Brazil’s crisis creates an opportunity
The country needs a programme of comprehensive economic and fiscal reform
Martin Wolf
Brazil is in economic, political and moral crisis. This is not my judgment. It is the judgment of a former senior official I have known for decades.
It is hard to argue with this: the economy has suffered a huge recession, with real incomes per head down 9 per cent between 2013 and 2016; growth is structurally too slow; the fiscal position is unsustainable; and a corruption scandal has engulfed the political elite and leading businessmen.
Indeed, the Supreme Court has authorised investigations into one-third of current cabinet members, one-third of senators, and one-third of state governors, as well as the president, leaders of congress and of the main political parties. Not surprisingly, politicians and parties are discredited. As I learnt when in Brazil last month, local experts fear this may lead to an extreme polarisation of politics. Yet a crisis can also lead to change. Brazil should seize that opportunity.
One must not exaggerate the gloom. Life expectancy has risen from 60 years in 1970 to 74 in 2017, while the fertility rate has fallen from five children per woman to just 1.7. The energy of the judiciary in pursuing the Lava Jato, or Car Wash, investigation into corruption is admirable. The recession has even turned into a mild recovery: the International Monetary Fund forecasts growth at 0.7 per cent this year and 1.5 per cent in 2018. The latter could be too pessimistic. The monetary stability gained in the 1990s persists, with year-on-year consumer price inflation down to 2.5 per cent in September.
Nevertheless, the structural economic and political challenges are huge. Income inequality remains among the highest in the world. That is not offset by fast growth: between 1995 and 2016 real gross domestic product per head rose just 25 per cent, putting Brazil behind Argentina, Mexico, Colombia and Chile. Relative to the US, Brazil’s real GDP per head has stagnated over the past quarter of a century. It is a little over a quarter of US levels, which makes this failure to catch up disturbing.
According to the Conference Board, Brazil’s total factor productivity — a measure of its rate of innovation — fell, at an average rate of 0.7 per cent a year between 2000 and 2016. Brazil’s national savings rate, always low, was just 16 per cent in 2016. Consequently, the central bank’s real short-term rate has averaged just under 5 per cent over the past decade. As a result, investment rates are quite low, too. Moreover, the population is ageing. In all, the growth rate of potential GDP is probably below 2 per cent.
Poor growth prospects make the dire fiscal position worse. Brazil has a huge structural fiscal deficit: the IMF thinks it will reach 11 per cent of GDP by 2022. Revenue is already quite close to 30 per cent of GDP. This should rise with the recovery, but not by enough to close the deficit and bring the rise in public indebtedness under control, since spending is close to 40 per cent of GDP. The government’s mandated spending cap will run into mandated spending, especially on pensions. By the early 2020s, it would have to eliminate all discretionary spending.
Brazil needs comprehensive economic and fiscal reform. The most important economic reforms include: opening up a relatively closed economy; tax reform; labour market reform; higher investment in infrastructure; and policies aimed at raising national savings. The latter connects with the fiscal reforms. These must include a comprehensive pension reform, to bring spending under control. A funded pension scheme could raise national savings. The government must also have the freedom to control the numbers and pay of civil servants. Doing all this would liberate resources for other areas.
It would be a mistake to see the needed reforms as technical. They are highly political. They involve making fundamental changes in the way the state, politicians and officials operate. The system needs to move from corruption to honesty, opacity to transparency, discretion to predictability, and from looking after the privileged to serving the people. That is what the corruption scandals, the slow-burning fiscal crisis, the inefficient pattern of government spending and the longer-term economic weaknesses are telling Brazilians.
Particularly in a free and democratic society, making such deep changes poses a huge challenge. This is especially true when the situation is improving in the short term.
Furthermore, the embattled current government (perhaps surprisingly) and the central bank (far less so) have done a decent job of restoring confidence in Brazil.
Yet political problems need political solutions. Here, the omens for the presidential election in 2018 are bad. Luiz Inácio Lula da Silva, under sentence for corruption, is leading in the polls, but may be prevented from standing. Second in the polls is Jair Bolsonaro, a rightwinger who makes Donald Trump look moderate and self-disciplined. Neither of these people would provide the reforms Brazil now needs, for different reasons: Mr Lula is discredited; and Mr Bolsonaro is a populist authoritarian. Better candidates exist. But support for them is still modest. Where, one wonders, is Brazil’s Emmanuel Macron?
It is impossible to visit Brazil, even for a short time, and not be enthused by the warmth of its people and the vitality of its culture. But the country has fallen on hard times. Yes, the short-term position is improving, a little. But too many people are unemployed, the economy is too feeble, the politics too corrupt, and the state too captured. That is what history and recent events tell Brazilians. Brazil needs a political and economic rebirth. The crisis makes this necessary. If that does not happen, the future looks sad.
BRAZIL´S CRISIS CREATES AN OPPORTUNITY / THE FINANCIAL TIMES COMMENT & ANALYSIS
THE MORAL IDENTITY OF HOMO ECONOMICUS / PROJECT SYNDICATE
The Moral Identity of Homo Economicus
RICARDO HAUSMANN
CAMBRIDGE – Why do people vote, if doing so is costly and highly unlikely to affect the outcome? Why do people go above and beyond the call of duty at their jobs?
