Scott Sumner  

Not all depressions are due to NGDP shortfalls

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Here's the Financial Times on Brazil:

Brazil's economy has suffered a dramatic decline this year. Economists surveyed by the central bank expect economic growth to contract 3.6 per cent this year and 2.7 per cent in 2016 while inflation is expected to reach 10.61 per cent this year and 6.8 per cent in 2016. The central bank's inflation target is 4.5 per cent plus or minus 2 percentage points.
That suggests roughly 7% NGDP growth in 2015, a reasonable figure given Brazil's 4.5% inflation target. And yet the RGDP numbers are horrific, far worse than in the US during 2008-09. And that's not even accounting for the fact that Brazil's per capita GDP is about the same as China's, and hence Brazil actually ought to be growing faster than the US, if it intends any sort of catch-up.

If tight money did not cause the Brazilian depression, what did? The Economist said it was economic mismanagement by the Socialist government:

Ominously, Ms Rousseff, too, has an economic disaster on her hands, largely the result of irresponsible fiscal and monetary policies and incessant microeconomic interventionism in her first term. Figures released this week show that GDP shrank for the third consecutive quarter between July and September. It was 4.5% lower than in the same period last year; 2016 will mark the second year of recession--the longest downturn since the 1930s. Inflation was around 10% in November and unemployment is rising. Alberto Ramos of Goldman Sachs, an investment bank, speaks of an "outright depression".
That's why it's called the AS/AD model, not the AD model.

Rousseff was elected in 2010, replacing Lula, another (moderate) socialist leader. Other left-wing governments in Latin America have also fallen on hard times, with the left recently suffering major electoral defeats in Argentina and Venezuela. (Venezuela's even worse off than Brazil, while Argentina's doing somewhat better than Brazil.)

It's also worth noting that in recent years some liberal American economists have moved sharply to the left. In this 2012 blog post (written during the disastrous first term the Economist refers to above) Paul Krugman praises the polices that drove Brazil into a depression:

Just to be clear, I think Brazil is going pretty well, and has had good leadership. But why exactly is Brazil an impressive "BRIC" while Argentina is always disparaged? Actually, we know why -- but it doesn't speak well for the state of economics reporting.

Back in the 1990s, when he wrote Pop Internationalism, Krugman would have been sharply critical of those sorts of populist economic policies. Now he thinks America's media has a right-wing bias, because they criticized the socialist policies that were being pursued in Argentina and Brazil. Given the current state of those two economies, it looks to me like the criticism was more than justified.

I see an unfilled market niche on the moderate left. Will any economist assume the role Krugman played in the 1990s, defending the neoliberal orthodoxy?

PS. I welcome comments by people who know more about Brazilian economic policies than I do. I understand that the government intervenes heavily in the labor market, but don't know how important those interventions are in terms of the current depression. Here's an interesting article from a progressive point of view (written before the current depression), which discusses the pros ands cons of Brazil's minimum wage policy. My takeaway is that the minimum wage increases did lower poverty during the previous commodity export driven boom, but may now be a drag on the economy.


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COMMENTS (15 to date)
ThomasH writes:

I think Krugman should stick to trying to persuade folks that 2008-15 is the result of AD slack rather than wasting time making sure folks understand that Brazil is having AS problems. Does the US Congress Brazil has an AD crisis?

Brian Donohue writes:

This is great documentation.

There are those on the left who live up to the ideals of fair, open-minded and critical thinking.

Krugman is at a point in his career when reversing course is probably impossible, but I'm confident this niche will be filled.

Sadowski's a Democrat, right? But I guess your thinking of Keynesians.

E. Harding writes:

The Brazilian recession is believed to have resulted from rapidly falling prices for commodities with fairly inelastic demand and from the China slowdown. The Russian and Venezuelan recessions are believed to be a product of low oil prices, though the Venezuelan recession has certainly been made worse by the transition to Maduro in 2013.

Also, the spam filter here needs to be checked more often.

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marcus nunes writes:

For the past several years, policymakers in Brazil have been among the most stupid. While stepping on the demand accelerator they pushed even harder on the supply brake!
And are surprisede when they get as a result an "inflationary depression"!

marcus nunes writes:

And add to that a dysfunctional political system mired in corruption scandals...
Finance Minister Levy, who came in last January as "the saviour" has just quit. He has been replaced by one of the guys who was responsible for all the bad policies of Dilma┬┤s first term.
What can you expect?

marcus nunes writes:

Some recent illustrations:
https://thefaintofheart.wordpress.com/2015/10/15/brazil-seems-eager-to-relive-the-good-ole-days/

Scott Sumner writes:

E. Harding, You said:

"The Brazilian recession is believed to have resulted from rapidly falling prices for commodities with fairly inelastic demand and from the China slowdown."

