the future...and, it always will be."
3
@Norma De Gaulle never said that...
@Igor
The expression can be traced back at least to the 1940s and Stefan Zweig, but whether there are earlier uses of the phrase, one doesn't know. I know of no reference to Charles de Gaulle saying this.
Hi Paul, I think you have forgotten to mention that a lot of dollars that have been stolen by corrupt politics in the government. Today, all of this is gone and the poor people have paid the price.
7
At the end of Crashed. This story is told over and over. But Brazil is not Citibank so they are discounted. In other words, they are on their own.
"What happened instead was that the Roussef government decided to impose sharp spending cuts in the middle of a slump. What were they thinking? Incredibly, it seems that they bought into the doctrine of expansionary austerity."
Obama did the same thing in his first term, caving into right wing demands for austerity, as Roussef did, although the pressure on Roussef was exponentially stronger.
9
After someone (Krugman), was so inarguably wrong about Trump's economy why would anyone listen to or care about his interpretation of anything less economics?
1
Krugman writes "Maybe we’re all too distracted by the political crisis in the West — Trump, Brexit, etc."
Like most commentators in the US, Krugman implies that Brazil, somehow, is not part of the West. Ask any Brazilian, however, and they'd be confused by this. The quickest glance at Brazil's history shows that it is at least as Western as the USA. It speaks a European language, largely practices a European religion, and has a form of government largely modeled on the United States and Europe. It is a wonderfully diverse and multiethnic country, but it was born out of the same process of settlement that America was (with a similarly painful history in many regards, see slavery). It is not fully ethnically European, but neither is America, or for that matter France. It has many of the same lights and shadows of other Western settler-immigrant societies: built on progress and hope, but also on the oppression of native peoples and African slaves. If Jazz is Western, so is Bossa Nova.
Why does this semantic distinction matter? It matters because, in this time of crisis for Western liberal democracy, we have to remember our shared values. America and Europe should remember that there is a whole other continent that largely shares its principles of representative democracy. Bolsonaro is as much of an ideological challenge for Western liberalism as Trump or Brexit. If America (and Europe) forget to count us in, our base of common values will slowly erode.
14
@Diego Salvatierra It's a bit naive to think that commonalities in religion, provenance, language, culture and government would allow Latin American countries into Krugman's "West". Being in that club is a matter of wealth and the ability to project imperial violence, the rest is just talk. Also, why look to Europe and the US for cultural and political validation (a very post colonial urge)? Those countries are powerful and rich but clearly no more enlightened than others.
2
It's handy to have Prof. Krugman scanning the economic horizon and reporting back!
One conclusion from the case he discusses in Brazil seems to be that the instability of market exchange rates has an impact, not only in the more recognized way through panics of external lenders, but also through policy makers' need to avoid capital flight on the part of internal lenders, who are also resistant to their portfolios losing purchasing power in terms of U.S. dollars.
1
Meanwhile, we continue to barrel along as Hothouse Earth winds up more and more, and tips over into the death of billions.
The rich don't care, they think they will be protected behind high walls, or on luxury yacht icebreakers (yes), with the artic fishery set aside for their consumption.
Madness.
10
@William
You need to come to terms with your own mortality.
The consumer debt crisis was worse than you can imagine. In the past, Brazilians without a lot of money either paid in cash or made installment payments with the interest already built into the monthly payments. They couldn't even get credit cards. They had no experience with them. Suddenly, credit cards were being given out like popcorn. Interest rates were over 10% per month, not per year! Of course it was a huge disaster.
7
“Economic perfect storm,” in reading this article I can’t help but harken back to 2008 when the United States had its own economic perfect storm under a republican president named Bush. As I recall the democrats rode in and saved the day, and when the next election cycle came up what did the American people do in their infinite wisdom? Did they reward the democrats by increasing their majorities in the House and Senate? Nope, infact the opposite is true. The republicans have learned the lesson, the America people as a group are very ungrateful , all they care about when the storm has passed is that their taxes are kept low., and unless kept in a constant state of panic and trepidation will vote for whoever guarantees the most free stuff.
The republicans are back in power and the national debt continues to grow, and we can add a trillion dollar budget deficit to the numbers, the United States is headed back to where we were in 2008,and if Donald Trump wins reelection in 2020 you can just about guarantee an economic disaster so terrible that it will make what happened in Brazil look like a day at the beach.
The only question will be who Trump blames the calamity on, and the answer will be very simple, the guilty party will be US, since we refuse to face and fix our problems till it’s too late.
21
@artfuldodger
You recall incorrectly. GW Bush and the Congress responded perfectly. This turned a potential Great Depression into the Great Recession - bad, but nowhere near as bad as it could have been.
Obama, to his eternal credit, went along with the program. One can argue that his anti-business, pro-regulation policies made for a sluggish recovery, or not. He does bear blame for not fixing business income taxes to make them competitive with other developed countries.
1
@Loran Tritter You are delusional if you believe that. Don't "recall". Research. The Democrats had the majority in Congress and Obama, working with Bernenke, bailed out the banks. While this is credited with saving the economy, Obama and the Democrats had to clean the mess Bush and Cheney created. No wonder "red states" have the lowest Human Development Indexes in the country. Uneducated people, misinformed and incapable of doing basic research, will alway vote against their own interests. Perfect Republic plan, on top of gerrymendering, voter suppression, and other ploys.
3
No mention of neoliberalism. That's why Krugman is listened to less and less by citizens who are aware that Obama did the same thing:
** Incredibly, it seems that they bought into the doctrine of expansionary austerity.**
Smart writer, but something's happening he feels obliged to ignore. Wealth will do that.
6
@Happy Selznick Exactly. The Tea Party wave of 2010 occurred because Tea Party candidates promised hyper Keynesian fiscal stimulus. Obama stubbornly refused to allow them to have it once they were elected no matter how hard they begged.
4
@Happy Selznick: As much as it pains me to say you are absolutely correct Happy, although I prefer to believe President Obama went into it with the right ideas as well as the right ideology he was just hamstrung by the Clintonites surrounding him.
1
November 10, 2018
Trump-ism is everywhere in the century with anti social media that is simplistic and unfortunate to lack the political class that is will to take the managing the public arena for the path in economics and politics that is transparent and will doctrine that the party or parties are willing to live by, express and even having to face litigation harassment. Yet Brazil has a new President and that does speak well to at least process to obtain the human resources that every democratic nation seeks and what to be proud - say like in France, England, Canada, Germany, Russia
jja
3
The correlation between Brazil’s weak economy and the election of a far-right president is much weaker than what would be expected.
The choice of Jair Bolsonaro as president is much more strongly related to Brasilia’s longtime inability to clean itself. The people of Brazil are willing to try a different approach to hopefully end widespread corruption.
7
@Siddy Hall But that "different" approach is the same old, same old. Bolsonaro's party is one of the most corrupt in the country, even though it is relatively new. Bolsonaro himself has been involved in multiple corruption scandals, although they were almost ignored by the corporate media. The data is out there.
@Siddy Hall Bolsonaro and his party are openly, un-repentantly corrupt, just like Trump and his party are in the US. The new president may try a "different approach", but his own statements and history indicate that it will be far worse than what has come before. The problem with the "corruption" is that it is a broad, nebulous and easily exploited term. Brazilian voters and leaders should have identified specific, relevant solutions to the country's problems and elected someone who claimed to support those solutions, instead they decided that the whole system should burn. I hope it does not.
2
Brazil's economy is dependent to a great extent on commodity exports, and China is its biggest customer. When China's economy is slumping, as it is now, it imports fewer commodities from Brazil (as well as from other commodity exporters); thus, Brazil's economy slumps. Australia's economy, similarly dependent to a large extent on commodity exports, is also suffering from the effects falling commodity demand from China. One consequence of China's weakness is the fear of a potential real estate crash in Australia. The U.S. economy, by contrast, is far less dependent on commodity exports.
2
@workerbee Exactly. China's imports of Brazilian soybeans have dropped like a stone.
2
@Jeff Atkinson maybe Trump's trade war with China could temporarily benefit Brazil... their commodities could replace American ones that would be subject to counter-tariffs by China.
1
Dr Krugman: is the astonishing amount of corruption in PetroBras and associated government agencies (plus other corruption-ridden businesses) large enough to affect the macroeconomy?
5
@Richard Brown Yes, it did. Confidence shock.
"What were they thinking?"
They were thinking about themselves. "We can make out like Bandits if we break the piggy bank at the expense of the people."
Let's not assume that policy choices are made in the interest of the greatest number of people.
The people in power are are far more cynical than that. Big money first positions itself, then they trigger a crisis to transfer wealth. Wall Street traders do this to Main Street investors all the time.
Economic business cycles may well be more artificial than natural. If you are well-positioned, a crisis is a time to get rich fast.
It's the old wash and rinse cycle.
9
@Fourteen
I often wonder when I hear this sort of 'spiel' if the writers distrust their own parents to the same degree as they seemingly mistrust anyone who is not themself.
I know that as a parent of 3 children my decisions were balanced on how to the best possible for them within the limited resources I had available. They are grown now. I would hate to believe that they viewed my past decisions on what was best for myself, instead of me sacrificing for them as was what actually occurred.
Even now, that I need someone to help me to mow the yard and to tidy the house, I do the best I can to make sure they are are not harmed and treated as the valuable people they are. I pay them fairly and contribute to the retirements and taxes, as is just.
The point is, I know my integrity, ethics, and morals and they are not dependent on some fat guy up at the podium on Sunday mornings. I would be the same person I am now even if I were the President of the USA. The only thing that would change about me would be the color of my hair as I aged in office.
If people want stable, dependable, fair and just people to fill the offices of public service then they are going to have to start voting for them instead of the political massagist.
No grouping of people are all bad and the larger the group the more good or kind or equable people can be found. Liars will always repeat the same lie loudly, doing so will never make it fact or truth.
1
Or: "Just keep printing money. Is that so hard to understand?"
1
We seen to have only two systems now: capitalism (or local variants thereof) and socialism (or local variants thereof). In all poorly administered states and even in some developed economies, the oligarchs or the labor unions alternately control the economy.
Was the world always like this? Are there other systems?
2
@SV There was a brief moment after the second World War when capitalism came close to what could be considered it's senses. Apparently, it takes a world war before investors turn to what's right, as opposed to what's profitable.
