Will we ever learn?

Will we ever learn?

An edited version of the article posted in 2015

In moments of great instability, when a country is ridden with inflation, recession, and the consequent growth of unemployment, the prescriptions of the orthodox economic model may result in undesirable consequences. Reducing government expenditure and increasing the rate of interest may lead to reduced demand and reduced economic activity, thus increasing unemployment and decreasing tax revenues. If the reduction of revenues is greater than the reduction of expenses, the result will negatively affect the fiscal balance, thus increasing the inflationary pressure. It is a situation devoutly to be avoided.

The danger of using orthodox measures in times of recession lies not only in the immediate bitterness of the medicine but also in its frightful possible side effects.

But many countries are now facing that situation. They have shunned all opportunities to keep a distance from it and must now withstand, as a consequence, the fact that practically all decisions regarding the future become a dilemma.

Brazil is today, one of the most evident and significant cases of countries in such a situation. Greece may be excluded from the picture because, being in the Eurozone, its concern is with debt and shortage of cash, rather than with inflation.

It is of little use to lecture the leaders of these countries about the disasters that they (or their predecessors) have caused. The problem is a fact and it must be managed. Besides, it is very improbable that the present leaders of these countries, who have not learned from history, will learn from lectures.

There is no universally accepted formula to deal with simultaneous inflation and recession.

Economics, unfortunately, must face paradoxical situations. Past mistakes cannot be undone. New mistakes may be frightful. And it is naive to assume that politicians are willing to submit their appetites to the higher interests of nations.

It is certain that neither Greece nor Brazil will adopt effective and economically material measures to shorten and to abate the crisis.

Greece will, of course, enact the legal requirements of the bail-out agreements. But it will implement them negligently and grudgingly. It will not be surprising if, within a few years, it will be negotiating a new bail-out. Agreements that impose upon the sovereignty of countries have never proved to be very effective. There are no convincing precedents that they have the faculty to convert irresponsible and profligate countries to faithful followers of the culture of austerity.

But let us return to Brazil. It is facing what is probably the worst economic, political, and ethical crisis in its republican history. The president is already in the 9th month of her second term and has not yet proposed anything of real significance. Only palliative cuts in government spending and, of course, tax raise, in the form of a " fiscal adjustment program". This program relies on a 60% tax raise and a 40% reduction in expenses. The new Minister of Finance, a man of liberal (in the economic sense of the word) principles, has assumed the parentage of this program. He deserves great sympathy. He accepted the job and unselfishly secured to himself the condition of a foreign element in a snake pit. He knew very well when he made the decision. that the president herself and her political entourage would do their best to surreptitiously sabotage him and, if possible, make him the scapegoat for new mistakes. Whether he fails or prospers, let us not forget that he dared to risk his ass for the country.

The adjustment program, even before its full implementation, has already been proven insufficient. The president has officially submitted to Congress a budget for 2016 with an uncovered deficit of R$ 30 billion. This is not a joke. In the proposed budget, the uses are greater than the sources of funds. It is something like resorting to a question mark to balance debits and credits.

Standard and Poor's has just announced, for the second time in less than one year, the downgrading of the country. It is no longer a member of the select list of countries with "investment grade", a ranking it had acquired only 7 years ago. This seriously aggravates the situation, particularly from a political point of view.

As the executive branch insists on raising taxes, top politicians, even those traditionally supportive of the government, are changing their discourse. They are now calling for more substantial cuts in spending before increasing the tax burden. However, their points of view change as frequently as day-to-day events affect their interests. The speakers of both houses of Congress have recently gone back and forth in their positioning. Mr. Renan Calheiros, of the lower house, less than three weeks ago, became, as the press put it, a new convert to Ms. Roussef1s inner circle of unconditional supporters. Last Thursday, however, he made a public statement that any assumed liberal (again in the economic sense of the word) would welcome as his own. Mr. Eduardo Cunha, of the senate, moved from a moderate to a bitter critic of the president as he was officially charged with corruption. The Vice-president, Mr. Michel Temer, a man of a notoriously high cultural level (which may explain the mutual intolerance between himself and the president) recently abdicated the position of political coordinator of Government. Last Thursday, he stated that the remedies to the economy must not be too sour. It has become almost impossible to point out who opposes and who supports the government. The official opposition is so distant from an agenda or a platform that it could be classified as a nonentity.

