What went wrong in Brazil?

Back in 2012, Paul Krugman did a post praising the “New Economic Policy” in Latin America, which focused on reducing inequality.  A few weeks later he singled out Argentina and Brazil for special praise:

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.

And it’s true that these countries had shown some impressive growth.  But that was more than 2 and 1/2 years ago.  How do things look today?  Obviously things are going downhill rapidly in Argentina, but what about Brazil?  Here’s The Economist:

IN 2005 a debate raged between the two most powerful figures in President Luiz Inácio Lula da Silva’s government. Antonio Palocci, the finance minister, proposed taking advantage of faster economic growth to eliminate Brazil’s persistent fiscal deficit””and thus lower its exorbitant interest rates””by capping the increase in federal spending. But Dilma Rousseff, Lula’s chief of staff, thought Mr Palocci’s plan “rudimentary” and blocked it. Ms Rousseff became Lula’s successor as Brazil’s president in 2011, implementing a “new economic model” that placed full employment and wage increases ahead of macroeconomic rigour.

Fiscal laxity has come back to haunt Ms Rousseff, who won a second term last month by the narrowest of margins. As we went to press she was due to announce that Joaquim Levy, one of Mr Palocci’s deputies in 2005, will become her new finance minister. Nelson Barbosa, the most capable economist in the ruling Workers’ Party (PT), will get the planning ministry. Mr Levy is a Chicago-trained economist who has been running a big asset manager; his presumptive appointment has been welcomed by investors. It seems that Ms Rousseff has at last tacitly accepted the error of her economic ways.

Big spending policies to promote jobs, and wage increases to reduce inequality—no wonder Krugman was impressed. Unfortunately Brazil is now paying the price, with only about 1%/year RGDP growth over the past three years.  Fortunately, after Keynesian economics makes a mess of things there’s always a few “Chicago Boys” available to clean up the mess.  I have another post at Econlog, discussing how Krugman’s preferred tax policy failed in France, and how a somewhat more moderate economic minister was brought in to clean up the mess.  Not a good two years for Keynesian/Piketty economics, maybe 2015 will be better.

Speaking of the supply-side, I endorse Miles Kimball’s post where he argues that Doug Elmendorf should be reappointed at the CBO. The GOP would be making a mistake if they force him out.

I won’t do much blogging over the holidays.  Merry Christmas to my Christian readers, and Happy New Year to everyone!

(Look for some big announcements in January.)

Update:  Here is an RSS feed for my Econlog posts:





78 Responses to “What went wrong in Brazil?”

  1. Gravatar of E. Harding E. Harding
    24. December 2014 at 15:57

    Here’s a New York Times article pointing out what went wrong in Brazil in the 1970s:
    Here’s a graph of several RGDPs per capita (note: type in GDP per capita, PPP (constant 2005 international dollars) to see accurate relative comparisons):
    Check the Korea box to see what could have happened had decent economic policy been implemented in the early 1980s.
    Brazil has the most time-intensive business tax code in the world. It takes 100+ days to start a business, though it’s not too costly. Getting a business construction permit takes 400 days. Tax rates are agreed to be the greatest business constraints by local businesses.
    The place is crawling with obviously needless regulatory hassles:
    Brazil’s exports as a percentage of GDP are lower than in Japan and the United States. Even Argentina has done more to promote exports since the discrediting of import substitution in the 1980s. If anything went wrong in Brazil over the past 30 years, it has been the failure to implement meaningful trade, tax, and regulatory reform in the 1980s.

  2. Gravatar of E. Harding E. Harding
    24. December 2014 at 16:11

    I think Brazil should be replaced by Indonesia in the BRICs. South Africa is even more of a joke “emerging market” than Brazil.

  3. Gravatar of JNCU JNCU
    24. December 2014 at 16:20


    Thanks and may Christ bless you and your loves ones, even if you do not believe in him. : )

  4. Gravatar of W. Peden W. Peden
    24. December 2014 at 17:11

    So the old saying remains useful: “Brazil is the country of tomorrow- forever.”

    E. Harding,

    I think that the problem is: no market, no emergence.

    Scott Sumner,

    Krugman’s question on Brazil and Argentina has some worth: why was Brazil praised so much back then? Of course, we now know that both economies were houses built on sand. Even more amazing has been the decline of the Putin model over the past five years. And I would mention Venezuela, but to the credit of left-wing economists, there was never a “Chavez model” that was widely admired by economists.

  5. Gravatar of Ray Lopez Ray Lopez
    24. December 2014 at 18:41

    @everybody bashing on Brazil–did you come up with your theories before Brazil had their latest economic difficulties or after? If you’re so smart, why aren’t you rich (like me)? Like our host, are you coming up with ex post reasons or ex ante? Listening to Sumner is like driving a car forward using your rear view mirror. It works for a while until that fork in the road. Do you wonder why Sumner always sounds so confident, always bashes his audience, resorts to ad hominem? Smoke and mirrors is what he sells, so why not? There’s no substance to his posts except speculation. All he does is talk past his audience, as I found when I discussed gold with him in threads past, using Ben Bernanke and Richard Cooper’s papers as evidence, both respected economists and both anti-gold BTW. Sumner nitpicked with their language, and misread the very words they were saying. This from a professional economist. If economists resort to these tactics (and Krugman’s another one, though arguably Krugman has a vested interest never to be wrong since he gets $1M a year or so, rumor had it, for blogging at NY Times; but what is Sumner’s excuse?) it’s because their hypothesis are not provably wrong, which is not science they are practicing but religion. They are so confident about how to spend other people’s money, but are poor themselves. Let’s face it (and I heard this from an economist who changed their career into another one, so they could do an honest day’s labor and make more money too): economics is fashion. It’s B.S. It’s metaphysics. There’s no ‘there, there’, like Oakland where Scott wants to retire. Scott is not peddling anything but snake oil. Happily, as others have noted, nobody is buying his wares. He only has this crummy group as his finest accomplishment. Remember, this is a guy who buy his own admission does not do much debate except though this blog. Imagine that, he’s in the proverbial basement and this is his finest work? Rubble.