3
@SV
Actually, in our most prosperous era, oligarchy was kept in check and the unions had some modest power. Though far from controlling the economy, they did help bring about the 40-hour work week, paid vacations, safety laws and other reforms that helped the rise of a strong middle class. Neither capital and labor was dominant.
Then a few super-capitalist Ayn Randian theoreticians started stoking resentment against the New Deal and the social safety net in general among the would-be oligarchy, notably with the Powell memo. That's when the General Welfare aspired to in the Constitution began going seriously into reverse.
15
@SVIn what country does labor run things? I don't think that is the case anywhere.
3
Very much your respect your thoughts, but a lot wrong here in last third. 1) Where was fiscal austerity? NFPS primary balance went from 0.6% primary deficit to a bit above 2% in past couple of years. There was quasi fiscal austerity in terms of reigning in public bank policy lending, though most of this occurred in 2017 and 18 and was after worst of recession. Dilma's government prioritized growth in mandatory spending (notably pensions by real increases in minimum wage) 2) Monetary policy had to get contractionary to re-anchor inflation expectations. The Dilma BCB under Tombini had experimented with very low rates while inflation was the top of the band, and inflation expectations reset to the top of the band. Then you had a price shock in the form of Dilma correcting artificially low regulated price inflation (which indeed was related to FX depreciation, i.e. Petrobras gasoline pricing policy) that caused inflation expectations to completely de-anchor. The only choice was a brutal, Volker-esque increase in rates to restore BCB credibility (helped by the Dilma impeachment and Tombini being replaced by Ilan). So the sub-optimal policy response was mostly a function of the Dilma government not doing their homework when times were good. Fiscal policy had little space, since debt was already growing rapidly, and monetary policy was having to confront a large cost-push price shock with compromised credibility.
7
Paul you’re leaving out a few crucial elements that have contributed to Brazils economics woes for generations. #1 Too many poor people having to many children they can’t take care of . #2 endemic generational corruption by the one percent. #3 Attempts by us (American Neo Liberals and neo conservatives) to influence or do harm to their economy when they behave in a fashion not approved in the boardrooms of our major corporations, in particular when there is an attempt to swing to the left and actually help the poor people of Brazil, yes including their overpopulation problem. We would much rather have a near fascist such as Michel Temer in there who will aide and abet the plundering of the country by yet its and everyone else’s biggest problem Wall Street and Hedge Funds who set up nations and companies to fail so they can pick over their carcass as they are now doing in Puerto Rico and no doubt will do in Venezula as soon as Trump and his sanctions lead to total chaos and revolution much as we are attempting to do or have already done in every corner of the world. We at one time stood alone as “ deciders” about who got to thrive and who got to suffer depending totally on their complicity with our multi nationals now we have competition from China as they bribe their way to dominance around the world before they too are in such total control as to be able to dictate foreign policy to their beneficiaries under threat of having the rug pulled out from under their economy.
11
@Ted What bigoted assumptions. The birthrate in Brazil is actually lower than that in the US and many first-world nations. It is below replacement level. "Overpopulation" has nothing to do with their economic problems.
2
Why is PK, who states up front he knows little about Brazil writing this analysis?
4
@Slo Please read the article again. Professor Krugman clearly states that he know little about Brazil's politics and hence the article is about its economy. If you have a problem with the analysis, please get a PhD/Nobel Prize first so that you could bring something useful/new to the discussion.
@Slo
PK knows economics. Better n anyone actually. That's why he's writing about economics. He said he doesn't follow politics in Brazil.
What about the “car wash”? Incredible corruption, collusion and pay-offs between the left wing government and Brazil’s largest corporates.
6
@Jordan Schweon. Italy has a bigger shadow economy and hasn't yet succumbed. Brazil's is surely not the only government that is corrupt. Most are. The notion of corruption in and of itself is not sufficient to explain the problem, but it serves the narrative of the new President. It's a story that enables strong men and is based upon human beliefs, not facts.
4
I lived in Brazil for 13 years and had a small manufacturing company.
People voted for Bolsonaro not because they liked him but because of the huge corruption over 15 years by Lula and the Workers Party.
This is from a 2015 New York Times article:
“What has stunned Brazilians isn’t the novelty of this fraud but its epic scale.”
https://www.nytimes.com/2015/08/09/business/international/effects-of-petrobras-scandal-leave-brazilians-lamenting-a-lost-dream.html
This is a very good and thorough article with lots of details.
15
@Independent The "corruption" of PT was overblown by corporate media and people bought it hook, line, and sinker. The most important point is what the Brazilian people didn't see in the corporate media: scandals far greater than anything they could accuse PT of, and yet Moro tabled those investigations and nothing has been heard of them ever since. Now Moro accepted an appointment in Bolsonaro's government, after putting in prision the man who would beat Bolsonaro hands down. And the "evidence" simply doesn't hold. Shame on Moro and Bolsonaro's voters. You have normalized fascism. You have made Brazil look terrible across the world now!
1
Also: huge population expansion but low productivity growth; unsustainable pensions with people retiring at 50 or 55; rampant corruption and self-dealing; unimaginable crime where it can be dangerous to take a simple stroll, absence of safety where your house can be broken in at any time, decaying infrastructure ....
... macroeconomics was the least of it.
8
@Kai Back in the early 1990, the Brazilian cultural attaché in NY took home 20,000 bucks a month. As Brazilians say: Pode? [Is that even possible?]. Yes, the 55-year old government worker retirees sure do get a good deal.
@Kai Sounds like the US.
Brazil might be the last country where one wants to analyze economics without regard of its politics.
Corruption is the keyword here. In 2014, Operation “Lava Jato” (Car Wash), started showing the incredible extent of bribery involved in every echelon of Brazilian politics – currently suspected at at least 9.5 billion (!) US dollars. In a system so corrupt, where bribes are normalized and rivals that do it have an advantage, no one has much influence without joining in.
Voters became horribly disgruntled when political parties became implicated. A disunited legal system soon became a political tool for going after select corrupt politicians. And in a society so polarized and fixed, voters and elected officials became cynical towards new policy initiatives.
Austerity was a political consequence of this endemic corruption. Dilma Rousseff, Brazil's Worker's Party (PT) president, was impeached in 2016 and succeeded by her vice-president Michel Temer. He stems from a different political party (PMDB) and soon enacted ideologically-driven austerity measures.
It's telling that he managed to drive through extreme budget cuts despite being armed with a single-digit approval rating. Brazil, so polarized and seemingly incurable, only allows for more destruction, and economic considerations are subservient to the politics of rancor.
8
@The Empyrean. Given the influence of big money in our politics, I would guess that our system is equally corrupt, but has better optics. For the time being. If US voters really knew to which extent large money donors corrupt elections, they too might revolt. Our corruption is better camouflaged, that's all.
4
I’ve always figured most economists proclaiming that Brazil was the “country of the future” for the past 20 years, were merely doing so because “order and progress” was written on the Brazilian flag.
4
Good thing that they got rid of the irresponsible labor loving government before the crisis hit.
1
Two words: Eike Batista - scammed the world on his various commodity related ventures (oil, iron, power, steel, ports, ship building), racked up huge debt, got people in Brazil excited, purported to be the new face of Brazil and then it all collapsed. Exactly paralleled rise and fall of commodity boom and collapse.
2
In the Mexican crisis of 1994-5 that I lived through was the result of a flight of investments by the corrupt ruling class insiders as it was being replaced by the next corrupt ruling class insiders - 1994 was the presidential election and government transition year.
All the corrupt officials were cashing out and sending their ill gotten gains abroad (much like crony-capitalist-tax-dodger-insiders in our own country). They were the ultimate insiders with control of the dollar-peso government-regulated-exchange-rate. The ruling-class-insiders converted their pesos to dollar, and only then - "sudden-stop" - devalued the peso in half leaving everyone owning and earning half what they used to have - including me - holding the bag. They did exactly the same thing six years earlier.
Trump envisions himself as the next Carlos Slim Helú on MAGA-con steroids.
I'm sure the Brazilian ruling-class-insiders are doing the same in Brazil. There's a reason the wealthy-insiders always increase their wealth regardless of the economic crises they impose on everyone else.
8
@PAN
Your description of the process in Mexico is quite interesting, especially because it mirrors the process that took place in Thailand in 1996-97.
There, as apparently in Mexico also, insiders cashed out in local asset markets and moved their winnings outside the local currency area.
That didn't harm the economy in the first instance, but it depleted foreign-exchange reserves.
When outside lenders noticed the thinning reserves, they started taking precautionary steps, and this triggered the full-on reserve crisis: the sudden stop that Prof. Krugman mentions.
2
Good article but there is one more factor, corruption. I lived in Brazil when inflation was rampant. We had to buy coffee on the commodity exchange because the cruzeiro was so weak. Then we'd sell it in dollars. All along the way everyone wanted a take. The corruption at the highest levels were and are one of the major reasons why Brazil's economy has lost its luster.
4
@g.i.
People/soldiers are not well paid and the payoff money trickles through as more compensation. My father bid gov't defense projects there and was told the bid had to be 10% more for this. Upfront corruption.
3
Both Brazil and the US have presidents who are outright fascists and our president who has a criminal regime is busy at destroying the regulations that make criminal tampering with the economy easier.
Although our illegitimate president is running scared now that that the people have spoken, our Republican/Fascist party can take heart, he is going to Paris where he will meet with Vladimir Putin for advice on whether or not to start arresting reporters and Democrats and declare martial law because the US is being invaded by frightened brown people. The alternative being to pardon his family and friends and have the new president Pence pardon him and, of course repay all the dark money it took to elect him, since he never repealed the sanctions, but he can keep the money that he stole.
That would be a win, win for everybody Putin may advise. The Black Sea needs a Trump resort and maybe China will loan you the money.
6
"Incredibly, it seems that they bought into the doctrine of expansionary austerity."
Yes, "incredibly", or "unbelievably" because it is unbelievable. Over and over again I see very smart columnists attributing to very smart policy makers really stupid decisions because "incredibly" they believe in "expansionary austerity" (even after all the blatant examples of the folly of such a course in the past decade). As another example, "incredibly" such and such policy maker is a "climate change denier" so they have decided to roll back environmental controls.