Alternative means of raising taxes, however, have been announced and dismissed, as the creativity of officials is put to work. A new alternative is announced as soon as a previous one is dismissed because of public or political resistance. No budget cuts of great impact, however, have been considered. The president's rate of popular approval is only around 7%. She has become so unpopular that she avoided the traditional presidential speech to the nation on independence day. If her face is shown on TV, the noise of protesters beating on kitchen utensils is immediately heard on the streets. There is a generalized sentiment that she has lost not only political and popular support but also any reference to consistency and coherence. She is no longer perceived to have an agenda. She is no longer perceived to run the government. She insists on denying what is obvious and in asserting what is absurd. Most of what she says in public does not make sense. The press consistently makes fun of her incomprehensible and ludicrous statements.

Ms. Rouseffs low popularity is the outcome of years of populist irresponsibility, mismanagement of the overwhelming spread of corruption within the government's party and its allies. Even members of the opposition are being submitted to inquests by the Federal Police. The New York Times recently published that about 40% of congressmen are in some way involved in corruption.

But the total isolation and lack of direction of the president is perhaps not the chief cause for effective measures not to be taken.

Ideology and incompetence are at the basis of the problem, but at the surface is the yet scarcely mentioned fact that cuts mean enormous numbers of dismissals of Worker's Party militants and political protégés of its allies. These militants and protégés have been strategically appointed to accommodate personal appetites, to open corruption channels, and to compensate for the loyalty of congressmen for past and future favors. Political appointments as a means of exchange for political support has been a widely accepted practice in the country since the re-democratization occurred in the mid-'80s. Cash, of course, has been used too. During the government of ex-president Lula, top leaders of the Workers Party were condemned and sent to jail for buying political support. The scandal, at the time, was widely covered by the média. It was called "mensalão", referring to the fact that payments were made every month. But even after that scandal, tough cash handed out, which never stopped, is perceived as corruption, the use of absurd practices of recruitment for public jobs is normally perceived as a casual matter. It has been conducted openly and candidly as if paying taxpayers' money to inapt or unnecessary functionaries, in the form of salaries and benefits, were not as unethical as subtracting money from government coffers. This seems to be the level to which the ethical perception of a large portion of the population has been lowered in the country.

Now, returning to the question of what can be done. The numbers are impressive. It is estimated that there are approximately 130 thousand federal government executives and "assistants to" that have been appointed by discretionary decisions. Because civil servants appointed through ordinary procedures have tenure, any dismissals would have to concentrate on this lot. The minions of heavyweight dignitaries

The reduction of ministries from 39 to maybe 20 would help, of course. But very little if there is no elimination of jobs. Freezing salaries might help, in the long run, but its impact on the feelings of individuals toward the government is similar and more widely spread than cutting jobs. Cutting down on fringe benefits, such as cars for personal use would upset exactly the most influential people.

The overwhelming question, therefore, is: how many jobs and which ones can the government afford to cut without creating uncontrollable personal hatred within its ranks? If the Workers Party is now agonizing, could it ever survive such a shock? If the so-called "allied basis" of the government in congress is now totally inconsistent in its loyalty to Ms. Roussef, it would probably become consistent in grudging that loyalty.

Returning, to the initial considerations of this post. Yes, there is a way out of the crisis but is not reasonable to conceive it in practice. The same cultural aspects that allowed it to progress are now the impediments to solving it. It is an enormous frustration.

The way out of the present crisis does not seem to rest in cutting expenses only, which falls in the dilemma of suffocating the economy and, in the end, rebounding on inflation. That is necessary, yes, but cutting the superfluous, in a moment of recession, could better be associated with transporting the amounts cut to pari pasu investments and required expenses, such as in the nation's precarious public health and infrastructure systems. That, as an explicit Government Program, combined with effective measures that do not require large sums of money, such as simplifying the bureaucratic procedures that have made Brazil one of the worse countries to do business in, the simplification of the taxation procedures (even if not reducing the tax burden), the unquestionable assurance of property right, the reduction of protectionism, etc, would no doubt result in the recovery of credibility which, in turn, would signal to the investor, at home and abroad, that this is a feasible country, that welcomes risk-takers and respects their money. A governmental program of this nature may also propose that in the medium term, it will deal with questions such as public security, rationalization of the energetic system, transportation and distribution infrastructure, etc. If it accomplishes its short-term goals, it will eventually acquire credibility for its mid-term proposals. The fact is that the government must govern. This is the only available option.

But again, considering the evolution of facts, it does not seem that we have the will or the competence to do the right things.