Two recent books – Identity Economics by Nobel laureate George Akerlof and Rachel Kranton and The Moral Economy by Sam Bowles – indicate that a quiet revolution is challenging the foundations of the dismal science, promising radical changes in how we view many aspects of organizations, public policy, and even social life. As with the rise of behavioral economics (which already includes six Nobel laureates among its leaders), this revolution emanates from psychology. But while behavioral economics relies on cognitive psychology, this one is rooted in moral psychology.
As with most revolutions, this one is not happening because, as Thomas Huxley surmised, a beautiful old theory has been killed by ugly new facts. The ugly facts have been apparent for a while, but people cannot abandon one mental framework unless another one can take its place: in the end, beautiful old theories are killed only by newer, more powerful theories.
For a long time, economic theory aspired to the elegance of Euclidean geometry, where all true statements can be derived from five apparently incontrovertible axioms, such as the notion that there is only one line that connects two points in space. In the nineteenth century, mathematicians explored the consequences of relaxing one of those axioms and discovered the geometries of curved spaces, where an infinite number of longitudinal lines can pass through the poles of a sphere.
The axioms underpinning traditional economics embody a view of human behavior known as homo economicus: we choose among the available options that which we want or prefer the most. But what makes us want or prefer something?
Economics has long assumed that whatever informs our preferences is exogenous to the issue at hand: de gustibus non est disputandum, as George Stigler and Gary Becker argued. But with a few reasonable assumptions, such as the idea that more is better than less, you can make many predictions about how people will behave.
The behavioral economics revolution questioned the idea that we are good at making these judgments. In the process, they subjected the assumptions underlying homo economicus to experimental tests and found them wanting. But this led at most to the idea of nudging people into better decisions, such as forcing them to opt out of rather than into better choices.
The new revolution may have been triggered by an uncomfortable finding of the old one.
Consider the so-called ultimatum game, in which a player is given a sum of money, say, $100.
He must offer a share of that money to a second player. If the latter accepts the offer, both get to keep the money. If not, they both get nothing.
Homo economicus would give $1 to the second player, who should accept the offer, because $1 is better than zero dollars. But people throughout the world tend to reject offers below $30.
Why?
The new revolution assumes that when we make choices, we do not merely consider which of the available options we like the most. We are also asking ourselves what we ought to do.
In fact, according to moral psychology, our moral sentiments, on which Adam Smith wrote his other famous book, evolved to regulate behavior. We are the most cooperative species on earth because our feelings evolved to sustain cooperation, to put “us” before “me.” These feelings include guilt, shame, outrage, empathy, sympathy, dread, disgust, and a whole cocktail of other sentiments. We reject offers in the ultimatum game because we feel they are unfair.
Akerlof and Kranton propose a simple addition to the conventional economic model of human behavior. Besides the standard selfish elements that define our preferences, they argue that people see themselves as members of “social categories” with which they identify. Each of these social categories – for example, being a Christian, a father, a mason, a neighbor, or a sportsman – has an associated norm or ideal. And, because people derive satisfaction from behaving in accordance with the ideal, they behave not just to acquire, but also to become.
Bowles shows that we have distinct frameworks for analyzing situations. In particular, giving people monetary incentives may work in market-like situations. But, as a now-famous study of Haifa daycare centers showed, imposing fines on people who picked up their kids late actually had the opposite effect: if a fine is like a price, people may find that it is a price worth paying.
But without the fine, coming late constitutes impolite, rude, or disrespectful behavior toward the caregivers, which self-respecting people would avoid, even without fines. Unfortunately, this other-regarding view of behavior has been de-emphasized both in the corporate and the public domain.
Instead, strategies have been derived from the view that all our behaviors are selfish, with the intellectual challenge being to design “incentive-compatible” mechanisms or contracts, an effort that has also been recognized with Nobel Prizes.
But, as George Price showed long ago, Darwinian evolution may have made us altruistic, at least toward people we perceive as members of the group we call “us.” The new revolution in economics may find a place for strategies based on affecting ideals and identities, not just taxes and subsidies. In the process, we may understand that we vote because that is what citizens ought to do, and we excel at our jobs because we strive for respect and self-realization, not just a raise.
If successful, the new revolution may lead to strategies that make us more responsive to our better angels. Economics and our view of human behavior need not be dismal. It may even become inspirational.
Ricardo Hausmann, a former minister of planning of Venezuela and former Chief Economist of the Inter-American Development Bank, is Director of the Center for International Development at Harvard University and a professor of economics at the Harvard Kennedy School.
WHEN WILL THIS STOCK MARKET BUBBLE BURST? / SEEKING ALPHA
When Will This Stock Market Bubble Burst?
by: Thomas Sobon
Summary
- This will be the first of two or more articles I plan to write about stock market matters. My last article was written more than a year ago.