This is all a game. These governmental policy makers are very smart people who would not be in the positions they are in if they weren't. The truth is they have different goals and don't care about the damage their "incredible" policies do. In Brazil, the goal was probably to roll back social spending.... pain for the people in exchange for gain for the elites.
In the US, your government officials are not stupid; they understand global warming is happening: they don't care. They want financial gain to position themselves for the environmental catastrophes and food shortages on the way.
Analyses that postulate stupid behaviour by smart people are missing the point. It's smart behaviour toward a socially reprehensible goal.
30
@D. Baker
Well stated, and I agree with you, with one unimportant caveat: some of the government actors and elite policy influencers actually aren’t sophisticated enough thinkers to ascribe to them “smarts”. They loosely know that somehow these goals benefit them and/or their “team.” I know. I worked in policy in out of government in five countries, include the USA.
6
@D. Baker: You mean they're not working for us? Who'd a thunk it.
1
@D. Baker
There is a difference between austerity with interest rates near zero and austerity with positive interest rates. Plus, there was no fiscal austerity of consequence to begin with.
Boy, this macroeconomics stuff is tough! I guess I have to say that I was warned (i.e., "wonkish"), but I read the thing anyway. The "perfect storm" analogy helped somewhat - the "bad policy" part resembled the EU mistake of fiscal austerity in a slump - but Krugman should perhaps increase the number of analogies so that we lay people will read his analyses through to the end.
I have one: Brazil was a restaurant that served blowfish. The price that diners would pay for the dish wasn't enough that the restaurant could employ a qualified preparer, so, several deaths later, the restaurant took blowfish off the menu, saying publically, "Mistakes were made."
6
Not to contradict any information here but the whole of Brazil is much more than the sum of it's parts. Go to Brazil. See it. Some things will shock you, but it's a marvel of nature and the human race.
Now the ugly truth. Brazil under the PT pulled a massive con job. The economy was "Para inglês ver/" For the English to see.
The people of Brazil are still predominantly poor and uneducated. The statistics released by the PT government concerning everything were doctored for political purpose in extreme. All those people lifted out of poverty were lifted out by about 50 cents. They fell back.
Articles in the FT or the Economist, Ratings grades were all drawn up for a decade on essentially false info. These types of professionals like big symbols and the PT knew this - it gave them what they ordered.
The Real was propped up by enormous buy backs by the central bank. This kept the currency artificially high. The Big Investors liked this. They never visited the country. Or worse still if they did they stayed a day or so on the seductive Zona Sul in Rio where life is completely unlike the rest of the nation.
It was bad for Brazil's domestic business scene to have rich man's money in a poor land. It propped up weaknesses. The oil wealth was not only used for corruption it was also essentially given away to buy votes. The Olympics and World Cup wasted fortunes that should have gone to education. The wealth was squandered away before austerity became necessary.
.
16
@Arthur Conspiracy theorist. No, Brazil isn't all that. It's a country where corporations pollute freely, where CEOs exploit the people and steal natural resources without paying their fair share of what they take. It's a country with massive social inequality, slums everywhere, one of the highest murder and violent crime rates in the whole world. Brazil is a country that wants its poor to stay that way, so there's enough cheap and near-slave labor for corporate exploitation. Brazil is a country with the highest number of LGBT+ murders and crimes in the world. Now that we saw how Brazilians really feels and think by voting for a monstruos fascist like Bolsonaro, we know better. I'm ashamed to be Brazilian.
1
Uncontrolled population growth is never cited by these pundits. Brazil's population has increased by 21% since 2000 to 211 million.
Have you noticed that all of the prosperous and happy parts of the world have very low population growth rates. Corruption also plays a large role here but why is the simplest answer never addressed.
33
@Michael
Women in Brazil use birth control at the same levels as Europe. Abortion is illegal, unfortunately, but Brazil is not experiencing any significant increase in population nor immigration. It is the size of the United States but with 100 million fewer people. They have deforested their continent less than we have. Go to Brazil. Learn from it. Enjoy it. Africa is the population explosion problem. Brazil is not at all like Africa. It is unique.
1
@Arthur
In recent years the population growth has died down in Brazil. Some of this has to do with miscarriages caused by administration of the DTAP vaccine in utero.
I am not comparing Brazil to Africa.
2
@Michael
Population growth is good. People are the ultimate resource. Unless there's something wrong with the system, and that can be fixed, they produce more than they consume.
In the US for example we need more people, we need immigrants because we're getting too close to the replacement rate.
The devil is always in the details.
All workers belong to a union whether they know it or not. Not a bad thing, but all workers get an inflation based wage increase annually tied to inflation. So inflation is perpetually perpetuated.
Companies pay enormous taxes on income and payroll taxes. It’s almost as if a company’s existence is not based on capitalism , but socialism.
Commodity based economies are always fragile because margins are so low, don’t require an increase in skilled labor, and usually don’t require improved infrastructure and supply chain ( as manufacturing ).
Add a dose of corruption , with high import taxes , and a 1% elitist reality that dwarfs the US.
Brazil was looking good for awhile , but as with most countries , that change is elusive.
5
@R Hoff I wasn't going to respond, but your one comment has so many falsities I couldn't resist!
"Companies pay enormous taxes on income and payroll taxes." Actually, company tax is pretty standard for large companies at roughly 34%. However, the SIMPLES tax system for small & medium companies leaves them paying from as little as 3% (on revenue, NOT profit) & then distributing the profit tax free to the owner. So a medium sized business owner can pay far less on their comparatively large income than a wage earner (who pays 27.5%).
On-costs (including payroll tax) are very high in comparison to developed countries. It can range from close to 100% for the lowest salaries but declines in percentage as the wage goes up because some of the taxes/payments have limits. Not to mention, these are based on a minimum wage of US$1.50 per hour, so a Brazilian manufacturer paying 100% on-costs to a minimum wage worker is still paying less than half of the hourly rate of a US manufacturer.
"Commodity based economies..."
Everything in this statement is incorrect when applied to Brazil!
A huge issue for farmers in Brazil is finding suitable skilled labor to operate & maintain farm machinery & technology.
Brazil's soy farmers have a price advantage of 25% over US soy farmers at the farm gate. This advantage is totally eroded by increased supply chain costs in getting their soy to port. Poor Brazilian infrastructure is the only thing keeping many US farmers in the game!
In further relentless pursuit of his political agenda, Krugman makes false representations, claiming falsehoods are facts. Government spending NEVER decreased as Krugman claims. There were some actual decreases of subsidies to some companies. But there were much larger increases in entitlements, especially the ridiculously generous retirement benefits beginning at very early ages. The result is relentless increasing of government spending, not spending decrease.
See the 5 and 10 charts in the link below which well display the relentless increase of government spending during the years Krugman falsely and deceitfully claims there was decrease.
5
Sorry, I forgot to add the link. Here it is
https://tradingeconomics.com/brazil/government-spending
@Errol, neither false nor deceitful. Your link has nominal spending, Krugman's real (inflation-adjusted). When inflation runs above 5% a year, as in chart 4, that makes a big difference. And real numbers are called real because they are more important than nominal.
1
Sound economic analysis. But not one mention of the political corruption of the PT, in power over most of the last 2 decades?
I'm amazed at how out of touch the NY Times is with respect to Brazil.
You've been reading too many NY Times Op Eds written by left wing Brazilians who can only rush around and cry that the sky is falling.
6
It is good for papers like the NYT to (re-)start looking a bit outside of US politics. We have all become to fixated on Donald T.
8
@Pedter Goossens FYI: The BBC regularly pays attention to Brazil.
1
a) Corruption
b) Socialism
c) Crime
6
Basically what happened to Brazil is called Democratic Socialism.
Educate yourself a little on what the leftist administration's of da Silva and Rousseff wrought onto one of the richest countries in Latin America.
- President Lula da Silva (Jan 2003 - Dec 2010) WORKER'S PARTY
- President Dilma Rousseff (Jan 2011 - Aug 2016) WORKER's PARTY
From Wikipedia:
- The Workers' Party (Portuguese: Partido dos Trabalhadores, PT) is a left-wing democratic socialist political party in Brazil
4
What happened to Brazil? Maybe voters there saw what happened in Venezuela and wanted to go the other way, much to Krugman's astonishment.
7
Operation Car Wash - massive government corruption.
You forgot to mention the deep inequality in Brazil, even worse than the one in the U.S.; and the generalized corruption, and the loss of trust in their democratic institutions. And electing a fascist now won't alleviate their woes.
5
As Keynes said, financial placements can be described as a "whirlpool of investment in a sea of speculation," a factor not factored in to financial market analysis even today.
Globalization, is a positive sum game, or a positive multiplier, when the global economy expands, but a negative sum game / negative multiplier when it contracts. Advocates of globalization only emphasize the former effect.
Lula, Dilma & Co. provided substantial benefits for the poorer people in Brazil, but they also couldn't resist enriching themselves in the process. Lula is in jail and Dilma came in fourth in a Senate race. Clearly their brand is tarnished.
The white collar criminality of the "Workers' Party" (lol) was also accompanied by a substantial increase in general violence and criminal behaviour in the major cities. Bolisario, it should be noted, is a macho promoter of "law and order," but not publicly a raving "nationalist" like Orban and Erdogan.
If the 20th Century was marked by a desire for greater
"democracy," (all power to the people) the current one seems to have political cultures that have given up on the idea because it means that the people have to work actively to be informed and to hold politicians accountable.
Politicians learned that economic issues (economic rationality) are only one, and not always the most important one, for the hoi polloi. Emotional issues based on identity, status and fear are often the telling ones.
9
In the shadow of giant rises and falls in inflation, production, demand are narratives that say good is bad and bad is good, up is down and down is up. The narratives describe an oppositional defiance that is a policy syndrome of decision-makers who are clueless themselves.
With rudimental training in economics, no experience in markets and regulation, they wear their desire for power and greed as a fetish. South Africa is experiencing the comparative issues of a stalled economy; India too, to some degree.
These narratives are equally as important as policy in understanding large economic swings, and too little attention has paid to the narratives and their influence and network effect. Generally, countries yelling and screaming are crashing.
The narratives impact economics: for example, only narrative (not demand!) holds the American farm belts (South, Midwest, Pacific Coasts) from dominating the global food supply.