    Oh, Merry Christmas.

  6. Gravatar of ssumner ssumner
    24. December 2014 at 19:24

    Ray, You asked:

    “everybody bashing on Brazil-did you come up with your theories before Brazil had their latest economic difficulties or after? If you’re so smart, why aren’t you rich (like me)?”

    Umm, because we didn’t inherit a lot of money like you did?

    Or because we believe in the EMH?

    But If I was rich like you, I’d be out having fun, not spending all my time at the computer writing endless comments for an obscure blog, which just make all the other commenters roll their eyes at what a buffoon I am.

  7. Gravatar of ssumner ssumner
    24. December 2014 at 19:40

    Thanks JNCU, and Merry Christmas to you.

  8. Gravatar of Saturos Saturos
    24. December 2014 at 22:56

    Noah Smith is skeptical about the effects of taxes on labor supply: http://www.bloombergview.com/articles/2014-12-24/do-higher-taxes-make-us-work-less

  9. Gravatar of Saturos Saturos
    24. December 2014 at 22:56

    Merry Christmas, Newtonmas, and a Happy Winter Solstice to all Moneyillusioners!

  10. Gravatar of Benjamin Cole Benjamin Cole
    25. December 2014 at 02:35

    Well, as a Market Monetarists, free-market types, yes I agree with this post.

    Still, I have an uncomfortable feeling whenever anyone cites a nation-snapshot and then says “See? That’s what happens when you do (or don’t) follow my ideas.”

    The USA boomed-boomed-boomed in the 1960s with a top 90% MTR, Big Unions, Big Steel, Big Retailers, Big Auto, No Internet, heavily regulated finance industries (remember Reg Q and stockbroker commissions?) and heavily regulated telecommunications (AT&T), and very heavily regulated transportation (trucking, railroads and airlines, rate-regulated and route regulated). And very small foreign trade.

    It was Fat City baby.

    I would argue against all the tax rates and regulations of the 1960s, and would argue against Big Labor etc, etc. etc. Yet the nation increased real per capita incomes by one-third in 10 years.

    China has boomed by exporting and printing money. My guess is the Far East nations have prospered by following game plans far removed from free markets. State-sponsored exporting, perhaps forced saving and close government-industry relations and printing money.

    Can anyone visit Detroit and really say this is better than 50 years ago? So is free trade really always a positive?

    Like I say, I am a free marketeer, Market Monetarist. But citing a snapshot here or there and saying “See, that proves my point!” has always struck me as a type of cherry-picking.

    Unfortunately, as it leads to great gobs of arguments and blurriness, I think it is the long sweep of economic history that supports free markets and Market Monetarism, and yet there may be a contradiction between free markets and MMism, just as there is between pollution and free markets, or perhaps health care (which many regard as a moral issue) and free markets.

    But dudes, explain the 1960s.

    And happy holidays to all my fellow MM’ers! In the end we will prevail by sheer verbiage! (Well, maybe we will get shouted down by the gold nuts and Austrians, but I believe we can mount bigger megaphones.)

  11. Gravatar of Ashton Ashton
    25. December 2014 at 02:56

    Another off-topic question, but this has been confusing me recently and I’m not by any measure an economist.

    Is it possible for a financial crisis to push an economy into recession? Financial crises can obviously depress aggregate demand, as we saw in 2008, but it feels like you need a bad monetary regime to be complicit in *allowing* the crisis to depress AD – and judging by your criticism of Bernanke’s idea of disintermediation, you’d agree too.

    So, if we were to follow an NGDPLT regime – which obviously avoids nominal shocks by definition – could a financial crisis provoke a Recession somehow? Is there some “real” aspect to financial crises which I’m missing.

    Also, just as another point of interest, how does NGDPLT help with problems which are “real” – like supply shocks or policy failures or whatever?

  12. Gravatar of ssumner ssumner
    25. December 2014 at 06:50

    Saturos, Thanks, I’ll do a post on that.

    Ashton, You said:

    “Financial crises can obviously depress aggregate demand, as we saw in 2008,”

    Actually it was a tight money policy at the Fed that caused the 2008 recession.

    NGDPLT is ideal for real problems like supply shocks. It prevents the real problem from spilling over into a much worse demand-side problem. Between January 2006 and April 2008 housing construction in America fell in half (a real problem), and yet unemployment was almost unchanged. That’s because monetary policy was reasonably effective during that period.

  13. Gravatar of ssumner ssumner
    25. December 2014 at 06:51

    Ben, Detroit lost out because the auto factories moved to cheaper southern states. Trade was not the main problem, we still build lots of cars.

  14. Gravatar of Prakash Prakash
    25. December 2014 at 07:11

    Benjamin, Doesn’t a good deal of the US’s dominance of that period owe to the fact that it was probably the most prominent industrial country unscathed by WWII?

    Happy Winter Solstice to all the northern hemisphere-ites, Happy Summer Solstice to southern Hemisphere-ites (I can only remember Lorenzo! 🙂 ) , Merry Christmas to the Christians and Happy New year to Everyone!

  15. Gravatar of W. Peden W. Peden
    25. December 2014 at 08:33

    Merry Christmas, Scott. It’s been an impressively successful year for you.

  16. Gravatar of Ashton Ashton
    25. December 2014 at 08:52

    I wasn’t trying to argue that the crisis caused the recession, I was saying it worsened a recession which was already ongoing by *further* depressing aggregate demand.

    I was merely wondering if it’d be possible to have a financial crisis so bad – even with NGDPLT – that it’d result in a serious recession.

