Opinion – Samuel Pessôa: For the orthodox, the economy is already operating at full load

A version of the opinion to PEC 32 of 2022, by Senator Alexandre Silveira (PSD-MG), mentioned the modern monetary theory (TMM). Subsequently, at the request of the future Minister of Finance, Fernando Haddad, the mention of TMM was removed from the opinion.

The version with the mention can be downloaded directly from the Senate website (3HN5ZoB).

The topic is controversial and deserved careful reporting by Alexa Salomão, published in this Sheet on the 12th.

TMM presents two controversial propositions. The first is that the causal relationship between public spending and tax revenue is inverse. Spend first. Spending moves the economy, and revenue is a consequence of this movement.

The second proposition is that a State that finances itself by issuing debt that will be paid with its own currency does not go bankrupt. The reason is contractual. Upon maturity of the debt, the Central Bank, a state body, can always issue currency and buy back the debt.

The first proposition may be true. Its verification requires a careful econometric study to establish whether the causality is from expenses to income or vice versa. In general, in this type of exercise with macroeconomic data, causality is bilateral. The second proposition is correct and trivial (more details in my 5/3/2020 column).

The central issue, therefore, is not the monetary part of the theory. There are no major repairs here, nor are there any major new features. The theme is resource constraint. What is the inflationary risk of financing through monetary expansion of the public deficit?

For this question, it is useful to follow the opinion’s argument: “It is worth remembering that, despite the recent improvement in the labor market, with the unemployment rate presenting a consistent downward trend, reaching 8.3% in November of this year, its level is far above what can be considered a situation of full employment. Although there is no consensus on what the unemployment rate would be when the economy is at full employment, even more conservative estimates point to values ​​below 5%” .

Below is the major source of disagreement.

The table shows the evolution of the unemployment rate measured by the Continuous National Household Sample Survey (PnadC) by IBGE since 1996. As the PNADC began in 2012, the data were reconstructed by FGV Ibre from the Monthly Employment Survey ( PME) and the annual PNAD. The data for the fourth quarter of 2022, unemployment of 8%, is the FGV Ibre estimate.

The lowest value reached by the unemployment rate in the last 26 years was 6.7% in the 2nd quarter of 2014. Unemployment was below 8% from the 4th quarter of 2011 to the 1st quarter of 2015. All the evidence we have is that in that period the economic policy was unsustainable. In particular, during this period wages rose permanently above labor productivity and inflation was above the target, despite the damming of various administered prices, including fuel.

In other words, a full-time unemployment rate below 5% is, in Brazil, a fiction. The Brazilian economy is already operating at full load. The fiscal impulse promoted by the Transition PEC will make it very difficult for the Central Bank to bring inflation to the target.