Ready-made, the world's best agricultural work force comes to our borders and are abused and turned away. Farmers report hardships in finding workers for harvesting and production, shipping, but the they-take-our-jobs/danger narrative is the main barrier to US market domination of a safe, cost-basis food supply for a global population projected to double in the next decade!
Monkey business and bad memories aside, no country is better equipped to benefit from and serve this massive market increase--an opportunity soon to be missed.
1
One must not forget that this expansionary austerity solution is what the extremist right wingers and their sycophants in the Chicago/Hoover/Stanford economics universe were recommending the United States undertake in response to the financial crisis the free market extravaganza in the credit markets brought it. Larry Kudlow the tv guy for Trumps’ neo fascist economics was a big proponent as well.
15
Neither corruption or economic stagnation or mismanagement of fiscal policy dictates a turn to fascism. Militarism, repression, torture, assassination, all of which are characteristic of authoritarian leadership in South America are not solutions that restore the standard of living for the majority of people.
What fascism does is protect the privilege of the ruling class, the wealthy industrialists and the politically compliant.
That this turn was the result of an election is very depressing and raises doubts about the capacity of popular democracies to make informed choices.
11
@Marvin Raps
Great points all. Might just say on your 3rd point, I'm fairly positive it's been 100% proven correct already and you sure don't have to look to Brazil to find it.
You say: Neither corruption or economic stagnation or mismanagement of fiscal policy dictates a turn to fascism. Sorry you're wrong. Those conditions have engendered fascism from Weimar to mussolini to peron. Historical facts can't be ignored. If your point is that those considerations are commonly joined with others like those you name, that would be more accurate.
Since your the guy who predicted the great fall of the Stock market if trump were elected, give Brazil a break and stick to your lousy predictions about the US.
6
@greatnfi: Dr. K. is a macroeconimist, therefore, he was indifferent to the microeconomic effects of persistently very low interest rates in the US. The boom is asset prices, real and financial, is the result. He should stick to what he knows, which is NOT apparently, either microeconomics or politics.
2
@greatnfi
Please try not to be a "top tick" guy. As far as I can see the music is still playing so maybe we should wait just a while to see who was ultimately correct on our predictions. That is unless you are going to explain to me that you dumped your stock portfolio in its entirety on the high and jumped right back in on the last swing low?
2
@greatnfi Give Trump time - he's working on it with his idiotic, destructive tariffs. Ask a soybean farmer...
2
I live in Brazil. It is important to emphasize that the opposition (partitioned from the right) did everything to hinder the government of President Dilma.
That made the situation worse. To the right the worse, the better. What happened here was that the vehicles of communication joined the part of the judiciary to end the Workers' Party which ended up culminating in the arrest of President Lula.
What the press (mainly Globo) did not expect is that this gave strength to the fascist candidate, Bolsonaro.
The plan was for the center-right party to take power but it went wrong. Now Brazil has become a dangerous country for blacks, homosexuals, feminists ... Today teachers who talk about politics in schools are already being arrested.
The situation should get worse.
18
As a Brazilian citizen I can tell you what happened to Brazil, Mr. Krugman. Politicians' greed of a magnitude unimaginable.
3
Please let me know how it’s possible that the U.S. economy did not tank because Trump one, as you claimed was a guarantee
1
@Jake
Have you ever walked up to a slow burning, but steady burning campfire and tossed a gallon of gas on it? Better stand back for a minute but in short order the whole fires gone. A simple explanation for the trump tax cut. If Mr. Krugman could call the "top tick" in the stock market I would imagine you wouldn't be reading his excellent opinions in the NYTs or any other publication for that matter.
@Jake Give it a little more time, Jake.
@Jake
Takes time and hard work to kill a healthy economy. GWB had essentially the same policies but 9/11 and the wars accelerated the process leading up to 2008 and 2009. Obama spent virtually all of his 8 years setting it right, which Trump inherited.
Like all of Trump's 6 bankruptcies, sooner or later the loan comes due, and it simply hasn't....yet. But nobody's talking about how the signs are there.
The stock market has gone from steadily going up, to bouncing up and down, but always more down.
The Fed is raising interest rates to counter inflation which as returned...and Trump doesn't realize that once he named Powell, Powell doesn't answer to him and cannot be fired. Which causes Trump to rant at Powell.
Housing prices are not rising and are getting lower.
Wages have not increased significantly and consumer spending is slowing.
And there's nearly 2 trillion in deficits that did NOT get plowed back into the economy--that Republicans planned to pay for by slashing/trashing SocSec, Medicare, Medicaid, and the ACA.
The crash cannot be avoided, just like Trump's bankruptcies, you cannot spend trillions you don't have without, sooner or later, having to pay the piper. Whoever is President on Jan 20, 2021, Trump or not, will face paying that piper in his/her term.
Thievery and dereliction of duty. Two of the main driving forces of the rapidly multiplying kakistocracies of the new millennium.
5
Just as with Argentine, you refuse to see the brutal corruption underpinning the Brazilian society disdain for the political class. Macro is the wrong angle to understand Brazil.
2
@Ard
If American society felt exactly as you described to the tune of say, 30%, how would you say that would compare to the % level of Brazilian society?
@KC
it barely registers compared with that of Brazil. Krugman seems to be spot on re US political landscape, but misses Brazil and Argentina. It does not take any merit from his insightful points.
I think Mr. Krugman misses the point. His is a macroeconomic view, which focuses on trade issues and monetary policy.
The reality is that Brazil is and always has been a case of "bread and circuses", without the bread.
While throwing crumbs to the most needy through programs like "Bolsa Familia", granting stipends to the poor, politicians on a grand scale used the federal, sate and local coffers like their own personal piggybanks.
Consequently, the numerous offshore accounts, and scandalous high lifestyles established by the scores of corrupt politicians drained the treasury. Everything else that followed was a consequence of these corrupt practices - leaving no resources for public health, sanitation, public safety, or education.
And Brazilians, for all their good nature and "joie de vivre" have always valued end-runs and workarounds over culpability - leaving the ethical elements of their society to shout in the wind.
What Brazil needs is not a new strongman government, but a cultural shift - just as we do in the U.S. And as we know here, those changes take place at a glacial pace.
19
Henrique Cardoza did the hard spade work to rescue Brazil's economy, planting the seeds that sprouted during Lula's terms in office. Unfortunately, Lula wasn't an economist and forgot - just like Trump - that his predecessor did him a great favor and put him on 3rd base. Other than the "Bolsa Familia," he did little for the economy. Corruption ran rampant, the destruction of the Amazon continued apace.
5
Krugman - its nice to see you write a piece that isn't a political hack job. You can't resist the subtle arrogance of your (wonkish) though can you?
Many of the previous comments touch on the levels of corruption present in Brazil. It is very clear after decades of left wing rule in Central and South America that left wing government bureaucracies inevitably fall victim to corruption with those who are "owed", i.e. government workers, labor unions, the permanent political class, all given more and more every year while the real producers see themselves being taken advantage of. Go ahead and retire at 55, who do you think is going to pay your pension? There is no moral courage in leftism - no morality at all when it comes down to it. It robs people of their personal dignity because it doesn't even keep them safe. At its basic level a government needs to keep its people safe to it will fail.
4
@John Wilson I believe that if you look at the history of Central and South American countries you see that for the most part they were ruled by authoritarian, right wing, capitalist regimes that funneled all the money to the elites with nothing for the masses. The Chavistas were not so much socialists as typical state communists who simply substitute uneducated fools for elites. Social democracy is quite simply the most stable and reliable system. Yes, people don't get filthy rich, but the bulk of society lives very well. Western Europe is the prime example. The US before the big tax cuts starting in the '60s is another.
8
@John Wilson What does this have to do with leftwing/right wing? Are you claiming that right wing governments in Central and South America are not corrupt? Questionable at best.
4
@John Wilson
Yes sir Mr. Wilson some good points. I for one having spent a lifetime in the "system" become concerned and actually don't feel very safe when a particular political party goes after a Social Security System I've contributed my own money to for decades, or when a party goes after my health insurance that will once again leave me out in the cold with my "pre existing."
Mr. Wilson, in fact, I'm not quite sure which existing democracy you are trying to use as a bell weather to compare Brazil to? I do know for a fact you are not referring to the United States of America at this period of history.
3
Somehow, it seems, in every national and international crisis, the root cause, no matter how you slice and analyze it using Keynsian and / or Austrian school analysis (surprise, kids, they really are the same thing, only emphasizing different tools), the root cause ALWAYS comes back to one thing: Corruption.
What caused the 2008 crisis? Sophisticated corruption that involved bundling thousands of mortgages together and pretending it was a solid entity when millions of those mortgages were based on sophisticated hard-sellers convincing unsophisticated simple people they could afford far more house than they actually could. This was corrupt to the core.
Even a tiny country like The Bahamas, with a population about 1/2 the size of a typical US Congressional district--350,000 at the last census-- is burdened with corruption, due, in part, to no FOIA. Just this week, the power company, BPL (recently re-organized from the old BEC) is caught with $8 million dollars missing--so bad 3 senior execs were suspended and all the hard drives in PCs were pulled for investigation! Despite adding a VAT, recently increased to 12%, money keeps hemorrhaging off preventing the new government from addressing infrastructure and the shanty-town crises. And the corruption is everywhere, big and small. In Abaco (a major Bahamian island group) an Inland Revenue clerk is in jail accused of stealing between $20,000 and $30,000 in VAT moneys for her personal use.
Corruption poisons economies. Always.
18
@Dadof2 Corruption and the grifters primarily responsible for it are a global menace and have existed since humanity's earliest origins. These grifters can wear different robes from religious, military to imperial but their negative impact on society is equally damaging. The USA is learning that lesson once again.
5
Dr, Krugman
The Brazilians are tired of corruption.
They diagnosed the illness right but did not take the right medicine.
Sad.
10
Paul, enough with the 'wonkish'--it's patronizing and unnecessary. We know who you are--we expect you to provide analysis--it's up to you to do it well for your readership.
2
The debt-deflation story doesn’t seem consistent with the chart that Brazilian inflation was consistently around 6% and peaked to double-digits during the slump. This combination of high inflation and real GDP growth reduction suggests that Brazil’s problem was and is more of a supply-side stagflation problem.
