Opinion – Samuel Pessôa: The limits of the possible

In previous columns, I spent a lot of time revisiting the Brazilian macroeconomy in the 2000s. A more complete analysis can be found on the Ibre Blog.

The reason is very clear: the period from 2004 to 2012, approximately, was the best for the country since redemocratization: we had economic growth with falling inequality and clear signs in several indicators of improvement in the well-being of the population in general. .

However, the period ended in the greatest crisis in our history. In my opinion, the crisis was due to the unsustainability of the economic policy in the period and to a high degree of artificiality of the economic policy, already present in President Lula’s second term, which worsened in Dilma’s first term.

That our best period had an unsustainable economic policy and, in the end, was very artificial says more about us than about the government, in the case of the PT period.

In democracy, governments decide according to popularity. If practicing an unsustainable economic policy generates gains in popularity, the policy adopted will be unsustainable, regardless of the political group that occupies the Planalto.

Unsustainability occurs when economic policy forces the economy to operate beyond its capacity. It tests the limits of what is possible in the economy.

Two concepts from macroeconomics textbooks express these limits. The natural rate of unemployment and the neutral rate of interest.

The natural rate of unemployment is the one that keeps inflation stable, that is, that does not accelerate inflation or that keeps wages growing at the rate of labor productivity.

A neutral interest rate is one that keeps the economy growing at its potential with stable and on-target inflation. That is, it is the interest rate that neither contracts nor expands aggregate demand.

Of course, these two parameters of the economy —the neutral interest rate and the natural rate of unemployment — are not constant in nature. They depend on the entire legal and institutional framework within which the economy operates. Institutional reforms can change them.

In a recent text on the Blog do Ibre, my colleague Bráulio Borges presents evidence that the 2016 labor reform may have reduced the natural rate of unemployment by one percentage point, from 9.5% to 8.5%.

Bráulio’s result is great news. But, depending on the dynamics of the economy in 2022, it may not change the fact, discussed in last week’s column, that we may enter 2023 in a situation close to full employment.

Latin America, in general, and Brazil, in particular, have had difficulties in building long growth cycles. The enormous inequality makes it difficult to build consensus.

In Brazil, the only limitation we have had to unsustainable policies is that, sooner or later, they result in an acceleration of inflation. And so far, our society has shown signs of heavily punishing the chief executive’s party that is blamed by society for inflating the economy.

In this respect, we are ahead of our neighbors to the south.

The column’s title recalls an important text published in 1976 in the journal Pesquisa e Planejamento Econômico, by the late FGV colleague Ibre Regis Bonelli, in partnership with Pedro Malan. It approached the limits of what was possible in the economic policy of the period, in an attempt to keep the economy growing strong in the midst of numerous imbalances. It never ends well.