  17. Gravatar of Jorge Larangeira Jorge Larangeira
    25. December 2014 at 09:50

    You are, of course, correct that President Rousseff’s “heterodox” economic experiment has been one gigantic fiasco, leading to a collapse in growth and investment, and surge in inflation and public sector debt. By appointing a Chicago-trained economist to the Fin Min in her second term, Rousseff tacitly acknowledges this grand failure. The policies of the first term, however, were never Keynesian in any sense of the word– whatever the government may have claimed– and, to my knowledge, never championed as such by Paul Krugman. Indeed, countercyclical fiscal policy of Keynesian flavor would have required sharp fiscal contraction from 2010 onwards when, by any metric, the Brazilian economy was dangerously overheating. By contrast, even on the right Rousseff generally earns plaudits for her income transfer policies– which, in fact, began before her party rose to power. In matters economic, I am mildly sympathetic to the Keynesian worldview and believe the Great Recession can be adequately explained under a Keynesian framework. Brazil under Rousseff, however, is closer to Austria circa 1920’s and, as such, better described by doctrines espoused by Hayek et al.

  18. Gravatar of Daniel Daniel
    25. December 2014 at 09:50


    Ask yourself – what happens when the demand for something remains constant, while the supply drops ?

    Now ask yourself this – what happens when aggregate demand remains on its trend (thanks to NGDP targeting) while aggregate supply falls below trend (because it’s a recession, in your scenario) ?

  19. Gravatar of Becky Hargrove Becky Hargrove
    25. December 2014 at 09:54

    Merry Christmas, Scott, and of course Happy Holidays to all!

  20. Gravatar of cassander cassander
    25. December 2014 at 16:46

    >But dudes, explain the 1960s.

    Easy. the 90% marginal rate was meaningless, because the pre-86 code had more exemptions and deductions, and the 90% rate only applied to incomes above 300k, 2.3million in todays dollars.

    There was more regulation of some industries, like trucking, but less of others, like manufacturing. There was basically no environmental regulation, no AA, no OSHA, etc. etc.

    Detroit didn’t die because of free trade, it died because of godawful governance. there were more than a million people living in the city as late as 1990.

    As for unions, the trouble with them isn’t so much high wages as work rules. I garuntee you the contract the UAW signed in 1960 didn’t look like this.

    I could go on, but you get the point. in the 1960s, the new deal state was still pretty new still relatively free of cruft. despite a few high profile removal campaigns, we have picked up vastly more cruft since then.

  21. Gravatar of Jon Jon
    25. December 2014 at 18:18

    Saturos… a couple points against Noah:

    – Higher tax rates improve creative tax avoidance

    – Noah discusses jobs with minimum hours, etc. Noah has in mind the median worker. Yet… 70% of income tax revenue comes from the top quintile. I daresay things work a bit different up there–including substantial opportunity to vary time spent working, different kinds of work, composition of income, etc. As group we are also well above subsistence, more leisure is a choice we can make. etc, etc.

  22. Gravatar of Benjamin Cole Benjamin Cole
    25. December 2014 at 18:37

    Cassander, Prakash and Scott S.:

    Maybe so.

    But nations and regions with strong industrial bases always seem to prosper, ala China currently, and Far East nations one after the other. Indeed, Japan began faltering when the yen became so strong that exports were harder. This has been going on in the entire post-war period. Is there a nation with a strong prosperous industrial base that is in decline?

    So after 60 years, can we draw some conclusions about having a strong industrial base?

    My point is what I said: Snapshotting a nation or region and claiming victory in an economic debate is dubious. A snapshot of the USA in the 1960s reveals fantastic increases in per capita incomes and health and welfare. And a nation doing “everything wrong.” High taxes, onerous regs, in general.

    But hey, I like Market Monetarism, and an expansionary monetary policy, and low taxes, and the lightest regs possible (although pollution should be taxed).

    But I do not think I can build a case by snapshooting a nation.

    Add on: China has boomed-boomed-boomed for 20 years, with the CCP directing economic development, forced savings, and sponsored export manufacturing industries.

    Not my way—but can we so breezily say the Chinese have been wrong?

    Or, are their aspects of economic development and progress we are blind to?

  23. Gravatar of dtoh dtoh
    25. December 2014 at 18:37

    Jon, Saturos,

    What Noah and almost everyone ignore is the impact of asymmetric returns on capital (a few winners and a lot of losers… especially start-ups.) This results in small changes in the tax rates having a hugely amplified impact on expected after tax returns.

  24. Gravatar of dtoh dtoh
    25. December 2014 at 18:42


    You said, “As for unions, the trouble with them isn’t so much high wages as work rules. I garuntee you the contract the UAW signed in 1960 didn’t look like this.”

    Excellent point. Over the years, I have had a lot of discussion with the biz dev guys at Toyota who are responsible for overseas investment. The one thing they consistently said, was that the quality and skills of workers was much higher in Michigan than elsewhere and that they would happily pay higher wages, but there was absolutely no way they would invest in a location where the unions told them how to run the business.

  25. Gravatar of cassander cassander
    25. December 2014 at 19:18

    >So after 60 years, can we draw some conclusions about having a strong industrial base?

    A few petro states aside, I’m not sure how “having a strong industrial base” is different from “being a developed country.” And while I agree that being rich is a good recipe for being rich, I’m not sure how useful that lesson is.

    >High taxes, onerous regs, in general.

    but that’s my point. high taxes and onerous regs compared to what? Compared to the 20s? absolutely. but compared to today? taxes as a share of GDP haven’t budged since the korean war. regulation is harder to measure, but there is unquestionably more of it today than there was back then, at least in terms of sheer number of words. the level of restriction is higher than then is at least arguable. in some areas, like environmental regs, the 60s look like a libertarian paradise compared to today.

    >Not my way””but can we so breezily say the Chinese have been wrong?

    the CCP has let capitalism flower in the coastal regions and SEZs, and then they’ve taken a big chunk of the surplus that generated and used it to prop up the old communist economy that’s still running in the provinces. From a purely economic pov, obviously they’d be better off just letting capitalism spread everywhere, but if the hybrid is what it takes to buy enough political peace within the regime to prevent it from strangling the capitalism (this certainly was the case in Deng’s day, now I don’t pretend to know either way), I’m happy with it.

    My concern is not so much that they have done wrong, but that the hybrid will continue to prove successful enough that they’ll keep pushing off the hard task of mustering the political will start winding down the communist economy, and eventually that enormous bubble will burst. Mind you, I’m not predicting that will happen, I don’t follow closely enough to judge, it’s just what my org theory background leads me to instinctively fear.