1
Compare that with Trumps good luck ( inheriting an economy firing on all cylinders) and bad policy, namely, his tariffs. Once the price increases generated by the tariffs are fully realized it will be a bumpy ride.
4
Krugman describes what he alleges is the perfect storm trifecta of bad luck and bad policy that caused Brazil's economic slump in 2015-2016. The bad policy portion he describes as:
"fiscal austerity and monetary tightening even as the economy was headed down."
That is typical Krugman muddled thinking caused by his intense political biases. It is the same kind of characterization that is often used regarding effort in the US to reduce the size of an increase in government spending. Opponents falsely describe a reduction in the size of an increase as a decrease in spending. That is what occurred in Brazil.
The leftist Workers Party government that been in control for many years had enormously increased government spending, including in the form of huge payments to a great many people for very early retirement at very generous benefit levels. When the President was impeached for corruption (doctoring the governments books to hide that it was essentially bankrupt), an opposition party gained control. That opposition had to restrain spending increases in order to avoid a financial collapse of the government. It is that restraint that Krugman criticizes. Krugman's highest priority is that a leftist government be in control, even if that means total financial collapse of the government.
3
@Errol
While it may be correct that there was a lot of government spending because of retirement benefits, it does not change the fact that if you dramatically cut government spending during a downturn you will cause a severe recession. Couple that with rising interest rates and it becomes an economic disaster. Bad policy in the face of an economic crisis will make things worse no what brought it on.
5
@JS
But spending was NOT cut. There was no decrease. There was merely slowed further increase. Terming a slowed increase as a decrease is misleading and done to deceive, nearly always motivated by political agenda.
2
@JS
Here is a link to chart of Brazil government spending. Check out the 5 year and 10 year charts which show the relentless increases including during the years Krugman falsely claims were decreases.
https://tradingeconomics.com/brazil/government-spending
4
Perhaps wealthy countries could to something to help Brazil stop destroying the rain forest and back off. The rain forest as I understand it is one place that naturally consumes CO2 and produces oxygen. The world needs more rain forest, not less.
3
I appreciate the headline's forewarning that the column would be "wonkish", which led me to read it before any other part of the digital New York Times. As he uses this phrase in a different aspect, it was "remarkable and depressing story". In today's tweet-infested news, it is a challenge to read a cogent column pulling together events worldwide and in our own hemisphere which have a direct bearing on our lives, not to say the lives of other millions. Thank you for "wonkish" work.
1
Most of the comments here make sense as explanations of what happened. Clearly, the government is corrupt at all levels, but it is the government’s inability to pass serious reforms that is the main problem. Don’t look only at today’s debt levels, look at the bankrupting cost of the extremely generous entitlement programs. For example, Brazil already spends as much on pensions as the Italians (as % of gov’t expenditures), yet the average age in Brazilians is half that of Italians! So, the burden on society will grow exponentially unless they change course quickly and dramatically. This and other badly needed reforms will be very unpopular but must be passed quickly and decisively for Brazil to attract investment and thrive again. The alternative is an eventual credit default and a much more severe crisis than what they have endured to date.
1
The article doesn’t mention a word about the massive corruption imposed by the PT party during its 13 years in power. You can run all kinds of analysis to justify what happened to Brazil but at the end it all comes down to a greedy and corrupted PT headed by sociopath Lula who instead of “govern for the poor” and establish long term solutions for the country, stole from the country it’s future by focusing on stealing public monies. Brazil has lost a golden decade in the 2000s where the combination of global commodity boom and global growth should have been used by Brazil to fix its infrastructure, focus on quality education and increase productivity. Instead PT and Lula used these years to advance its scheme to serve a few, inflicting the largest Federal corruption ever discovered in the world.
3
@Julia
If Lula stole public money... where does he have stashed his billions of dollars?
1
Fixating on inflation is a method of protecting the wealthy. What inevitably suffers is, well, everything else.
Pretty much the model in our ghastly new time.
2
It seems that I suddenly have a lot of Brazilian neighbors and some new Brazilian friends... all of whom are here in SoCal, going to school, investing in businesses, doing start-ups, micro-breweries, surfboard shaping and design shops, etc. All young, with families, kids in school, etc... It feels like a brain drain. Most of them have some money, a few appear to have a lot of money. None of them want to go back to Brazil but quite a few are snatching up properties in their home country... for vacation homes, maybe?
3
This is what is so unnerving about the Trump administration---confronted with a real crisis, the individuals he picks to navigate us out of the crisis are A Team Incompetents. You can almost predict that in the crisis these individuals will make all the wrong moves.
1
Mr. Krugman, please keep in mind you are not writing for colleagues. The terms you use, the graphs and the logic require explanation. As a Times columnist we count on you for just that, but in this case you failed.
@publius
He warned us it was wonkish. The man only has so much column space allotted to him! I didn't really understand some of it either but I could do further research elsewhere to fill in that gap if so inclined.
As for the graphs: thumbs up to the FRED graphs, big thumbs down to the World Bank one. Labeling the axes is taught on the first day of Graphs 101!
4
I have avoided Krugman's columns in the past few years because his political analysis is as hysterical as an NYU freshman rebelling against his Republican father. However, I read this column because of my interest in Brazil and my hazy recollection of Krugman as an intelligent economist. I powered through his obligatory "crisis in the West...fascists in Brazil" references without falling asleep, and got to his cogent and efficient recap of the Brazilian economic contraction. It was an excellent, non-partisan review. Why can't he do this more often? I get the need for clicks, but more clear thinking on economics would be a nice thing.
1
@Achilles
Have to agree with you here.
When Prof K writes in economics he is erudite, clear and convincing. And hes been right nearly all the time.
Id love it if he left the political whingeing to hand-waving pseudo-intellectuals like David Brooks and Ross D.
@Homer
Yeah, he starts by claiming he knows nothing whatsoever about Brazilian politics and then later calls the recent election a disaster. How does he have an opinion about something he knows nothing about? The answer is obvious.
3
Their economy is shrinking, their people are getting poorer, but the iBovespa (Brazil main stock market index) is reaching new highs. Kind of reminds me of some other countries..
1
@ronen1966
Like the US?
You are right, Dr. Krugman. The Brazilan Labor Party (PT) thought they had hit the jackpot with huge offshore oil fields and their politicians decided to "reward" themselves with kickbacks. The price of oil went down, the corruption was exposed and now we have a fascist President (also a fascist Vice-President) who, like Trump, are determined to take advantage of the naivité of Evangelical voters to perpetuate the enormous economic and social inequalities in the country. It is worth pointing out that, due to its geographical position and the size of its territory, Brazil has the biggest capacity in the world to generate solar energy, but its politicians don't seem to be interested in solar energy, because it doesn't require huge dams or huge offshore platforms and so the opportunites for kickbacks are not very abundant.
8
I meant to say "naïveté", not "naivité"
@Josef :
I mean naïveté, not "naivité".
The US in 2008 introduced a punitive tax on on Brazil produced Ethanol to shield its farmers from low cost competition
That was under Obama, and continued throughout his administration.
It certainly contributed to Brazil woes
"
1
Brazil is a country that shouldn't be in trouble! Look at their resources. Oil (pre-sal), rare metals, etc. Oligarchy, an inefficient one, is the root problem. Full potential of the people has being wasted for years. Oligarchies are considered more "people" than THAT PEOPLE!
2
From my humble perspective as the husband of a Carioca, Brazil never was doing as well as it seemed like they were doing when it seemed like they were doing well. Protectionist tariffs made a tube of Crest cost 12 reals; new cars lined the wharves impressively, but the average worker who made 800 reals a month couldn't buy one. The wealth and the growth were not shared. Sound familiar?
In 1997 when I first went to Brazil I noticed no one used plastic in the stores and pé-sujos. By 2014, no one paid for anything with cash. In the roaring twenties run-up to the Olympics and World Cup you could sense something phony, a bread and circuses bash that everyone assumed someone else was going to cover. We were dimly aware that the Lula government had run the nation over the vacancy at the edge of a cliff, like the coyote in the cartoons. It was only a matter of time before we fell.
Brazilians may love their Samba, but to me, the national character is better captured in the bossa nova, sweet, intricate, but tempered with longing, with saudade. I pray that Brazil manages to get rid of Bolsonaro in four years, and starts over again. It won't be the first time.
4
This would be amazing. If we hasn’t seen the same “expansionary austerity” nonsense in the US and Europe.
1
Brazillian here. Do not forget the poor outlook for investiments cause by the political gridlock post 2014 election, by impeachtment of the last president and by the "lava-jato" inquiry. The political groups responsible for the gridlock, for the impeachment and for the "lava-jato" inquiry are now in power on Brazil. So far the president elect seens to trail a similar path of Trump in terms of use of fake news and nonfact-based (ideologically driven) public policies.
3
Hmm, fixating on inflation instead of on the downturn, sounds familiar. Are we sure Paul Ryan wasn't vacationing in Brazil?
1
The Socialist Lula was convicted of corruption and accepting bribes and received a 13 yr sentence. Brazil has huge natural resources which can provide solid economic improvement resulting in GDP growth if the money is not stolen by corruption. The characteristic of Socialists is they are always for giving away others money as long as they get to keep their wealth.
2
It’s hard to believe that Krugman nowhere mentions the paramount reason for Brazil’s economic/political crisi...the Lavo Jato or “car wash” corruption tsunami that brought down not only the Rouseff government but resulted in the indictment and conviction of her mentor and former President Lula. Indeed the rot was so complete that all manner of politicians, businessmen and bankers were swept up by the investigation. It was the ONLY topic in Brazil for the past 3 years. How Krugman ignores this issue and it’s obvious relation to Brazil’s economic problem is a mystery, but then I find much of his writing to be mythical in origin.
3
The leftists were in charge for awhile and what Brazilians saw was corruption and terrible policy choices. They nearly bankrupted the country to host the Rio Olympics and, despite leftist rule, income inequality continued to grow. So one could certainly posit that the Brazilians have not embraced Rightism as much as they have rejected the leftist incompetents who had been running the place.
4
The Norwegians must be the only people on this earth with the moral fortitude to take their oil resource and turn it into a state fund to invest and use for the future good of their country.
The UK blew their North Sea oil. Most of Africa and South American are wasting their oil funds.
The North Americans aren't putting shale oil funds into anything useful. They are just like South Americans, wasting the natural resources of their country.
