Not all depressions are due to NGDP shortfalls
By Scott Sumner
Here’s the Financial Times on Brazil:
Brazil’s economy has suffered a dramatic decline this year. Economists surveyed by the central bank expect economic growth to contract 3.6 per cent this year and 2.7 per cent in 2016 while inflation is expected to reach 10.61 per cent this year and 6.8 per cent in 2016. The central bank’s inflation target is 4.5 per cent plus or minus 2 percentage points.
That suggests roughly 7% NGDP growth in 2015, a reasonable figure given Brazil’s 4.5% inflation target. And yet the RGDP numbers are horrific, far worse than in the US during 2008-09. And that’s not even accounting for the fact that Brazil’s per capita GDP is about the same as China’s, and hence Brazil actually ought to be growing faster than the US, if it intends any sort of catch-up.
If tight money did not cause the Brazilian depression, what did? The Economist said it was economic mismanagement by the Socialist government:
Ominously, Ms Rousseff, too, has an economic disaster on her hands, largely the result of irresponsible fiscal and monetary policies and incessant microeconomic interventionism in her first term. Figures released this week show that GDP shrank for the third consecutive quarter between July and September. It was 4.5% lower than in the same period last year; 2016 will mark the second year of recession–the longest downturn since the 1930s. Inflation was around 10% in November and unemployment is rising. Alberto Ramos of Goldman Sachs, an investment bank, speaks of an “outright depression”.
That’s why it’s called the AS/AD model, not the AD model.
Rousseff was elected in 2010, replacing Lula, another (moderate) socialist leader. Other left-wing governments in Latin America have also fallen on hard times, with the left recently suffering major electoral defeats in Argentina and Venezuela. (Venezuela’s even worse off than Brazil, while Argentina’s doing somewhat better than Brazil.)
It’s also worth noting that in recent years some liberal American economists have moved sharply to the left. In this 2012 blog post (written during the disastrous first term the Economist refers to above) Paul Krugman praises the polices that drove Brazil into a depression:
Just to be clear, I think Brazil is going pretty well, and has had good leadership. But why exactly is Brazil an impressive “BRIC” while Argentina is always disparaged? Actually, we know why — but it doesn’t speak well for the state of economics reporting.
Back in the 1990s, when he wrote Pop Internationalism, Krugman would have been sharply critical of those sorts of populist economic policies. Now he thinks America’s media has a right-wing bias, because they criticized the socialist policies that were being pursued in Argentina and Brazil. Given the current state of those two economies, it looks to me like the criticism was more than justified.
I see an unfilled market niche on the moderate left. Will any economist assume the role Krugman played in the 1990s, defending the neoliberal orthodoxy?
PS. I welcome comments by people who know more about Brazilian economic policies than I do. I understand that the government intervenes heavily in the labor market, but don’t know how important those interventions are in terms of the current depression. Here’s an interesting article from a progressive point of view (written before the current depression), which discusses the pros ands cons of Brazil’s minimum wage policy. My takeaway is that the minimum wage increases did lower poverty during the previous commodity export driven boom, but may now be a drag on the economy.