    >, Doesn’t a good deal of the US’s dominance of that period owe to the fact that it was probably the most prominent industrial country unscathed by WWII?

    massively overrated as an explanation. that can explain the US share of world GDP (damn near 50% in the late 40s), but not US growth after 1950.

  26. Gravatar of ssumner ssumner
    25. December 2014 at 20:14

    Ashton, I think it’s possible, but extremely unlikely in a Country like the US. I don’t know of any examples in US history.

    Jorge, I doubt Hayek would have approved.

    Ben, I agree that countries have good and bad periods, and all judgments are provisional. regarding industrial production, I recently did a post showing that IP has grown much faster in the US than Europe or Japan.

  27. Gravatar of Ray Lopez Ray Lopez
    25. December 2014 at 20:57

    @EVERYBODY… what a bunch of uniformed people. For crying out loud, please GOOGLE stuff before you respond. Wow.

    Cole asks why the USA in the 1960s ‘boomed’. It’s vague as to what he means, but arguably he is referring to either the USA’s higher growth rate back then, or, USA’s world share of GDP. Re the former, it’s well known that the USA entered a productivity slowdown after the early 1970s–Google this–causes unknown but I say due to Keynesianism, Great Stagnation thesis, and weak patent laws. Re the latter, it’s false that the USA has really changed much, see this link: http://mjperry.blogspot.com/2009/11/us-share-of-world-gdp-remarkably.html (by a GMU econ graduate, Mark J. Perry, it shows, surprisingly, that US share of real world GDP has stayed constant since 1970 to now, at about 26%; other regions have increased their share, like Asia, and others, like the EU15, have lost market share).

    This is yet another example of how “group think” works in this newsgroup. One person says something silly and the others pile on the trend. Little independent thinking except from a few like Major Freedom, I and a few others I will not name since the rest of the group will turn on them like a flock of angry birds.

    @Sumner – don’t worry about me, I have a beautiful girlfriend here in the Philippines less than half my age. As for inheritance, it’s true that most of my north of $10M USD fortune is an intestate share (inherited), but I also made north of half a million (I round it to 1M) by working as a engineer and now semi-retired as a online small business owner. And I ‘lived large’ while I worked, buying the fanciest clothes, best cars (BMW 3-series five speed manual was my favorite), renting the nicest apartments (always at or over $2k a month in rent for a studio), fine food ($100 a plate, I paid for the whole table, starred Michelin eatery), but no steady girl though, hard to find a decent one that’s not obese in the USA even for a handsome guy like me. One year I made close to $100k (in the 1990s, when that was worth more than now) and yet saved nothing for the year, in fact I was slightly in debt. How you doing? The only thing I envy about you Scott is that I recall reading somewhere that you have kids; I’m working on doing that. I would suppose you probably favor a large inheritance tax, since you favor consumption over savings and deferring consumption until the next generation. Typical American mindset: leave nothing to the kids, eat all your savings and die broke. Nice.

  28. Gravatar of Major.Freedom Major.Freedom
    25. December 2014 at 23:07

    “If you’re so smart, why aren’t you rich (like me)?”

    “Umm, because we didn’t inherit a lot of money like you did?”

    “Or because we believe in the EMH?”

    These rhetorical questions imply that NOT believing in the EMH is a requirement to becoming rich if you start out not having inherited riches.

    Glad that has finally been admitted.

    Those silly hard working entrepreneurs who have become rich, believing it had something to do other than not being a lazy moron who gets lucky throwing darts at a stock market investment target.

    You heard it here folks. EMH is not a descriptive model of markets, but is rather a prescriptive model the use of which will prevent you from becoming rich.

    Why am I poor? Because I believe in EMH!

    It is apparently never because you’re lazy and/or stupid. That would be too rough on the ego.

    Inherit or luck. Those are your choices.

    But how did those families become rich in the first place that enabled one generation of parents to give riches to the next generqtion?

    It is luck that explains everything. The stupid and lazy person is poorer than the intelligent and hard working person because of luck.

    Why does anyone go to school at all? We can all be unintelligent and throw darts all day.

  29. Gravatar of benjamin cole benjamin cole
    26. December 2014 at 00:35

    Cassander–every large company in China is controlled by the CCP. Even publicly held companies are controlled either through voting stock or board seats. The CCP controls their central bank. I would say the CCP has controlled Chinese economic development for 20 years and done a stellar job.
    It ain’t my way—maybe it works better than my way.

  30. Gravatar of Daniel Daniel
    26. December 2014 at 02:18


    One year I made close to $100k (in the 1990s, when that was worth more than now) and yet saved nothing for the year, in fact I was slightly in debt.

    And that is your claim for being a member of the elite ? That at one point in time you managed to have an upper-middle class income ?

    I have a beautiful girlfriend here in the Philippines less than half my age.

    Ignorance is bliss, do you actually think she wants you or your money ?

    best cars (BMW 3-series)

    Ummm, you do realise the 3-series used to be their entry-level models, right ?

    No wonder you and Major_Moron get along so swimmingly, you’re both retarded and deluded.

  31. Gravatar of Ray Lopez Ray Lopez
    26. December 2014 at 03:00

    @Daniel–reeding comprehension is not your forte, troll. I told you I made less than $1M from working, and a lot more from inheritance (DC area real estate if you must know; thanks Big Government rent seekers, you made me and mine rich). Of course she’s in love with me. And I like the 3-series, it’s fun to drive as it has manual. The 5 and 7 series are not as fun. BTW, how is the cancer coming? LOL I don’t have that power, but I do know people who do have the power to curse you, like S. King’s horror book Thinner, and it seems to come true.

