Brazil’s economy after the pandemic

I wrote an article on the path to economic recovery in Brazil after the pandemic. The article was published by Instituto Monte Castelo, a Brasilia-based think tank, and it is in Portuguese. Here is a summary of the key points.

Brazil’s economy is overwhelmingly interventionist, as shown by its progress (or lack thereof) in data compiled by the World Bank in its Doing Business studies, or Heritage’s Foundation Index of Economic Freedom, or the World Economic Forum’s Global Competitiveness Report. As predicted by theories of economic interventionism (more recently, Robert Higgs and Sanford Ikeda; but, classically, Ludwig von Mises), a time of crisis invites more government intervention or, remarkably at certain historical junctures, disintervention.

From a free market perspective, what can be done?

Brazil’s situation is, to a certain extent, a reflection of the global scenario. A global crisis was bound to happen, given the unrealistic inflation of asset prices in global financial markets, reflecting the artificial propping up of the major economies around the world by injections of money and credit, as well as increased public spending after 2009. COVID-19 triggered it, but it was the tip of the iceberg. Brazil suffered from capital outflows and its currency devalued sharply against the US dollar.

In terms of how the external scenario reflects on Brazil, the only thing that can be done is decrease the level of risk in Brazil’s economy, or maintain interest rates on a level that reflects the amount of risk in the economy (given that Brazil’s Central Bank has been cutting rates throughout the year). The fact that the President is fighting with his cabinet and with the other branches of the government also reflects poorly in terms of political risk.

However, there is a lot that can be done in terms of the domestic scenario. The economic crisis resulting from the pandemic also reflects, in part, a change in consumer preferences and in how things will have to be done safely to avoid contamination. This means that some businesses will not thrive as much (restaurants, for example) and that other industries will incur in much higher costs to operate more safely. This disequilibrium would have happened regardless of government-mandated restrictions, and alert entrepreneurs will spot a chance to obtain gain by creating value for their consumers and clients.

However, it’s much harder to shut down inefficient companies, fire people, and open new ones, and hire people, in a heavily interventionist economy such as Brazil’s.

Shutdowns and other government imposed restrictions, especially on the local level, are making things worse. Brazil’s case is one of a milder shutdown. The government is offering a small compensation package for the trouble, but not much compared to the “stimulus” packages in Europe and the US. This probably reflects a more sober approach by Brazil’s Central Bank. However, on the one hand small businesses struggle to get access to credit due to the red tape, so this favors large companies and will concentrate the market in the long run. There’s also an idea of propping up airline companies and other inefficient businesses. This, in my view, would be a mistake. But lobbyists will line up to get their share of the cake.

The path to economic recovery in Brazil will necessarily have to involve local and federal deregulation, cutting lots of red tape, and major tax reforms. Labor laws have been made more flexible a few years ago, and the current administration managed to pass a massive pension reform that will reconfigure some of the public debt. However, this is not enough. Deeper reforms to cut public spending on a more permanent basis will have to be proposed, and the federal government will have to work harder to signal institutional and political stability and predictability.

The challenge is that the current administration can’t get reelected in 2022 with very little to show in terms of the economy, and the effects of the reforms proposed above will only become clearer in the long term. The temptation is to do just what the US seems to be doing – anti-trade nationalism to punish a foreign scapegoat, or the abstract scapegoat of ‘globalism’, appease some of the cronies with monetary and fiscal populism, red herrings making the population and the media focus on culture wars, etc. But this temptation is to be expected according to the economic theory of interventionism. Whether it will be overcome, only time can tell.

Nightcap

  1. Making economic predictions is useless Branko Milanovic, globalinequality
  2. In praise of “austerity” Alberto Alesina, City Journal
  3. Suicidal tendencies Irfan Khawaja, Policy of Truth
  4. The study of history, strategic culture, and geopolitical conflict still matters Francis Sempa, ARB

Cyclical History

An interesting result from behavioral/experimental economics is that bubbles can happen even with smart people who should know better. But once those people go through a bubble, they do a better job of avoiding bubbles in the future.

I think this result has major implications for society more broadly and I think we’re seeing it play out in the news. In the ’70s people learned a lot of hard lessons about things like stagflation (and racism–but ask a sociologist about that) that made the following decades easier. But those people gradually retired and were replaced with people who weren’t inoculated to certain ideas (like the idea of inflating your way out of a supply-side recession).

We’re now living in a world where the median voter and her elected representatives have unlearned those hard lessons. And so we’re going to live through the 1970’s again. Hopefully. If we’re not so lucky we might live through the 1930’s again.

Nightcap

  1. Public and private pleasures (the coffeehouse) Phil Withington, History Today
  2. The historical state and economic development in Vietnam Dell, Lane, & Querubin, Econometrica
  3. The liberal world order was built with blood Vincent Blevins, New York Times
  4. Bowling alone with robots Kori Schake, War on the Rocks

Nightcap

  1. On the new conservative movement in the United States C Bradley Thompson, American Mind
  2. The sense of shame and the politics of humiliation Thomas Laqueur, Literary Review
  3. Money, modern life, and the city Daniel Lopez, Aeon
  4. Space exploration, and comparative coranavirus lockdowns Scott Sumner, MoneyIllusion

Nightcap

  1. Alesina was one of the most creative economists of his time Guido Tabellini, Il Foglio
  2. Alberto Alesina. A free-spirited economist Papaioannou & Stantcheva, VOXEU
  3. Nation-Building, Nationalism, and Wars” Alesina, Reich, & Riboni, NBER
  4. The case against Mars Byron Williston, Boston Review

Broken incentives in medical research

Last week, I sat down with Scott Johnson of the Device Alliance to discuss how medical research is communicated only through archaic and disorganized methods, and how the root of this is the “economy” of Impact Factor, citations, and tenure-seeking as opposed to an exercise in scientific communication.

We also discussed a vision of the future of medical publishing, where the basic method of communicating knowledge was no longer uploading a PDF but contributing structured data to a living, growing database.

You can listen here: https://www.devicealliance.org/medtech_radio_podcast/

As background, I recommend the recent work by Patrick Collison and Tyler Cowen on broken incentives in medical research funding (as opposed to publishing), as I think their research on funding shows that a great slow-down in medical innovation has resulted from systematic errors in organizing knowledge gathering. Mark Zuckerberg actually interviewed them about it here: https://conversationswithtyler.com/episodes/mark-zuckerberg-interviews-patrick-collison-and-tyler-cowen/.