Don't confuse "resulted from" and "triggered by". otherwise people might assume falling commodity prices are an excuse, Australia's not in recession, much less depression.

As for Venezuela, is oil dependent Norway in a depression?

Marcus, I appreciate those comments, you are in a much better place than I am to see the flaws in the Brazilian policy regime.

Jose Romeu Robazzi writes:

@Prof. Sumner
Brazilian NGDP is currently growing at 4%, and falling in the last 6 quarters. It is the tighter we have seen since 1998.

Under your measure, yes, the depression is partly the central bank's responsibility. But the Brazilian case shows the problem I see when you look at macro aggregates and high inflation levels. From 2010 to 2013, we could say that the central bank managed a huge success in market monetarists view: NGDP growth around 10%, inflation at 6.0% and relatively high average growth (4%).

The government judged that this results were caused by its policies, that can be summarized in three elements : 1. negative taxes for the very poor ("Bolsa Familia"), 2. real growth on the minimum wage, 3. Heavy intervention on investments (petrobras, energy sector, automobile industry protection).

I think the problems started when people did not factor out the commodity boom when measuring growth potential. A lot of people believed we could have RGDP growth of 4%. Skeptics like me were warning productivity was not growing that fast at all, but since we have imperfect tools to measure it, that line of thinking was dicarded by mainstream economists and officials.

Now we can say that the very policies that seemed to be a success engineered something that resemble a (huge) negative supply shock: nominal wages growing much faster than productivity, and state intervention kept capital formation too low. When inflation started to rise, the problem with IT showed up: under a negative supply shock, in order to keep inflaton on target the monetary authority is forced to cause a huge recession. The recession is big because the inflation target is too high. Once wages start growing at high nominal rates, rigidity make them keep growing even when the recession has already started.

Now, would things be better if we were under NGDP targeting ? Well, if we were under NGDP targeting at 10%, inflation should be 16% in 2015, not 10%. Were we under NGDPLT, we would have to make up in the future for a 27% gap in NGDP growth. Assuming RGDP is indeed lower than previously believed, most of that would be just more inflation.

As for the claim the commodities prices falling rapidily "caused" the depression and don't agree. Brazilian economy is large and diversified, and not very open. Brazil has structural problems that affect supply, and a lot of people just don't want to accept that. RGDP potential is low, period.

That is my view, already too long a comment ...

Scott Sumner writes:

Thanks Jose, I agree that NGDP targeting would not have solved Brazil's problems.

Jose Romeu Robazzi writes:

Of course, my point is twofold:
1. No matter how good is your AD management system, if you rationalize supply shocks you will get yourself into trouble.
2. High levels of inflation targeting (like PK is so fond of) or high NGDP LT (like some market monetarists seem to be) will actually make things worse.

I think there is a lesson here.

James Alexander writes:

JoseRR
One additional complication in Brazil is that the "inflation rate" is so politically charged a concept that there is no consensus on it. Is the same true of the GDP Deflator? I guess if NGDP or the Deflator became important for monetary policy then they too would become politically charged. The problem is then not NGDP Targeting but the politicisation of of any measure to steer macro policy. This would not then be a failing of NGDP Targeting but a failure of Brazilian politics.

Jose Romeu Robazzi writes:

My point is that high levels of inflation targeting disorganize the supply side, because people keep expecting high nominal wage growth. When a negative supply shock hits, instead of a smooth adjustment through constant NGDP growth and a little more inflation, we will have a strong recession and still have double digit inflation. Then inlation becomes politically charged, it is not the other way around.

Alexander Hudson writes:

Matthew Yglesias fits very well into the market niche on the left. He may not be an economist, but his economic commentary is still better than most of what you find out there, on the right or the left.

Jose Romeu Robazzi writes:

Brazilian President just increased national minimum wage by 11.7%, after a year where inflation was 10.6% (consumer prices). This after a year when we had -3.6% RGDP growth, and durging a strong negative supply side shock. This means more recession ahead, and more unemployment.

James Alexander writes:

JRR
What should we call it when the President acts like that, raising real minimum wages? A negative supply shock? Whatever. It does illustrate the political nature of the problem.

Perhaps you are right, though. At high levels of inflation like Brazil now it may be better to target inflation itself rather than NGDP growth - and eventually downgrade and then remove the constant indexation questions.

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