  32. Gravatar of Jorge Larangeira Jorge Larangeira
    26. December 2014 at 03:33

    To clarify my previous post, Brazil under Rousseff has not been an experiment in Keynesian economics. Keynesian policies would have required fiscal tightening at some point. And no one, not even on the right, finds fault with income distribution policies that reduced Brazil’s notoriously high inequality (and which Krugman rightly praised). Brazil under Rousseff bears closer resemblance to Austria or Weimar Germany in the 1920s: soaring inflation, dilapidated public finances, relentless government intervention, etc. In other words, the kind of economic chaos that made young Hayek take a hard a turn right and produce a scathing critique of state-led economic development. My second point is that, in Latin America, one can be be excused for embracing crackpot Austrian-type doctrines– not out of any inherent theoretical superiority of said doctrines, but out of sheer despair!

  33. Gravatar of Mike Sax Mike Sax
    26. December 2014 at 08:41

    The last few years also haven’t been too kind to Supply Side econ at least not in Kansas.


    It turns out that big tax cuts really do reduce revenue.

  34. Gravatar of Steven Kopits Steven Kopits
    26. December 2014 at 09:21

    Brazil boomed because demand for its exports boomed. These included, in order:

    – iron ore
    – petroleum (although the country remains a net importer)
    – soybeans
    – sugar
    – poultry
    – soybeans
    – coffee
    – corn
    – and then (after aircraft and cars), woodpulp, gold, tobacco, fruit juice, and ferroalloys

    Now, if you look at the source of demand growth over the last decade for all these commodities, you will find that China provides 50-70% of the direct demand growth, and 70-100% including indirect demand growth (eg, demand growth from a Vietnam benefitting form exports of, say, clothing to China).

    As the Chinese market has cooled, the value of these exports has also cooled. And therefore, they are no longer propping up a Brazilian economy that is not really well-managed. In other words, a slowing of the Chinese economy is exposing weakness in the Brazilian economy–as it has or will in Australia, Canada, and Norway. The difference is, of course, that these latter three countries are well governed, and Brazil is not.

    As for the Argentines, it takes some special talent to screw of up a country so blessed in natural resources. But that’s Argentina’s comparative advantage: screwing up their country.

  35. Gravatar of Mike Sax Mike Sax
    26. December 2014 at 10:37

    Dynamic scoring or no.

  36. Gravatar of Zack Zack
    26. December 2014 at 11:21

    Total Taxes/Government Spending as percent of GDP (federal, state, and local)

    1950: 22.3/22.2
    1960: 25.1/27.4
    1970: 27.0/31.6

    2012: 26.4/35.6


    And Cassander’s point about the lack of environmental regulations in the 50s and 60s is an important one that a lot of people seem to ignore in these discussions.

  37. Gravatar of E. Harding E. Harding
    26. December 2014 at 14:00

    Is there a nation with a strong prosperous industrial base that is in decline?

    -Mexico and Japan are both stagnant, and have been for over two decades.

  38. Gravatar of E. Harding E. Harding
    26. December 2014 at 15:48

    More evidence in favor of Indonesia replacing Brazil in the BRICS and South Africa being expelled:

  39. Gravatar of Saturos Saturos
    26. December 2014 at 16:37

    God, did they just pick Stephanie Kelton as CBC chief economist? Isn’t she an MMTer?

  40. Gravatar of ThomasH ThomasH
    26. December 2014 at 17:22

    It is an error to conflate government spending even “big” government spending with “Keynesianism,” as Scott seems to do in this passage: “Fortunately, after Keynesian economics makes a mess of things … ”

    Keynesian government spending financed by debt depends on the finding projects which have positive net present values under recessionary conditions — low discount rates and nominal prices that exceed opportunity costs for the inputs into those projects. Recessions expand the range of investments with positive net present values, but it is still possible to invest too much or in the wrong things during recessions just as during normal times. And of course investment in projects with negative net present values does not promote growth whatever the state of the macro economy.

  41. Gravatar of benjamin cole benjamin cole
    26. December 2014 at 19:04

    Your comment raises yet another complication. What is the value of clean air? In Los Angeles smog has been reduced by 95 to 98 percent some people say. I can remember when you could see the smog looking down a city block.

    If we impute a value to a cleaner environment, then have environmental regulations been expensive or provided huge benefits?

  42. Gravatar of Ray Lopez Ray Lopez
    26. December 2014 at 19:26

    The arch Keynesian Brad DeLong supports a gold standard! see below.


    Macroeconomic stability is:
    stable and predictable paths for total spending, the price level, and interest rates; hence
    a stable and predictable path for the velocity of money; hence
    (1) then achieved by a stable and predictable path for the money stock; and
    if (3) is secured by institutions, then expectations of (3) will generate the possibility of (1) and (2) so that if (3) is actually carried out then eppur si muove…

    Now there are two different institutional setups that can produce (3):

    a monetarist central bank committed to targeting a k% growth rate of the money stock via open-market operations [RL: SCOTT’S TARGET NGDP SCHEME WOULD ALSO FALL IN THIS CATEGORY]; or
    a gold standard in which a Humean price-specie flow mechanism leads inflating countries to lose and deflating countries to gain gold, tightly coupled to a banking system in which there is a reliable and stable money multiplier, and thus in which the money stock grows at the rate at which the world’s gold stock grows (plus the velocity trend).

  43. Gravatar of Zack Zack
    26. December 2014 at 20:08

    benjamin cole,

    Fair point. I’m sure most people would agree that many of these regulations have had benefits as well as costs. L.A. is a good example. Pittsburgh is another (at least from what I hear. I wasn’t around back then). For that matter, countries like China are dealing with some of these same questions now. I think there’s obviously a balance to be struck. Where to draw the line becomes a complicated discussion in its own right.

  44. Gravatar of Jon Jon
    26. December 2014 at 23:24


    She will be Bernie Sanders’s chief economist, and yes Bernie Sanders’s–the only socialist in congress–is the democrats ranking member on the senate budget committee.

  45. Gravatar of Ray Lopez Ray Lopez
    27. December 2014 at 01:10

    First, an apology. After reviewing the gold standard issue at various economist blogs, I see that a return to the Gold Standard is a sensitive issue (unbeknown to me, I thought it was pretty much settled that it’s not going to happen, though I think Paul Ryan and the Teabaggers have something to do with this; I don’t follow US politics anymore much). I did not realize this when I posted here. So, henceforth I will refrain from posting on the gold standard, unless it’s mentioned by our host.

