By PAULO NOGUEIRA BATISTA JR.*
The Central Bank acts as a fourth power, while high interest rates mean transferring income to the wealthier sectors of society.
I am among the most insistent, most stubborn critics of the Central Bank's interest rate policy. Apart from President Lula, of course, who is hors concours. He has made criticisms that are always pertinent, almost always accurate. I return to the load today, modestly accompanying our President's critical efforts.
The subject is vast, it would deserve an essay of at least 50 pages. I will try to be synthetic. I begin with the appeals of Minister Fernando Haddad, who has been calling for harmony between monetary and fiscal policies for some time. Makes perfect sense. The most used term in the literature is fiscal-monetary coordination. In all reasonably organized countries, even an autonomous Central Bank is obliged to coordinate its actions with those of the Treasury. This means not only the regular exchange of information between the two instances, but the care to take into account the actions of the other party in the definition and implementation of yours. If there is any prevalence, it is the tax authorities, who represent the elected government. In some countries, the Treasury even has formal representation on committees that set monetary policy.
Efforts towards fiscal/monetary harmony
Minister Fernando Haddad, as a matter of fact, does not limit himself to launching public appeals in favor of harmony. It has been doing its best to appease the Central Bank and, more importantly, the social base of the monetary authority – Faria Lima, also known as the bufunfa gang. It's not easy, reader, but the Minister of Finance makes an effort. In January, he announced a fiscal adjustment package. Then, he abandoned or postponed the increase in inflation targets, accepting the Central Bank's arguments that this would be counterproductive. In April, he announced a “fiscal framework” with restrictions on public spending, hoping to convince the Central Bank that the fiscal risk will be small from now on.
Fernando Haddad also indicated that he intends to negotiate with the president of the Central Bank the names of the two new members of the institution's board of directors. Under the autonomy law, it is the prerogative of the President of the Republic to now appoint two of the nine members of the Central Bank and Copom boards. The terms of two directors expired at the end of February and the government, it is not quite clear why, still has not appointed the replacements. At the time of writing, early May, nominations are still pending. If it were up to the Treasury alone, the names would be submitted to Roberto Campos Neto for approval. I don't want to be unfair, but that's the impression that the Farm is giving. In fact, the minister himself made statements to that effect some time ago. It's more than just printing, then.
Central Bank, a fourth power
Fernando Haddad's pleas in favor of harmonization have so far fallen on deaf ears. It is because the Central Bank's command sees the proposal as a veiled attempt to suppress or condition its sacrosanct autonomy. The Brazilian Central Bank has the extravagant claim, it seems, of defining its steps without considering Treasury policy.
Let's be more clear. The truth is that the Central Bank behaves like a fourth power. It is not just autonomous, but independent. This is contrary to what the law intended. The conventional distinction, incorporated into Brazilian legislation, establishes that the autonomous Central Bank is free to pursue the goals set by the elected political power, through the National Monetary Council (CMN).
An independent Central Bank would have the prerogative to set its own inflation targets. This distinction, in the Brazilian case, is more theoretical than practical. It so happens that the Central Bank has one of the three votes of the CMN; the other two are from Finance and Planning. In addition, the Central Bank acts as secretary for the Board, which gives it additional power. To complete the picture, Finance and Planning are apparently unable or unwilling to face the Central Bank's orthodoxy.
Smelling blood, the Faria Lima advanced. The command of the Central Bank has already given repeated signs that it intends to frame the economic policy of the elected government. You see, reader, not only the fiscal policy, which must do “the homework” to which Minister Simone Tebet insistently refers, but also the federal public banks, which have been admonished by the Central Bank, in its communiqués and minutes of meetings, not to adopt policies that aim to stimulate economic activity, as this would supposedly reduce the effectiveness of monetary policy.
government with tied hands
If “harmony” prevails, as understood by the Central Bank, the government will have its hands tied, inert, probably unable to act to relaunch an economy that has been stagnant for ten years! Will fiscal policy, limited by the framework, be able to orient itself towards an active role? Will the government be able to order BNDES, Banco do Brasil and Caixa Econômica to provide a sufficient volume of credit, at attractive rates and terms, to unlock investments in the Brazilian economy? If it depends on BC, no, never and never. All these instances will be subject, harmoniously, to the objective of ensuring monetary stability and compliance with inflation targets. The President of the Republic, in turn, will be able to calmly continue his criticism of high interest rates. Harmony will continue smoothly.
Notice, reader, that this “harmony” also includes the right that the Central Bank reserves to launch firecrackers against fiscal policy! The high interest rate policy, for example, raises the cost of debt and the public deficit. But this is a source of “fiscal risk” that, God knows why, need not be considered. High interest rates also bring down levels of activity and employment, reducing tax bases and, other things being equal, government revenues.
In an environment of economic slowdown, any attempt to increase revenues, or to try to keep them stable, even without necessarily resorting to new taxes or rate increases, as intended by the Minister of Finance, will encounter tenacious resistance from taxpayers, who will redouble their efforts to evade taxation.
Let's elaborate on this point a little. The fiscal framework established, as central targets, zero primary deficit in 2024 and surpluses in the following years. If the economy continues to stagnate or, worse, enters into recession, the effort to reach the target will be greater and will tend to accentuate the tendency of the economy to stagnate. Fiscal policy will be pro-cyclical, in other words. One solution to avoid stagnation/recession would be to adopt expansionary fiscal measures.
But will the fiscal framework make room for an anti-recession policy? Doubtful, given the constraints on public spending included in the fiscal framework. Another solution would be to activate the federal public banks to provide the credit that private banks do not provide, especially in periods of high interest rates and stagnation. Possible? In theory, yes, but the Central Bank has already warned that this hinders monetary policy…
Finally, let's not forget the following. Public deficits, since Keynes, are seen as admissible in periods of stagnation or recession. In these situations, it is recommended to let the automatic stabilizers act (that is, the cyclical retraction of the tax burden and the increase in certain expenses linked to economic activity) and insert countercyclical components in fiscal policy, expanding, for example, public investments and social transfers, with effects in terms of income deconcentration and demand and activity multipliers.
See the absurdity, reader. The increase in the public deficit resulting from high interest rates does not have any positive effect. It increases the fiscal risk, without benefits in terms of economic recovery and with a concentrating effect on income. Only in Faria Lima will this policy deserve applause – and frantic applause. Simple to understand why.
High interest rates mean transferring income to the more affluent sectors of society. All those who have financial savings or cash reserves invested in government bonds and other assets benefit. Now, the poor and wealthy, and even the lower middle class, have little or nothing in terms of financial savings. Those who receive the additional income are the super-rich – especially billionaires, large companies and banks that have large investments in government bonds and other liquid assets. Soft life. High profitability, with liquidity and without risk. The rentier's paradise.
Those same well-offs spend none or almost none of the additional income they receive as a result of the generous policy of the Central Bank. The money received is hoarded and invested in government bonds and other assets. It does not circulate in the economy, nor does it help to reactivate it.
I conclude here this diatribe that has already taken too long. I confess, I no longer have much hope of helping to change the macroeconomic picture. What I wrote here is just the outburst of a Brazilian who has watched, disgusted, the repetition of the same absurdities for decades.
*Paulo Nogueira Batista Jr. he holds the Celso Furtado Chair at the College of High Studies at UFRJ. He was vice-president of the New Development Bank, established by the BRICS. Author, among other books, of Brazil doesn't fit in anyone's backyard (LeYa).
Extended version of article published in the journal Capital letter, on May 05, 2023.
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