Does Lula get the economy right?

In the first weeks of government, the President of the Republic acted quickly in the economic area. He authorized several measures and issued opinions on economic policy, continuing what he did in the election campaign. Whether or not he has been right is the subject of intense controversy. 

Economic orthodoxy, including and notably the buffoon crowd and their numerous spokespersons in the media, seems increasingly restless. They expected a more docile Lula, more similar to the Lula 1 of the times of the Antônio Palocci/Henrique Meirelles duo – a period in which developmental economists, in turn, were furious, publicly criticizing the government. I used to put it on myself, even with a certain amount of exaggeration, I would say in hindsight. 

Lula 3 is now configured as independent and assertive in the economic area, and even more so than Lula 2, from the Guido Mantega period, which already caused certain shivers. The noise is currently quite intense. Do what? The dissatisfaction in the mercadist hosts must be faced with patience and tranquility. With dialogue and consistent measures, these reactions may be mitigated. I don't believe much, I confess, but I express hope.

>>> National Monetary Council and Central Bank – a necessary review

If he were an economist, the current Lula would be a developmentalist, Keynesian and heterodox. It's no wonder that the bufunfa gang gives “the triumphant jerks of a run over dog”, as Nelson Rodrigues would say. Not being an economist, it is natural for the President to slip up when he enters the economic field with more specificity. I deal with some of them next. Fundamentally, though, he's getting it right. 

The controversy raised by the government's first steps is vast. I will only deal with certain issues related to the Central Bank (BC), monetary policy and fiscal policy. 

For example, the President's opinion on the sacrosanct autonomy of the Central Bank caused a stir. Lula recalled that in Brazil "there was a great struggle to have an independent Central Bank," but that, with his experience, he can say that it is "nonsense to think that an independent Central Bank will do more than when it was the President of the Republic who appointed them." He added: "I doubt that the current president of the Central Bank is more independent than Meirelles was," also noting that the Central Bank, although independent, has not met its inflation targets in recent years. 

Is the President right? Basically, yes, although not in some more specific points. The Brazilian Central Bank became autonomous, not independent. In the academic literature – which no president has an obligation to know – “independent” is the BC that sets its own inflation targets; “autonomous” which seeks the goals set by the government. In Brazil, it is the National Monetary Council (CMN) that sets the targets and the interval around the center of the targets. 

But this is, in part, fiction, which vindicates Lula. The Central Bank's influence on the National Monetary Council (CMN) is significant, as it holds one of the three voting votes and acts as its secretary. In practice, the Central Bank sets its own targets, at least for certain periods. I have already written about this (see “Monetary Council and Central Bank – a necessary review”, May 30, 2022). Now, as far as I know, the CMN will be composed of Minister Fernando Haddad, who chairs it, Minister Simone Tebet, and the president of the Central Bank, Roberto Campos Neto. Assuming that Tebet follows a more conservative line, Haddad will be in the minority on the CMN. And the Central Bank may, in practice, be able to continue setting its own targets.

Another point is that, contrary to what Lula's statement suggests, the president and directors of the Central Bank continue to be appointed by the President of the Republic. What has changed? With the autonomy law, approved during the Bolsonaro administration, the leadership of the monetary authority has fixed terms, not coinciding with that of the President of the Republic. Lula certainly knows this. What did he mean? In my opinion, that the current president of the Central Bank will not be as independent as Henrique Meirelles was, president of the Central Bank during Lula's first and second terms. Autonomy law or not, Roberto Campos Neto will have to coordinate monetary policy with fiscal policy and other aspects of economic policy, as happens, incidentally, in all or almost all countries. I hope this actually happens. We shall see.

Lula also declared that an excessively ambitious inflation target hinders economic growth. “Why not establish 4,5%, as we did in my previous mandates?”, he asked. The controversy in this regard is international and also occurs in developed countries, where it is also questioned whether central banks have set excessively ambitious inflation targets. The opinion of the President of the Republic is defensible – it has the support of many specialists both here and abroad. 

In Brazil, the current targets are 3,25% for 2023 and 3% for 2024. This is the center of the targets, which have an interval of 1,5 percentage points up and down around this center. It would be perfectly reasonable, on the next occasion when the CMN meets to address the issue, to slightly increase the center of the 2024 and 2025 target, say to 3,25% and the range to 2 percentage points. The ceiling of the target would thus be 5,25%. A minimalist adjustment that, however, would reduce the pressure for the BC to keep interest rates too high, harming growth, employment and public finances. Note, reader, that the basic interest rate set by the Central Bank affects public finances directly and indirectly, through at least two channels: directly, via the cost of the internal public debt; indirectly, via output and employment.

In the fiscal field, the Lula government has made important decisions. I highlight two. First: in the set of fiscal initiatives announced by Minister Fernando Haddad in January, changes were proposed, through a Provisional Measure, to the scope of the Administrative Council of Tax Appeals (CARF), correcting glaring distortions. The most significant change was the return of the so-called tie-breaking vote, that is, the Union's tie-breaking vote. During the Bolsonaro government, a measure had been approved in Congress that eliminated the tie-breaking vote and gave the taxpayer the upper hand in case of a tie in the CARF. In a parity council, with an equal number of members from the Treasury and taxpayers, this measure had been leading to successive defeats for the Union. Haddad's Provisional Measure provoked protests from large companies and tax lawyers who earn fortunes defending these companies. A good sign? Or a great one? 

Second decision: the clever and skillful maneuver to eliminate the infamous spending cap, created during the Temer administration, already in the transitional amendment proposal. It was established that a new rule or fiscal anchor, defined in a complementary law, will replace the constitutional spending cap. Period. From 2024 onwards, the Temer cap ceases to exist. A sensational maneuver, the kind that leaves the opponent on the ground. 

In short, Lula is hitting the jackpot as an economist.

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A summarized version of this article was published in the magazine “Carta Capital”. 

The author is an economist who served as Vice President of the New Development Bank, established by the BRICS in Shanghai, from 2015 to 2017, and as Executive Director at the IMF representing Brazil and ten other countries in Washington, from 2007 to 2015. He published the book at the end of 2019 through the publisher LeYa. Brazil doesn't fit in anyone's backyard: Behind the scenes of a Brazilian economist's life at the IMF and BRICS, and other texts about nationalism and our inferiority complex.The second edition, updated and expanded, began circulating in March 2021. Email: paulonbjr@hotmail.com

Twitter: @paulonbjr

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