    Second, I notice that when I hit the Enter key, a WordPress warning comes up that implies there’s moderation of posts? Anybody else see this? So perhaps Sumner now is moderating? I hope it’s not because of me. I’m very harmless, I just want the truth, that’s all.

    Anyway, I do see my previous post on Brad DeLong saying nice things about gold is up, so any moderation is not too censorious at the present. But no more talk about gold here, that’s my New Year’s resolution.

  46. Gravatar of Mike Rulle Mike Rulle
    27. December 2014 at 09:49

    As a moderately observant amateur in the macroeconomic political debates,I continue to be amazed at the lack of evidence based public debate. Of course I know it must exist in the various academic journals. From a continuum perspective, it seems that Hayek and Keynes (or what purports to be their arguments) are generally the two bookends of the capitalist debate. It has always made more intuitive sense to me to lean toward Hayek—which is millions competing, versus the accounting formulas of Keynes, which is the triumph of a accounting over human incentives.

    These are perspectives and theories,but arguing from each of those perspectives against the other is useless unless backed by the best empirical evidence each can provide. But even this is hard, because we do live in a nation where both methods or perspectives are present in real life. Still, it is worth the effort of empirical debate despite the ease of confounding. The inequality question is simply value differences. It does not matter to some if it creates less wealth for all because of their value views. But it would be useful to know what the facts are.

    I guess my point is I don’t really know if the Great Accountant and is acolytes are wrong or right, but I still lean toward more Hayek and less Keynes.

  47. Gravatar of Daniel Daniel
    27. December 2014 at 10:22


    You do know there’s much more to economics than Hayek and Keynes, right ?

  48. Gravatar of Major.Freedom Major.Freedom
    27. December 2014 at 14:20

    George Selgin on the 1920-1921 recovery:


  49. Gravatar of chris mahoney chris mahoney
    27. December 2014 at 15:10

    Elmendorf told us that ACA would reduce the deficit, which was nonsense on its face.

  50. Gravatar of Ray Lopez Ray Lopez
    27. December 2014 at 16:48

    @MF -thanks! This post by Selgin actually rebuts a point I made earlier, and it is much welcome. Earlier I had said that the Fed dropping of the discount rate in the spring of 1921 was perhaps a stimulus for the economy, but Selgin actually shows, consistent with how the Fed usually works, that the Fed’s actions were sterilized and in actually they had not much effect, with gold inflows from private parties doing the heavy lifting for recovery. Same as it always was. At best you can say the Fed, by cutting rates, gave a sort of ‘seal of approval’ or psychological boost to the market, nothing more. Fed is dead, market always wins.

  51. Gravatar of Major.Freedom Major.Freedom
    27. December 2014 at 18:50

    Real wages in Japan have crashed 4.3% yoy. Most in 21st century.

    Savings rate has turned negative, the first time this has happened since “official” records began in 1955.

    Abenomics FTW.

    Is there any other low inflation country that the psycho Monetareynesians have not “fixed”?

  52. Gravatar of cassander cassander
    27. December 2014 at 18:58

    if the GOP were smart, they’d keep elmendorf and futz with the budget process to rig the game in favor of spending and tax cuts. Unfortunately, they’re the GOP….

  53. Gravatar of Scott Sumner Scott Sumner
    27. December 2014 at 21:12

    Ray, I see your idiocy continues even when I am on vacation, accusing me of starting a policy of moderation out of fear of your persuasiveness. Is there no form of mental illness to which you are not prone?

    Then you claim that someone who favored consumption tax would also favor inheritance taxes. Always good for a few laughs.

    Mike Sax, I guess you haven’t read either of my recent posts on Kansas.

  54. Gravatar of Thiago Ribeiro Thiago Ribeiro
    28. December 2014 at 04:33

    When the “pro-markets” president Collor temporarily banned savings withdrawls (effectively freezing accounts and rendering their owners penniless), Castro joked about how Brazil had taken an unexpected shortcut to Communism and achieved a classless society before any other country. It can be argued that Brazil has taken an unexpected shortcut to the social-democratic paradise as well. Brazil boasts almost Scandinavian levels of satisfaction and dissatisfaction (a nice climate covers-and stimulates- a lot of sins). Take a look: http://www.gallup.com/poll/153818/nearly-one-four-worldwide-thriving.aspx
    Why would a people much happier than the notoriously rich (and studious, hardworking, competitive, conscientious and law-abiding) Singaporeans take the hard and uncertain road of economic reform? In fact, we are irrationally rational, it seems. Yeah, I know, I know, reform is imperative, the system will break down, but… “in the long run…”. (be fair, how many “imperative” reforms (social security, welfare, immigration, financial services, education come to mind) is the USA postponing to the Greek Calends? Taking the hedonic treadmill into account, Brazilians have little incentive to make big, painful reforms (in fact, “Brazilian exceptionalism” goes a long way toward explaining why a country with its economic disparities and a critical mass of far left intellectuals never got the Revolution said longed for- don’t tell me about the military rule, it didn’t stop the Vietcong and the Castros, and most Latin American guerrillas performed better than the Brazilian ones).

  55. Gravatar of Thiago Ribeiro Thiago Ribeiro
    28. December 2014 at 04:41

    Erratum: ” (…) never got the Revolution said intellectuals longed for (…)”


  56. Gravatar of Mike Rulle Mike Rulle
    28. December 2014 at 07:56


    There is much more than that I don’t know.


  57. Gravatar of Ray Lopez Ray Lopez
    28. December 2014 at 09:41

    Sumner: “Then you claim that someone who favored consumption tax would also favor inheritance taxes. Always good for a few laughs.

    Why is there necessarily a contradiction? If you favor a consumption tax, which rewards savings, how does that contradict favoring an inheritance tax? In fact, the two taxes would be an ideal way to increase taxes: you are taxed if you consume, and, if you don’t consume and save all your money, you are taxed when you die.

