Inflation and employment

Nostalgia for the time when money grew on trees and multiplied effortlessly, thanks to the highest interest rates in the world, is a sport with a growing number of followers in Brazil. A banal statement by Dilma Rousseff in South Africa was enough to bring the spokespeople of the old rent-seeking system out of hiding and trigger buy and sell orders for future interest rates, in the natural gambling of the financial market.

Dilma stated the obvious: the best remedy to combat inflation is not to kill the patient by promoting unemployment. In fact, her policy has already become clear. Thanks to the fiscal leeway generated by the reduction in interest rates, the government gains room to maneuver to promote tax breaks, as has already occurred in energy and food, reducing the cost of doing business in Brazil.

The presidential speech, however, was interpreted as unorthodox and as a sign that the Dilma government disregards price stability, sacrificing inflation control in the name of growth. To these critics, it is only appropriate to suggest an understanding of the central mission of the Federal Reserve, the American central bank created in 1910, which matured its policy instruments and worldview after traumas such as the Great Depression. The Fed's main mission is "to conduct monetary policy, influencing monetary and credit conditions in the economy, in pursuit of the highest possible level of employment, stable prices, and moderate interest rates over the long run."

In other words, in the United States, the heart of capitalism and the international financial system, employment comes before stability. This doesn't mean that Americans are lenient with inflation. In Brazil, where the inflation targeting regime was implemented in 1999, those who protest most against exceeding the target (which hasn't yet happened under Dilma's government) are those who, in their time, exceeded it.

Armínio Fraga, for example, presided over the Central Bank from 1999 to 2002. In the first year, inflation was 8,94%. In 2000, it was 5,97%. In 2001, it was 7,67%. The following year, it was 12,53%. In four attempts, therefore, he only came close to the target once. And economic growth was also mediocre during his time in power.

The only truly spectacular thing is the sky-high interest rates. Coincidence or not, Armínio's team produced "genius" financiers who perhaps haven't realized that Brazil has changed and that, now, the multiplication of capital depends on an essential factor called labor.