Lula must have been the least corrupt politician in Brazil - 12 years prison time for one gifted apartment while half the Brazilian Congress has stolen hundreds of millions and get no prison time. What a farce.
Japan and Korea pulled themselves into the top bracket through enforced savings, education, deferral of present consumption for future income, consensus in the society, hard work and an obligation of the elites to pull the whole society up with them.
You can't put this package together in a modern society if there isn't the understanding that all will benefit from the sacrifices made by all.
That's why half the world is going backwards, because elites are greedy and have no morals. They lied about the future rewards when the going was good and they took the money for themselves. Now they are shooting anyone who complains and turning all those middle classes back into lower classes again.
The US, Brazil, Venezuela - the same pattern of behaviour, same results.
48
@David
It isn;t moral fortitude in Norway. That's a protestant myth. It's a real functioning democracy with strict government oversight of business activity and investment. This enforces the rule of law upon the wealthy and the financial world. The wealthy Norwegians would cheat ofn a South American Level if they could. Social Democracy and the Scandinavian Model of Government oversight make the theft and bribery on this side of the Atlantic impossible over there. They're only human in Norway, but they're well regulated humans.
8
Alaska too — wasted their oil bonanza on annual checks to residents, with nothing to infrastructure, education, social services. My born-again, Republican-voting sister has a special needs daughter, and her plan was to move to Democratic Washington State for a couple years, as that child gained her majority, so she’d be a WA resident and eligible for the kinds of social programs that my sister has resolutely voted against all her life.
How’s that for hypocrisy?
And, without blinking an eye, she told me this summer that her daughter-in-law wants to have their first child before she turns 26, while she’s still on her parents’ (ie Obama-care) insurance....I replied that I was very glad to see Obama-care working so well for them! And got absolute silence, and a glacial stare, in response.
Ya can’t make this stuff up. Alas.
It's so refreshing to hear someone say "I have no knowledge" about something they have no knowledge of. Really. Thanks.
3
What Krugman ignores is that the collapse of commodities and the huge build up of debt left Brazil rather in the situation of Venezuela. I'm as Keynesian as they come but the Brazilian government just didn't have the option of a large domestic stimulus programs that would have caused the currency to crash and probably a collapse in demand for their bonds. He also ignores the endemic corruption that lies at the heart of the Brazilian state not to mention the extra legal tactics used to destroy opponents or ignore federal law at the state level. Left and right are equally tainted by it. Basically Brazilian politics displays in an extreme fashion some of the dysfunctional tendencies we've seen in the US which is why it is so important to guard against them here.
Sorry Mr Krugman I'm giving you an F. Too simplistic by half.
5
This all sounds very similar to Europe in the aughts. It seems the results of decades of misguided policy choices the world over are coming home to roost. Interesting and informative book - "Can Democracy Survive Global Capitalism?" by Brandeis professor and journalist Robert Kuttner. Across Europe and in the US moneyed interests, in the guise of neoliberal capitalism, have captured government after government, dictating policy, their populations left to suffer the vagaries of "free markets" without governmental assistance, granted more so here in the US than in Europe. Just as Leona Helmsley said years ago, whereas taxes "are for the little people", government largesse is strictly for the wealthy. After all, they own government. And along comes a Trump assuring the masses that he and only he can fix it, and they lap it up. Until he doesn't. The question is, then what? Because nobody has all the answers, and even the ones we have are clearly politically impossible at this point.
1
Excessive tariffs and taxes helped suppress domestic spending. My friend bought a car (a tiny Chevrolet newly made in Brazil but equivalent to the 2003 Opel Corsa) for 30,000 USD. For the same price I got a performance car in the US with 1.9% APR financing.
1
Krugman’s analyses of economic crises in Latin America have roots dating to the 1970’s. He correctly informs us that counterproductive monetary and fiscal policies destabilized Brazil’s economy.
A rotting political system lies at the core of present day economic woes. Wholesale government corruption, beginning with the appointment of political cronies to run Petrobras, resulted in systemic loss of consumer and voter confidence. Public education, health, and housing were underfunded while monies were diverted to host the Olympic Games.
Brazil’s private sector has many able and honest leaders. Working class Brazilian’s are willing to work hard to move ahead. Neither can surmount ineffectual or corrupt political leadership. Hopefully, the incoming president will be more dedicated to an improved social-economic environment than consolidation of power and control.
3
Unfortunately for the economy, Brazilian politicians still believe in economic nationalism even though it has failed everywhere it's been tried. Consequently there are enormous taxes on imported goods. The idea is that Brazilians should make everything they need themselves but what if they can't? Most of them don't have a basic education let alone manufacturing skills. Some of them could have been given an education with the vast amount of debt generated by holding the World Cup and the Olympics. As in Brexit, we see economic decisions being taken for political reasons.
6
I spent much of the last 15 years regularly visiting Brazil on business. There had been 20+ years of leftist rule which 1) exploited the natural resource abundance of the land; 2) funneled resources to the very poor to retain their votes without seriously investing in infrastructure and education upon which to build a sustainable economy; 3) looked the other way at corruption and outright theft by elected officials; 4) tolerated a climate of lawlessness; and 5) covered the entire process up with a judiciary that was complicit. When global conditions shifted, the spiral came and it was more a political outcome than simply economic.
28
@Horsepower
Funny, other than 2) it sounds EXACTLY like what we've seen under the last 2 years of Republican rule.
But instead of funneling resources to the poor, we've funneled them to corporations and the uber-rich, and funneled truckloads of propaganda to everyone else.
And the early signs of the economy collapsing are already there. Inflation's creeping up, but the housing price boom is over and prices are coming down. Combine that with tariffs that will bleed at least a trillion out of consumer spending, and all the signs and omens of yet another Republican-generated recession like 2008 are appearing.
Fascism is rearing its ugly head around the world, as social media allows lies to propagate 100x faster than they can be discredited, so they spread.
11
@Horsepower
Agree completely. Is easy for someone that does not know Brazil to not see that the widespread corruption, nepotism, lack of investment in education and infrastructure are the core of what happened this month.
6
It's funny (or not) that economic crises are much more about timing than distribution these days. I was always taught that economics (esp macro) confronts issues of distribution of goods and of wealth, but I guess that presumes a sort of "adiabatic" (i.e., slowly changing) dynamic.
But over and over we see that trade and markets have done a reasonable job distributing goods and wealth (famine and egregious wealth gaps not withstanding), but there is a slow motion, frog in the steadily heating water kind of build up of risk potentials that get triggered by the timings of trouble. We need a catastrophe theory of singularities that couples the macro and the micro.
Like giant waves that build up from what appears to be a placid sea covering a shoreline with shallow but hidden geometry, how and when they break derives when a confluence of powerful forces. These are complex challenges.
9
@JFR: I think you are on to something here. Personally, I've run across anecdotal evidence that people and their institutions tend to collapse from unresolved internal contradictions if the rate of change exceeds something in the range of 5 to 7 percent per year. If the rate of change pushes beyond some fuzzy but low threshold, people become confused, angry, or frightened, and internal resistance builds up like heat in an overcharged high voltage line. Some people are trying to preserve the old ways of doing things, while others are trying to follow the new directions (however characterized), and the result is the collapse of both initiatives. The net conclusion I draw is that it takes at least 20 years to completely revise a power system, transportation system, communications system, political system, etc.
PK, who is among a handful economists who used basic keynesian macroeconomics to give a persuasive explanation of the slump in developed economies, gets this mostly wrong by trying to apply the same framework to an economy that was not experiencing a liquidity trap by any stretch (when your only tool is a hammer you see nails everywhere). First, Brazil has an inflation target that is, by no means, overly-stringent: 4.5% (+2% to accommodate shocks). While in the US and Europe inflation was running at zero, in Brazil inflation hit 10% — after years of running above target with the economy at full employment. So, while the Central Bank did eventually tighten in the face of runaway inflation, rates stayed tight for only about a year. As rates were eased, the economy did pull out of the slump. On the second point, fiscal policy, Krugman is correct in calling for a long term solution (which basically requires amending the Constitution). What he ignores is that, unlike Greece, which could be bailed out by the ECB, or the US, which is funded by the world, Brazil's debt is financed domestically by skittish investors (I know, I am one of them). With debt balooning to nearly 80% of GDP, yields skyrocketing and credit agencies falling over themselves to slash ratings, the alternative to austerity was a full-blown confidence crisis in the domestic debt market. Indeed, that prospect still looms should the new admisistration fail to implement reforms.
18
@Jorge Larangeira makes some interesting points. Krugman points out that most of Brazil's debt is in local currency. As far as I understand it, this kind of debt is normally funded in part by the government (printing money), private investors such as Mr. Larangeira, and consumers who buy houses and cars on credit.
From what I read about the crisis in Greece, external and internal problems can cause a crisis in which someone, or everyone, has to take a hit. This is in the short term a zero-sum-game where one of the players can decrease their losses only by increasing the losses of other players. Viewed in these terms, Larangeira would be saying that local private investors (such as Larangeira) would have a large incentive to push the burden onto the other two groups. So, decrease government spending overall and cut back on support for the poor in order to ensure that the investor class in Brazil escapes with smaller losses.
I think that this approach, while it would help the wealthiest stay wealthy, is likely to result in Constitutional changes. However I suspect that even Mr. Larangeira might not like them.
4
@Jorge Larangeira
"With debt balooning to nearly 80% of GDP, yields skyrocketing and credit agencies falling over themselves to slash ratings, the alternative to austerity was a full-blown confidence crisis in the domestic debt market."
No economist here, but this sounds like what is happening, or will happen in the US, right? The increase in interest rates is projected to push the US debt service to more than 100% of GDP, no? Although here a large part of our debt is owned by China and others. They are going to literally own us?
1
@Grindelwald The constitutional change required is pension reform. The bulk of pensions go to public servants (who, in Brazil, are the privileged elite) and well off salaried workers, not the poor.
About 15 years ago, Brazil found huge oil deposits offshore. As happens in many places, the oil money doesn't seem to benefit the economy but feeds corruption instead.
It seems like a big corruption scandal linked to the national oil company contributed to the economic crash.