    BTW, Sumner is approaching Murray Newton Rothbard (March 2, 1926 – January 7, 1995) in his ad hominem attacks, that’s impressive! Seems only I and Major Freedom are civil.

  58. Gravatar of Scott Sumner Scott Sumner
    28. December 2014 at 10:09

    Ray, Standard tax theory says the optimal tax on capital income should be zero, hence the optimal inheritance tax is zero, as inheritance taxes tax capital income.

    Simple thought experiment. In the US a rich guy who spends all his wealth on wine, women, and yachts before he dies pays far less in taxes that a thrifty, generous guy who leaves most of his wealth to his children. And liberals love that state of affairs.

  59. Gravatar of TravisV TravisV
    28. December 2014 at 12:07

    “ECB’s Weidmann says German 2015 growth may be better than expected”


  60. Gravatar of Negation of Ideology Negation of Ideology
    28. December 2014 at 12:38

    Ray –

    ” In fact, the two taxes would be an ideal way to increase taxes: you are taxed if you consume, and, if you don’t consume and save all your money, you are taxed when you die.”

    Under a consumption tax, if you leave money to your children, it will be taxed when the kids consume it. Adding an inheritance tax is a double tax.

  61. Gravatar of Ray Lopez Ray Lopez
    28. December 2014 at 20:11

    @Sumner, @Negation of Ideology – thanks to both of you for your civil comments. I agree with both of you that the ‘optimal’ tax (Sumner) and the ‘fair’ tax (no double taxation) (Negation of Ideology) is indeed as you two propose. But you still did not address my point (“Why is there necessarily a contradiction?). To summarize: a dictator that imposes a consumption tax AND a death tax is not being inconsistent. He is ‘screwing’ you, the owner of capital and wage earner. But he is getting what he wants, which is more taxes, at least short term. True, it’s not “optimal” in that in a more better “zero tax on capital” world, he could allow the pie to grow bigger, and, in this alternate universe world, get even more tax long term, but that line of thinking is constrained by Bounded Rationality as well as history. Think of this last point this way: if Communism is irrational, as is genocide, as they are, then explain the USSR and Hitler? Bounded rationality, and path-dependent outcome, and initial conditions. But that’s a topic for another day.

    Finally, please, raise your game. You’re conversing with somebody in the 1%, that, at his peak (sadly, probably not true anymore with age) tested nearly 140 in IQ.

  62. Gravatar of Philippe Philippe
    28. December 2014 at 21:04


    “Standard tax theory says the optimal tax on capital income should be zero”

    That conclusion is rejected by Diamond and Saez (2011):


  63. Gravatar of Negation of Ideology Negation of Ideology
    28. December 2014 at 22:40

    Ray –

    “Finally, please, raise your game.”

    I’m not playing any game. I don’t think of this as a contest. I’m not debating you or anyone else. If someone says something and I want to ask them a question or point something out I do so. I like to learn from other commenters. If someone says something I haven’t thought of I am happy. If they point out something and I change my mind, I don’t think of it as “losing”. If they change their mind, I don’t think I “won”.

  64. Gravatar of Ray Lopez Ray Lopez
    29. December 2014 at 01:46

    @Philippe – thanks good paper, and supports what I say about it being OK to tax the rich, in the next thread.

    @Negation of Ideology – you are naive. Sumner is not here to educate you or engage in debate, I found this out early when I stopped lurking and started posting. Sumner from the next thread: “Ray, I assume educated readers already know this stuff, that’s why I don’t provide sources. This blog isn’t aimed at people like you.”

    There you go. Sumner wants an echo chamber, not academic debate. Fair point, since outside of Nick Rowe I doubt any serious academic reads this blog.

  65. Gravatar of Edward Edward
    29. December 2014 at 09:57

    That paper is unbelievably bad. The assumptions contained within are questionable, even more so than the assumptions used by zero capital income tax people
    I’ll leave it to Scott to go into specifics

  66. Gravatar of Edward Edward
    29. December 2014 at 10:05

    But I also think its helpful to examine the assumptions used in life cycle literature of infinitely long lived benevolent dynastically minded individuals and to think of it less as DESCRIPTIVE and more as PRESCRIPTIVE.

  67. Gravatar of Philippe Philippe
    29. December 2014 at 10:35

    why do you think it is unbelievably bad? I’ve only read the part on capital income taxation.

  68. Gravatar of Scott Sumner Scott Sumner
    29. December 2014 at 21:34

    Ray, I used to be smart too. Time takes a toll on all of us.

    Philippe, I’ve posted on Saez, you can check my search box. Of course whenever there is a standard view on something in economics, there will always be dissenters, but that doesn’t mean it isn’t the standard view.

  69. Gravatar of Philippe Philippe
    30. December 2014 at 02:43


    what do you think of this, from Robert Waldmann:

    “Abstract. It is well known that, in standard growth models, the optimal tax on capital income goes to zero asymptotically. Even some serious economists (cough Glenn Hubbard cough) seem to have decided this means that capital income taxes should be eliminated right now. However, asymptotically we’ll all be dead. One can tell more if one looks at the simplest cases of standard growth models: an aK model with optimizing consumers who have logarithmic utility or a Cass-Koopmans model with Cobb-Douglas production and logarithmic utility (OK that was wonky but it’s about assumptions so I have to be honest). Consider such an economy in which the distribution of wealth is unequal at time 0. A utilitarian state would want to redistributed income. The first-best best way to do this is with a lump sum transfer. Let’s rule that out by setting an upper limit on the tax on wealth (or an upper limit on the tax on capital income). What is the best policy?

    The best policy would be to tax capital income at the maximum allowed by the assumption and use the revenues to reduce inequality until perfect equality is achieved. After perfect equality is achieved, there is no more reason to tax and taxes are zero. Thus, as noted above, the optimal tax goes to zero in the long run. The reason is that it is optimal to tax as much as is allowed by assumption so long as there is any reason at all to tax. Then stop.
    A simple minded application of the model to policy would suggest that we should tax as much as we can until everyone is perfectly equal. Now the model is not the world and this would be a terrible policy. However, the argument for roughly the opposite policy is based on the same silly model plus totally turning its implications upside down by pretending that time has already gone to infinity.

