Does Lula get the economy right?

Image: Eugene Liashchevskyi


Lula 3 is now configured as independent and assertive in the economic area

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.

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 “they fought a lot to have an independent BC”, but that, with his experience, he can say that it is “silly to think that an independent BC will do more than when it was the President of the Republic who appointed ”. And he added: “I doubt that the current president of the BC is more independent than Meirelles was'', noting that the BC, although independent, has not met the 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 that is, in part fiction, what makes Lula right. The BC's influence on the CMN is great, as it has one of the three votes and exercises the secretariat. In practice, the BC sets targets for itself, at least in certain periods. I already wrote about this in an article published on the site the earth is round. Now, as far as I know, the CMN will be formed by Minister Fernando Haddad, who chairs it, by Minister Simone Tebet and by BC President Roberto Campos Neto. Assuming that Tebet follows a more conservative line, Haddad will be a minority in the CMN. And the BC may be in a position, in practice, to continue setting its own targets.

Another point is that, contrary to what Lula's speech suggests, the president and directors of the BC continue to be appointed by the President of the Republic. What has changed? With the autonomy law, approved during the Bolsonaro government, the command of the monetary authority has fixed mandates, which do not coincide with that of the President of the Republic. Lula knows this for sure. What did he mean? In my opinion, the current BC president will no longer be more independent than Henrique Meirelles was, BC president during Lula 1 and Lula 2. Autonomy law or not, Roberto Campos Neto will have to coordinate monetary policy with political taxation and other aspects of economic policy, as is the case in all or almost all countries. I really hope this happens. We'll 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 taken important decisions. I highlight two. First: in the set of tax initiatives announced by Minister Fernando Haddad in January, Provisional Measures proposed changes within the scope of the Administrative Council of Tax Appeals (CARF), which correct glaring distortions. The most significant change was the return of the so-called casting vote, that is, the Union's tie-breaking vote.

During the Bolsonaro government, a measure had been approved in Congress that suppressed the casting vote and favored the taxpayer in the event of a tie in the CARF. In a joint Council, with an equal number of members of 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. Good sign? Or great?

Second decision: the intelligent and skillful maneuver to eliminate the infamous spending ceiling, created in the Michel Temer government, already in the transitional PEC. It was established that a new rule or fiscal anchor, defined in a supplementary law, will replace the constitutional expenditure ceiling. Point. From 2024 onwards, the Temer ceiling ceases to exist. A sensational dribble, one that leaves the opponent on the ground.

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

*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 in Shanghai. 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 January 27, 2023.


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