35
It's true that Brazil's debt is largely local-currency. But that is BECAUSE the central bank will tighten in the face of inflation. If the central bank didn't do that, borrowing locally would become impossible, the local currency would implode, and borrowing would be done in US dollars, as in Argentina.
Paul Krugman has a brilliant understanding of some types of microeconomics and also short-term US macroeconomics, but he hasn't thought enough about how things work in countries whose currency is not a global reserve currency.
20
Historically, Brazil has faced hyperinflation for decades; it was overcome in 1994 by the Plano Real, but its memory lingers in all Brazilian minds, including those running the Central Bank. The decision to keep interest rates high was a direct result of the fear of returning to the bad old days of 20-30-40 percent inflation PER MONTH.
11
excellent analysis of the macroeconomics behind Brazilian economic decline.
I would add that Brazilian central bank has kept its interest rates very high in an effort to support the real and encourage foreign capital inflow. Brazil relies on very high levels of foreign capital even though it is a rich economy because its 1% squander the savings. Brazil has one of the highest rates of income and wealth inequality in the world.
Brazil's economic rise in the 1990s and 2000s relied heavily on high commodity prices for soybeans, iron, oil, etc. When the worldwide commodity boom ended around 2009, Brazil was in trouble.
Unfortunately the new Brazilian president Bolsanaro, an ex-military officer associated with the most corrupt political party in Brazil admits he knows nothing about economics except that he wants to deforest the Amazon for soybeans and cattle to export.
26
@john
I am wondering who the 6 recommending readers were? The last paragraph is completely wrong. Bolsonaro (not Bolsanaro) was elected because he is not associated with or involved in any corruption in Brazil. And yes he admitted that he knows nothing about economics, but to compensate, he has appointed Paulo Roberto Nunes Guedes as the Minister of Econcmics. Guedes is a well respected economist and got his PhD from the University of Chicago.
4
''Over the past few decades those who follow international macroeconomics have grown more or less accustomed to “sudden stop” crises in which investors abruptly turn on a country they’ve loved not wisely but too well''.
Yes -
The ''Confidence Fairy'' has left Brazil - and as Paul Krugman should know -(as he mentioned Greece) if the Confidence Fairy -(aka ''the money slosh) leaves a country you need a very strong currency (like the dollar or the Euro) to protect you - or you end up like...
Turkey?
4
I tend to like Krugman's arguments for Keynesian responses to crises, but sometimes he goes to that well a bit too often and applies it to every situation. Seems to be the case here, in my opinion.
The PT's reckless policies over the decade before the collapse in GDP is what led to the crisis - price controls, unsustainable fiscal policy, loose monetary policy, deepening current account deficits. Towards the end of the Dilma administration they had to remove price controls as a last resort, which unleashed inflation.
The timing of the collapse of oil prices in 2014 along with sharply rising inflation in Brazil, put extraordinary pressure on the exchange rate. Foreign investment collapsed.
The first order of business here has to be to restore price stability - which means the central bank has to raise rates, both to rein in inflation and to stabilize the exchange rate.
You can have all the growth in the world, but if you don't have stable prices, you won't have positive real GDP.
In reality, the central bank made the CORRECT move by raising rates. A decade of price controls and massive current account deficits is not going to be corrected overnight. Unfortunately some years of economic pain were needed to get back on course - but the fault lies not in the medicine administered at the end, but the profligacy in policy by Lula and Dilma over the prior decade.
16
When I was young a common greeting was "what's happening?"
Sometimes instead we used "que pasa?"
This past summer I worked with mostly immigrant laborers from Haiti, Mexico and Central America. They spoke mostly rapid fire Spanish and French but their greeting was often in English. Almost the same greeting we used to use, but with a slight twist.
"What happened?" "Hey man.. what happened?"
Now I realize it's the catch phrase on an awful lot of news broadcasts, like every other story, they tell it, then:
"What happened?"
It almost always fits these days.
8
C'mon Paul. Brazil failed because of the institutional corruption that not only failed to create a society safe from predation, but limited the opportunity for success by creating an education system that catered to the wealthy.
48
@Mike
That education system may have catered to the wealthy but it didn't educate them. Brazil has a strange elite of old families whose children attend jesuit universities or go to school abroad and then return to the country to spend their lives surfing and shopping. Leisure is pretty much all those people are interested in. As for mass education, Brazil has lower teacher's pay and less social valuation than almost any country including the major nations of Africa. But still somehow it's a wonderful place. Still the values of bloodline over merit are strict and hard preserved from the days of the empire.
6
@Mike
Not saying that one secondary school can turn the country around, but Brazil has phenomenal government-funded boarding high school in Rio called Escola SESC. http://escolasesc.com.br/ Started in 2008 when Brazilian Commerce Department (SESC) realized importance/necessity of creating highly educated cadre of young people who could assume future leadership roles in government and industry. Acceptance to Escola SESC is complete meritocracy-- in fact, preference is for students' families to be low income (income not more than 5x national minimum wage, about $14,000 at today's exchange rate). Twice as hard to be accepted to Escola SESC as to Harvard, Stanford. Our family has had opportunity to host several of these students in the US (also an exchange with Phillips Academy Andover). They are completely remarkable young people, and should be the shining stars of Brazil's future! I fear that Brazilian economy is so bad that they will not have opportunity--if so, an enormous waste of national leadership potential and personal tragedy for !
It's hard to digest the underlying reasons why Brazil's government has made poor economic decisions leading to the the severe recession it's currently experiencing. In many cases when trying to understand the economics practiced by foreign governments I feel like and outsider looking in. In this case I can't help but think that there's much more to Brazil's economic doldrums then lousy economic decisions by government employees or appointees. Anyone wish to contribute their thoughts on just how political and industrial graft and corruption fit into Brazil's current economic problems?
6
This is not the first or third time the Brazilian economy has soared for awhile, then been smashed by sudden collapse of commodity prices.
By now they ought to have a better idea how to cope with that. But they don't. There is no sign of anything learned from repeated disasters.
Then again, we've repeated some very bad ideas to an astounding degree. It is something inherent in partisan politics.
34
Basically a giant Keynesian spending hangover
For readers that would like a more in depth and professional analysis:.Piketty, author of "Capital in the 20 Century" analysed the problem three weeks ago
Highly recommended !
French Versions
16 octobre 2018
"Brésil: la Première République menacée"
http://piketty.blog.lemonde.fr/2018/10/16/bresil-la-1ere-republique-menacee/
English version
October 16, 2018
"Brazil: the First Republic under Threat"
http://piketty.blog.lemonde.fr/2018/10/16/brazil-the-first-republic-under-threat/
22
@Woof Piketty's post offers no explanation why Brazil's economy took its recent downturn. His graphs on income inequality, where the parameters are mostly stationary over the duration of fifteen years, do not provide an explanation either for why Brazil's economy boomed or for why today Brazil's economy recedes.
4
@Woof
No. Just no. It isn't that the money was spent (Keynesian Hang Over) It's that it was wasted. It was not invested. It was wasted on keeping the currency artificially high. Keeping energy prices (especially car fuel) artificially low. Building unneeded white elephant stadiums for the World Cup. A giant two week party called the Olympics. And what was left after that was stolen and sent offshore. a trillion dollars of currency funneled away on pure old fashioned theft. That's not Keynesian Economics.
8
After the 2007-08 depression, the US didn't pump enough money into the system to spur robust growth, but at least we did have 2 years at the beginning of the Obama presidency where enough was done to at least keep us from going under. Our problem after the first 2 years was that the GOP really didn't want robust growth because slow growth made a good campaign issue for them. Still, the Fed's interest rates and the initial pump priming did, slowly, bring us out of the Bush era crisis. Without knowing the political environment in Brazil, it's difficult to know whether their actions were due to poor policy, or sabotage at the hands of an opposition party.
32
@Butch : Unfortunately, the Obama presidency, in addition to being incredibly corrupt, was an austerity-believing one too. Remember the "Simpson - Bowles" commission?
Corruption: Obama not only didn't prosecute the war crimes of Bush / Cheney, he promoted the torturers and prosecuted the whistle blowers. What he did in response to what was arguably the largest theft in history was let the criminals go free. Of course his biggest campaign contributor was Goldman-Sachs, so it was understandable, if not ethical.
Meanwhile, Brazil's Dilma Rousseff bought the austerity baloney. That cost her the job, and Brazil its economic trajectory.
Mark Blyth (author of Austerity: The History of a Dangerous Idea says austerity has been tried repeatedly, but it never works. It anti-works.
So...how bad does one have to be to lose to an obvious con man or dictator-in-waiting like Bolsinaro, or Trump? That's how bad the austerity-believers are. That's how bad the Democrats were.
1
The unemployment rate in Brazil is high, a large portion of urban population is unemployed, the rate fir the country is almost 12% or one in eight. Do not know if that counts those living in the Amazon or in other undeveloped areas.
Brazil has a small manufacturing base, very few industries, 60% of the country is in the Amazon. Tourist visas are expensive in retaliation for them needing one for U.S. travel, while Argentinians do not.
Crime is high in the large cities, which is also very expensive. It looks as if the public thinks a Fascist style government will do better. Lots of potential in Brazil, too many divisions there.
4
At Cornell in the 1960's I was told, by a Brazilian grad student in economics: Brazil has a great future. And it always will. He added that despite enormous resources, Brazil was determined not to use them for long term progress.
11
@Marvant Duhon
I lived in Brazil. It is an old quote:
"Brazil is the country of the future and always will be."
I think I once read it may even go back to the 1800's but not sure.
Once source attributes it to the book "Brazil - Land of the Future" by Stefan Zweig written around 1940 where a character says this exact quote.
5
@Independent
Variations on that quote are used in many different situations. Nuclear fusion is the energy of the future and always will be is one. It’s a common sentiment that probably didn’t originate in Brazil.
With Brazil as an example of the dangers in believing Rightist dogma unsupported by facts, aren't we allowed to be all the more concerned about democracies 'round the world when Pres. Un-indicted Co-conspirator starts Tweeting or holding press conferences ?
11
And what will we learn from this? Probably not very much. The most depressing part of all these downturns/recessions/depressions/hyperinflation episodes is how quickly people forget. It's depressing to watch the business community in America try to get regulations rolled back because those regulations interfere with their ability to be dishonest. Yet the politicians go along with it. If they don't they won't get money for their election campaigns. And they won't have a cushy job waiting for them if they lose or retire.