    The assumption of logarithmic utility is not at all innocent. It makes a huge di􏰀erence. A more general assumption (which is standard in the literature) is constant elasticity of substitution utility. In this case the optimal policy depends on the intertemporal elasticity of substitution of consumption *and* on whether the state can pre-commit to a policy that it would like to change later if it could.

    If the state can’t precommit, the implications are just like those for loga- rithmic utility described above: tax as much as possible so long as there is any reason to tax at all, then stop when everyone is perfectly equal.
    With precommitment, if the intertemporal elasticity of substitution is less than one (as are all empirical estimates of said elasticity) the result is to tax even more, that is to tax as much as possible until the initially rich are as poor as the initially poor, then tax them some more.

    These conclusions follow from analysis using standard techniques of the simplest case of the standard model. I think that they are not noted in the lit- erature. I conclude, as always, that to the economics profession mathematical analysis of stylized models is taken seriously exactly so long as the conclusions fit the prejudices of economists. Thus when an economist says “Mathematical analysis which you wouldn’t understand of my model shows that X is a bad policy” you should hear “I don’t like X.”


  70. Gravatar of Scott Sumner Scott Sumner
    30. December 2014 at 08:41

    Philippe, If the trade-off is a one-time lump sum capital levey for no tax on investment income going forward, I’ll do that deal in a heartbeat.

    The other argument is that lots of models are possible, but the burden of proof should be on those who claim future consumption should be taxed at a higher rate than current consumption, just as we’d place the burden of proof on those who insisted that strawberries should be taxed at a higher rate than blueberries.

  71. Gravatar of Benny Lava Benny Lava
    31. December 2014 at 11:59

    Benjamin Cole,

    Don’t forget about wage and price controls that lasted until the late 70s.

  72. Gravatar of Matt Waters Matt Waters
    31. December 2014 at 14:48

    “Brazil has the most time-intensive business tax code in the world. It takes 100+ days to start a business, though it’s not too costly. Getting a business construction permit takes 400 days. Tax rates are agreed to be the greatest business constraints by local businesses.”

    I have a hard time tracking why this sort of stuff happens in third-world countries, and even more importantly what’s the way to fix it. I don’t mean “fixing it” in terms of what rules to change, but how to change the political economy that created the rules and corruption.

    Certainly you look at Sachs, Diamond, etc. and their arguments are just catastrophically bad. Easterly is more interesting, but his solution of just letting third-world nations figure out things leaves me unsatisfied. If Diamond is right that third-world countries are third-world because of ecological reasons, then does that mean we’re just supposed to wait a thousand years or so for the agriculture and institutions to develop? It all leaves me very unsatisfied.

  73. Gravatar of Jorge Larangeira Jorge Larangeira
    3. January 2015 at 09:59

    While debates over policy in the ZLB rage in the econ blogosphere, I thought this little nugget might be of interest:


    Its a strory about the minimum wage “adjustment” in Brazil. In the last four years (president’s Rousseff’s first term), the rule was that minimum wages were adjusted once a year by the previous year’s inflation (real rigidity), plus the GDP growth of the year before last. In effect, a real *gain* every year (unless GDP contracted). With Brazil’s economy in a tailspin and the government vowing to tighten the belt, the rule was set to be changed this year. Indeed, only yesterday one of the cabinet members announced revisions to the rule that would make it less generous. But president Rousseff, fearing backlash from the unions, backtracked and decided to keep the rule as is. So Brazil is perhaps the only country where, not only nominal wages are rigid, but also real wages and even real gains are enshrined in law!

  74. Gravatar of TallDave TallDave
    3. January 2015 at 15:35

    What’s really surprising is that poverty, as measured by most organizations today, is actually a measure of income inequality. (If you want to amaze and confound someone not in the field, ask them if a country with a consumption floor of $100K in real dollars can have a lot of poverty.) It’s sort of the old joke about Communism being hardest on the poor.

  75. Gravatar of TallDave TallDave
    3. January 2015 at 15:38

    Matt Waters — Acemoglu is a lot more interesting on that question imho. DeSoto, too, though iirc he’s less prescriptive and more descriptive.

  76. Gravatar of Zamba Zamba
    7. January 2015 at 14:50

    Jorge Larangeira,

    I agree with you when you say that Brazil didn’t used keynesian economics, at least when it comes to Krugman-style keynesianism. The thing is that we have lots of post-keynesians here. They are overrepresented in Brazil in comparison with the world. Dilma did grad school in economics (although she hasn’t finished it) at UNICAMP (hub of post-keynesians), and many of the Workers’ Party economists share her views. They don’t believe in equilibrium or countercyclical policies. It’s about boosting agregate demand, mainly.

    This lenient view of inflation cost us a lot, in my view, since Kubitschek in the 50s, all the way through the military regime (apart from Castelo Branco), and into late 80s and early 90s democracy. The Real Plan changed the macroeconomic model until Dilma tried to revisit some failed policies. The good news is that we now have antibodies to this kind of macroeconomic arrangement. It took just one mandate of 1950s revival and the system showed some resistance. And as Scott pointed out, there is always a Chicago Boy out there to fix the mess.

    Ray Lopez,

    You’re insane bro…

    Hugs to y’all


  77. Gravatar of Derivs Derivs
    12. January 2015 at 09:43

    I love Brazil, but it is just a giant cesspool of corruption, that benefited by an enormous upmove in the CRB, and like most ‘commodity’ countries, failed to use this time to diversify industry and their economy. So now with commodities dropping, Brazil is in deep trouble.

    But it’s 40+ degrees, inflation is only 6.5- 7%, which for a Brazilian is almost 0. The beers are cold, the samba is starting, and the visuals on the beach are wonderful… so who cares!

  78. Gravatar of Brazilian Brazilian
    7. September 2015 at 06:06

    Well, the situation in here is even worse now. Keynesians did harm everywhere you look. Krugman should be ashamed of himself.

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