- Since then I kept abreast of stock market developments while writing short stories and poetry. I haven't won any major writing contests yet. The prizes are great; completion is robust.
- The stock market is at-or-near record high price levels. I think that is not sustainable. The partisan political situation in this country stinks and the stench just gets worse.
- I think the stock market could crash before long. In this article, I will write about past stock market crashes and use that as prologue for my next article.
- Since I am mainly a market technician, any future articles will concentrate on technical analysis with fundamental analysis and political considerations included as needed.
Introduction
"We have wasted seven years waiting for nothing, a likelihood that should have been established back then. Though the Fed is a joke, it is still politically potent, especially playing a key role in how even politics accepts what is actually wrong. Until it is fully humiliated, we are stuck in this limbo where we know exactly what is wrong but can't do a damn thing about it. They targeted a monetary rate that nobody uses in order to project a story that nobody believes just so the media would write about an economic recovery that doesn't exist. The Fed is truly a joke and though it isn't funny it is for now the only one we can tell. Until enough people hear it, we are stuck in only bad scenarios."
MARKETS ARE COOKING UP RECIPE FOR A CLASH / THE WALL STREET JOURNAL
Markets Are Cooking Up Recipe for a Clash
Investors have hardly blinked as central bankers are turning words into actions
By Richard Barley
FLATLAND
Gap between two - and ten year Treasury yields
Isn’t the storm supposed to come after the calm?
Financial markets have spent a good deal of time fretting about the withdrawal of the extraordinary monetary policy measures taken by central banks. Just the suggestion that U.S. quantitative easing wouldn’t last forever sparked the 2013 taper tantrum. Yet this year, with institutions from the U.S. Federal Reserve and European Central Bank to the Bank of England and Bank of Canada all taking action to rein in monetary largess, investors have hardly blinked.
The key difference this year is that central bankers are turning words into actions. The Fed came into 2016 with a dot plot projecting four interest-rate increases in that year, but only raised rates once. By contrast, if it raises rates again in December this year it will have delivered on its promises: three rate increases and the start of balance-sheet reduction. Yet markets still price in fewer increases next year than the three the Fed has on the cards. In essence, markets don’t buy what central banks are offering.
In Europe, the BOE, which has hinted at rate increases repeatedly in recent years, also has finally followed through—and yet the instant market reaction was that the central bank was “dovish.” The ECB managed to announce a halving of the pace of its bond purchases to similar acclaim.
SIDEWAYS
Change in ten year government bond yields since start of the year
Perhaps remarkably, long-dated bond yields have barely budged: At 2.31% in the U.S. and 0.33% in Germany, 10-year yields are pretty much in the middle of this year’s range, and still extremely low by historic standards. In the U.S., the yield curve has actually flattened sharply as two-year yields have risen, even though higher rates on short-dated paper should be at the expense of longer-dated securities. The persistent absence of higher inflation, as well as a steady drift down in the Fed’s longer-run interest-rate projection help explain the continued allure of longer-dated bonds.
But it also signals a possible conflict with what central banks are doing. Each action comes accompanied by what the market sees as reassuring language, and is couched as being dependent on economic data. That leads to an odd phenomenon: each central bank action is seemingly treated as a discrete event, not as part of a bigger shift. Robust global growth means, however, that central banks are all being encouraged to stick with their change in direction.
Of course, central bankers themselves don’t want to provoke market fireworks—and have almost bent over backward not to surprise. Unperturbed by where central banks are going, bond yields have stayed low, keeping financial conditions loose. This however, may ultimately encourage further tightening of monetary policy, perhaps in part due to worries about financial stability in the future.
The result is a recipe for a clash. If markets are right, then central banks, in particular the Fed, may face a struggle in tightening policy. But if central banks continue to push ahead, investors will be left scrambling to catch up.
Bienvenida
Les doy cordialmente la bienvenida a este Blog informativo con artículos, análisis y comentarios de publicaciones especializadas y especialmente seleccionadas, principalmente sobre temas económicos, financieros y políticos de actualidad, que esperamos y deseamos, sean de su máximo interés, utilidad y conveniencia.
Pensamos que solo comprendiendo cabalmente el presente, es que podemos proyectarnos acertadamente hacia el futuro.
Gonzalo Raffo de Lavalle
Friedrich Nietzsche
Quien conoce su ignorancia revela la mas profunda sabiduría. Quien ignora su ignorancia vive en la mas profunda ilusión.
Lao Tse
“There are decades when nothing happens and there are weeks when decades happen.”
Vladimir Ilyich Lenin
You only find out who is swimming naked when the tide goes out.
Warren Buffett
No soy alguien que sabe, sino alguien que busca.
FOZ
Only Gold is money. Everything else is debt.
J.P. Morgan
Las grandes almas tienen voluntades; las débiles tan solo deseos.
Proverbio Chino
Quien no lo ha dado todo no ha dado nada.
Helenio Herrera
History repeats itself, first as tragedy, second as farce.
Karl Marx
If you know the other and know yourself, you need not fear the result of a hundred battles.
Sun Tzu
Paulo Coelho

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