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O "terraplanismo econômico" do André Lara Resende — Transcript

by Frederico Krepe · 7,720 words · 1,368 segments · language en · Watch on YouTube

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0:00Hey everyone, how are you doing? I hope
0:02you're well.
0:03André Lara Rezende presented a proposal
0:05to reduce interest rates in Brazil and
0:07sparked a huge reaction in the economic
0:09and political debate, as well as in the
0:11press, especially after news broke that
0:13this proposal had caught the
0:14government's attention.
0:16I want to explain what he proposes,
0:18present some criticisms, and discuss why
0:20I consider the diagnosis important, even
0:22though I disagree with the solution.
0:24This discussion also says a lot about
0:25the poverty of our economic policy
0:27debate in Brazil. So let's talk a little
0:29bit about that.
0:41Before I continue, I want to introduce
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1:59and take a look, okay? So let's get to
2:01the subject of the video. Well folks,
2:02the starting point here is the article "
2:04I Accuse: a proposal to eliminate absurd
2:06interest rates," which was published by
2:08Lara Rezende on his Substack. And he
2:11begins by challenging a narrative that
2:12dominates a good part of the economic
2:14discussion in Brazil, which is that the
2:16country is in a situation of fiscal lack
2:18of control and that practically
2:19everything is subordinate. That is, a
2:21major fiscal adjustment in public
2:23spending, in primary expenditures.
2:26And so the recommendation appears all
2:28the time: cut spending, make a
2:29structural adjustment, slash expenses,
2:31uh, de-index pensions and social
2:33benefits from the minimum wage. And
2:35André Lara Rezende draws attention to a
2:37fundamental issue, because when we look
2:40at the budget, we need to separate our
2:42view of the primary result from the
2:44nominal result of public accounts.
2:47The primary result compares government
2:48revenues and expenses without including
2:50the interest bill, while the nominal
2:52result incorporates that account.
2:55So you can have a primary result close
2:57to equilibrium and, at the same time, a
2:59high nominal deficit due to financial
3:01expenses.
3:02And this is the core of his diagnosis
3:04for Brazil. When you look at the primary
3:07deficit, we see that it is relatively
3:09small, but the interest bill turns the
3:12nominal result into a much bigger
3:14problem. That is why the explanation
3:16that everything stems from an excess of
3:18primary spending leaves out a decisive
3:21part of the issue. Take the numbers he
3:23uses in the article: a gross debt of
3:26approximately 82.5%of GDP and an average
3:30cost of 12.68%per year.
3:32The calculation presented by Lara
3:35Rezende represents an annualized
3:37interest expense of close to 10.5%of the
3:40Brazilian GDP.
3:42It is a calculation of the cost to carry
3:44that debt stock, and the problem gets
3:46bigger when this cost is persistently
3:48higher than the nominal growth of the
3:50economy, which combines real growth and
3:52price changes.
3:54Think about the relationship between
3:55debt and GDP, right? If debt increases
3:57faster than the size of the economy,
3:59this ratio comes under upward pressure.
4:02Even an improvement in the primary
4:04result can have a limited effect given a
4:06very large gap between the cost of debt
4:07and economic growth.
4:10Therefore, when someone presents
4:11spending cuts as the main answer, they
4:13also need to explain what they intend to
4:15do about interest rates.
4:18You can compress public policy and cut
4:20investment while preserving a financial
4:22expense that continues to put pressure
4:24on public debt.
4:26And the effects go beyond the budget.
4:28High interest rates make credit more
4:30expensive, hinder consumption,
4:31discourage investment, and at the same
4:33time, debt remuneration is concentrated
4:35in wealthier segments of the population
4:37. There is an important distributive
4:39dimension to this economic policy choice
4:41. So, how does he intend to face this
4:43problem?
4:45The proposal involves a change in the
4:46organization of fiscal and monetary
4:48decisions with the creation of the CFMN
4:50, which would be the National Fiscal and
4:52Monetary Council.
4:53And this council would define goals for
4:55a horizon of 4 to 5 years.
4:58And inflation targets would be announced
5:00along with interest rate parameters, and
5:01the Central Bank would start operating
5:03the base rate within this predefined
5:05framework.
5:06The proposed rule sets the Selic rate
5:11and the economy's potential nominal
5:13growth.
5:14And in the figures he presented, the 3%
5:17inflation target would act as a floor
5:19and a potential nominal growth of around
5:225.5%would serve as a ceiling.
