Opinion – Marcos Mendes: You have to learn from mistakes

In May of this year, the book “Not to forget: public policies that impoverish Brazil” was launched. I organized the work, which featured 32 other authors. The goal was to learn from recent mistakes, not to repeat them. Unfortunately, the new government indicates that it will repeat several of them.

In the book, Samuel Pessôa and Bráulio Borges show that fiscal policy, which had already been expansionist since 2004, accentuated the structural deficit from 2012 onwards. With the economy already heated, inflation increased. Public debt skyrocketed, being one of the causes of the 2014-16 recession. Now, the new government has obtained from Congress a spending increase of more than 2% of GDP, also in a context of low productive idleness and growing debt.

Amaro Gomes and Francisco Sena analyzed the case of Ceitec, a state-owned company created to produce microelectronic components, which failed after 12 years of operation, at a cost of more than R$ 1 billion, and is in liquidation. They also studied Infraero, which was left idle and overstaffed after most airports were granted concessions. The new Minister of Science and Technology announced that she will stop the liquidation of Ceitec and the head of an unbelievable Ministry of Ports and Airports (almost all under private management) intends to “strengthen Infraero”.

Décio Oddone shows the negative consequences of not keeping fuel prices in line with the international market: low investment in the sector, risk of shortages, subsidies for high-income consumers, high tax costs, misleading price signals. It recommends more competition, transparency, tax simplification and reduction of Petrobras’ market power. The likely new president of Petrobras, however, prefers intervention in prices and a stabilization fund that has already failed in other countries, as I argued in the March 11 column.

The chapter by Marco Bonomo and co-authors and that by Vinícius Carrasco and Guilherme Freitas show that subsidized credit directed by public banks, which cost 1.5% of GDP in 2015, did little to encourage investment and increased productivity, favored large corporations at the expense of society as a whole and weakened the potency of monetary policy.

The replacement of the TJLP by the TLP at the BNDES zeroed out credit subsidies. The end of fiscal excesses reduced equilibrium interest rates. As a result, there was strong growth in long-term credit in the private capital market. Ignoring all this, the new president of the development bank promises subsidized rates for long-term financing.

André Lara Resende, who was even invited to become a minister, published an article attacking the current model of monetary policy. His argument can be summarized as follows: a) interest rate increases are not very effective in controlling inflation; b) public debt default risks do not affect the long-term interest rate, which is entirely defined by the short-term rates (Selic), set by the Central Bank; c) higher government spending on interest increases aggregate demand, which puts pressure on inflation.

It concludes that, if the BC lowers the Selic rate, inflation, long-term interest rates and the cost of public debt will fall. Fiscal adjustment and more growth, cutting rentier gains.

In the book, Marcelo Kfoury and Filipe Carvalho show that there was already an experiment in the forced reduction of the Selic rate, between 2011 and 2015. The effect was to discourage expectations and effectively increase inflation, which refutes Lara Resende’s thesis.

In that period, while the Selic rate was falling, ten-year interest rates rose sharply. Therefore, overthrowing the Selic by force does not reduce the cost of financing the public debt.

Long interest rates were high because the risk of default and inflationary erosion of the public debt increased. The BC has no control over these expectations.

The thesis that reducing interest rates lowers inflation has not passed the test of the Turkish experience, where inflation soared to 84% a year. In Argentina, the BC finances the primary deficit and inflation flirts with 100% per year.

Repeating such recent mistakes is not a good start.