Our representatives are, for the most part, so indebted to their rich donors that they can't be bothered to apply critical thinking to proposals that are downright dangerous to the economy and to us. I don't know who advises our elected officials when it comes to listening to the public but in last decade or so listening and understanding have not been part of their skill set. I think some of our DC pols need an extended vacation outside of the Beltway and longer residency period with the rest of us. Until that happens they will not be capable of understanding the average American who is not rich by any means.
108
@hen3ry Your point about regulations is something that crosses my mind every time I read the WSJ. The paper is full of articles about how this corporation cheated shareholders by misreporting and that corporation created an environmental disaster by breaking some law. Then I turn to the editorial pages and see the pleas for cutting regs and easing reporting requirements. It's as if the editorial writers don't read their own paper.
28
@hen3ry
Well said Sir!
5
@hen3ry, when corporations are not regulated and there is an environmental, and or financial problem, they tend to profit and the public, as usual, gets stuck with the cleanup.
2
In 2014, Professor Krugman was completely wrong (optimistic) about the Brazilian economic future. Unfortunately, he keeps getting so wrong about our economy, but now referring to our past.
9
As some others commented there are relevant aspects to be considered. The statement that Brazil has diversified into manufacture is too rosy, as a matter of fact the exchange rate of real since many years before actually drove a deindustrialization of Brazil, it was so much lucrative to import, while byzantine regulations makes it very difficult to increase efficiency.
When things were already not good there was the Carwash investigation that for good and bad paralysed a significant part of the economy, like a few % points of GDP. Loss of confidence also had a significant role in the debacle, Brazil would not sink into recession if we had an average government administration.
7
One thing to keep in mind: Unlike the US and the EU, the interest rate in Brazil was not constrained at a zero lower bound, very far from it in fact. So the garden variety "demand driven" stories that have been pushed for advanced economies in that period will not translate as easily.
''...the global environment deteriorated sharply, with plunging prices for the commodity exports still crucial to the Brazilian economy. ''
It still seems to me that there are money powers that be, that are deconstructing the global economy into their image, that they might lose in the short game (actually I think they are making a killing) to make multiple times more in the long game as their ''guy'' comes to power with promises (lies)
to recover whatever economy.
Aye ?
7
@FunkyIrishman: When times are tough, fascists win elections. Why? Frightened people want a strong leader to protect them. Its happened throughout history, and its happening again in Europe and the US as well as in Brazil. One could wonder whether folks looking to seize power sabotage their economies on purpose to gain power, or are merely opportunists. It works out the same either way.
53
@John M
John M, always love your posts, and maybe 99 times out of a 100 your commentary on this situation would be right. But in this case, Lula, Dilma and Haddad just had to go. Brazilians aren't just frightened in general, they're specifically terrified of the crooks who stole their country. I know it's a huge risk letting in Bolsonaro, who is a fascist, or at least he'd like to be. But sometimes you have to let a leopard in your house to chase out the jackals, even when you're not sure how you're going to get the leopard out later.
5
I looked in vain for some mention of Brazilian corruption, perhaps best exemplified by the destruction of Petrobras, the national oil company. Surely this has something to do with Brazil's recession. You can't run an economy in the face of widespread criminal activity.
105
@Elwood So, did it change with the impeachment? Will corruption end now? Or will just the reporting of the corruption become more difficult?
3
@Bolsonaro
Well a number of people are in jail now, and some have paid back considerable amounts of money, but to answer you question (and you already know the answer), no, corruption will always thrive.
https://www.britannica.com/event/Petrobras-scandal
2
What did Brazil in is the very same thing that this the US in: corruption and hypercapitalism in the face of economic failure, fear-mongering, and the rise of fascism in two nations whose histories run parallel, from inception. with some major differences, of course.
In both cases, the Great Recession was dealt with through insufficient stimulus, followed by forced austerity. The net result, in both nations, was that the "cure" was pawning off the crisis on the backs of those who can least afford it, throwing generations of workers under the bus. If you listen to Glenn Greenwald's Nov. 4 video, even those who stand to lose the most voted for the worst possible candidate because they offered them some hope for relief.
This is the problem the left, in the U.S., South America and Western Europe, has not been able to overcome. In France, when the left failed, voters didn't fall into the right wing nationalist trap and Macron was elected two years ago and he's turned out to be a conservative in neoliberal clothing. Just like in the US, a popular left wing leader almost rose but ended up losing out to neoliberal forces.
Here, in the US, even before the first votes were cast in the 2018 mid-term, national papers were already full of op-eds warning about the "extreme left." 2016's red-baiting is about to start all over again.
Will America have learned how not to get conned by greedy, corrupt leaders?
--
‘Things Trump Did While You Weren’t Looking’
https://wp.me/p2KJ3H-2ZW
68
@Rima Regas if there's money involved or tax breaks and a touch of racism, white supremacy, or a get rich quick scheme, no. You'd think we'd've learned after the 2008 recession courtesy of W but we didn't.
27
@Rima Regas I agree with what you wrote but I want to add to it. The political situation in this country is fostering changes in society (the massive tax cuts, abandoning the social safety net, war on education and science, suppression of voting, etc.) which all encourage a society in which there is a small number of very wealthy people at the top, a relatively small number of middle class technical people who are doing ok, but a large number (about 50%) of the population that are struggling and are one pay check away from homelessness. In some places this is the case now. It is said that, if they have an emergency, about 40% of the people in this country could not raise $500 without selling something or borrowing.
I don't think that a country where about half the people in the country are destitute can be a healthy society. And I expect it to get worse. There is nothing that says our country could not be another Brazil someday.
The very wealthy would be better off in the long run to pay higher taxes but keep a healthier society economically.
"Will America have learned how not to get conned by greedy, corrupt leaders?"
The short answer is no. The very wealthy are greedy; many of The Con Don's faithful vote based on racial/cultural/religious antagonism. That leaves about 45-50% of the country (most in urban areas) who generally support Democrats. The future depends on that 45-50%. Can they get their act together?
11
@Aubrey
That is why I've been using the word oligarchy in my commentary beginning the day after the 2016 election. That is what we now are.
Without Democrats doing the job of an elected party official, meaning doing teach-ins rather than pandering to voters who've been disinformed, misinformed and generally bamboozled by the right, nothing will change and the party will continue to drift wherever the ultra-conservative right takes it.
A prime example of the pandering and drift is Claire McCaskill who, in 2017 used Black Lives Matter together with the word terrorist in order to appeal to white Trump voters.
“First of all, let me say,” McCaskill responded, her voice made tinny by the microphone, “I don’t think anybody in this room thinks you’re a racist. If you’re being stereotyped that way that’s just as unfair as stereotyping every black person as a terrorist for Black Lives Matter.””
https://www.rimaregas.com/2017/09/04/triangulation-when-neoliberalism-is-at-its-most-dangerous-to-voters-updated-dem-politics-on-blog42/
Other examples are Tester, Heitkamp and Manchin, who while running as Democrats, support policies that are well outside that party's credos and regularly vote with the other side.
Without parliamentary leaders to hold individual legislators in line and even ban them when needed, drift will continue.
The other important thing is that in Bloomberg and Pritzker we have oligarchs on the left. Oligarchies are characterized by competing groups or mafias.
9
I don't get the fourth from the last sentence beginning "as best I can figure out."
1
So you are suggesting that the socialist regime demonstrated absolute incompetence in the mechanisms of capitalism? It's a shame that Brazilian voters had to choose between two terrible extremes. How did that happen?
11
A few comments on your piece.
Whereas bad luck and bad policy did play a role in the sharpest contraction of GDP in the past 25 years, bad policy came well before bad luck, and - as I see it - had little to do with the issues you mentioned.
Yes, monetary policy was tightned during the recession, but not because BCB panicked facing the currency depreciation. Truth is, Brazil got into the crisis with inflation already high. Core inflation was already running at nearly 7% per annum, due to expansionary fiscal policy and loose monetary policy all the way up to 2014. Inflation expectations were also way off the target, compounding the problem.
In addition to that, in order to curb headline inflation, fuel and energy prices were artificially contained, up to the point where Petrobras and energy companies were brought to brink of bankruptcy. In early 2015, bereft of alternatives, prices were realigned; in an environment of high inflation and unanchored expectations this was equivalent to throwing gasoline on fire: annual inflation reached about 11% one year later.
Moreover, it is not true that fiscal policy was tightned: federal spending (at constant prices) was higher in 2015 and 2016 than in 2014 (lower in 16 than in 15, though).
Thus, monetary pollicy was all that was left to deal with inflation, and it took more than 2 years to push inflation close to the target.
The crisis was the result of previous bad policy; terms of trade deterioration played a much smaller role.
58
@Alex
Correct correct correct
Inflation in Brazil cannot be taken lightly. To call it a temporary effect is disingenuous.
Market confidence maybe a fairy in the US or developed markets (the confidence fairy) as Dr Krugman likes to say, but it disappears rather quickly in Brazil.
10
@Alex
Thats the correct story right here Mr. Krugman. Brazilian crisis was a much more complicated case, with much more pressure on interest rates and inflation than the other economies that faced depression.
11
@Alex
due to expansionary fiscal policy and loose monetary policy all the way up to 2014.
Correct
That is why I called it in my post "a giant Keynesian Hangover"
As Anna Schwartz, co author of a Monetary History of the United States observed: "Paul Krugman is a respected trade theorist. But he does not speak authoritatively on subjects on which he has no expertise. Monetary economics is not his field of expertise. "
So whenever he does not understand monetary policies he falls back on trade.
8
One needs to take into account what happened in the previous years: a massive increase in unproductive government spending, roughly starting with the 2008 crisis, but increasing after the Brazilian economy quickly recovered. The massive expenditures were the cause of inflation, and created an unsustainable situation of government finances.
One may say that an error is the prelude to an even bigger error. However one cannot discuss the panicked reaction to inflation in 2015 without reference to the insane policies in 2011-2013.
10
Although waste, abuse, etc. is usually not a part of government spending that can be easily cut to the extent that moves the needle in most western countries, is this also the case in Brazil?
@ptuomov Yes, spending that benefit powerful individuals, at the expense of society as a whole, tends to be the hardest ones to cut - how did they make their way into the budget in 1st place?