5:24To reach this regime, there would be a
5:26transition period. The Central Bank
5:28would gradually reduce the SELIC rate
5:30over approximately 12 months to near 7.5
5:32%per year.
5:34And this rate would include a temporary
5:36safety margin of two percentage points
5:38above that 5.5%ceiling.
5:41Later, the margin would be reevaluated
5:43and reduced until it disappears.
5:44Operating outside this range would
5:46depend on exceptional authorization from
5:48this new council. So, the proposal
5:50establishes an announced direction for
5:52interest rates and institutional
5:54coordination aimed at sustaining this
5:56path. An important element is the
5:57composition of the Brazilian debt.
5:59Treasury financial bills, or LFTs, have
6:01remuneration linked to the SELIC.
6:04That is why a reduction in the base rate
6:06quickly lowers the cost of a significant
6:08portion of the debt.
6:10For other securities, this transmission
6:12happens more gradually, as refinancing
6:14occurs.
6:16Lara Rezende calculates that reducing
6:18the average cost of debt could produce
6:20fiscal savings of approximately 4%of GDP
6:22per year once the lower rates take
6:23effect.
6:25And these savings would help reduce the
6:27nominal deficit and improve the debt
6:29trajectory. It is an attempt to face
6:31this imbalance and the pressure of
6:32rising debt through financial costs,
6:34rather than focusing the entire response
6:36on primary expenses.
6:38He also acknowledges that falling
6:40interest rates could trigger capital
6:41flight and pressure on the exchange rate
6:43, and the proposal is to use
6:45international reserves to cushion
6:46sharper depreciations.
6:48In his assessment, the stock of reserves
6:50would provide the conditions to manage
6:51the transition. So there are pieces that
6:54need to work together.
6:56Coordination between policies, the
6:58announced reduction of interest rates,
6:59the effects of debt composition, and
7:01action on the exchange rate.
7:03The expectation is to improve public
7:04accounts without a persistent
7:06acceleration of inflation.
7:08But why does he consider that a
7:09reduction of this magnitude could happen
7:11without causing a rise in prices, a rise
7:13in inflation?
7:14To understand this part, we need to
7:16delve into the theoretical foundations
7:17of this proposal.
7:19So, many people immediately associate
7:21any argument from Lara Rezende with
7:23Modern Monetary Theory, or MMT, because
7:25André Lara Rezende has leaned toward MMT
7:27recently; he has been promoting some
7:29ideas, debating with some MMT authors,
7:31and has engaged with different schools
7:33of thought throughout his career, but
7:35that doesn't mean all the arguments he
7:37puts forward have the same foundation.
7:40In this article, the central reference
7:42is the fiscal theory of the price level
7:44, especially in John Cochrane's
7:45formulation, and the discussion
7:47regarding so-called neo-Fisherianism.
7:50The fiscal theory of the price level was
7:51actually developed within contemporary
7:53orthodox macroeconomics, folks.
7:55And this is important because a critique
7:57needs to start with the argument that is
7:58actually being presented.
8:00If a person responds as if they were
8:01facing a generic defense of MMT, they
8:03are already discussing something else
8:05entirely.
8:06So I’m going to try to explain the logic
8:08here a bit, without turning the video
8:10into an exposition of equations or
8:12boring you with more abstract issues.
8:15It’s like this: this fiscal theory of
8:17the price level attempts to explain the
8:18determination of an economy's general
8:20price level based on the relationship
8:21between government liabilities—that is,
8:23what the government owes—and its future
8:24fiscal capacity.
8:26And here I am talking about the State's
8:28financial obligations, including
8:30currency and debt.
8:32The question is: is the value of these
8:34obligations related to the expectations
8:36regarding the primary results the
8:37government will produce in the future?
8:40Imagine just as an example a government
8:42with 100 billion in debt. In the logic
8:45of this theory, the real value of these
8:47obligations must correspond to the
8:49present value of the future primary
8:51surpluses that support them.
8:53Now, imagine a shift in expectations.
8:56People start to assess that future
8:58fiscal capacity will be lower, while the
9:00nominal amount of those obligations
9:02remains the same.
9:04Within this formulation, an increase in
9:06the price level can reduce the real
9:07value of these liabilities and produce
9:09an adjustment between these two
9:10magnitudes. So, the 100 billion
9:12continues to be 100 billion in nominal
9:15terms, but it now represents less
9:17purchasing power. And that is the role
9:19the price level plays in the theory's
9:21mechanism. Expectations about future
9:23fiscal policy enter into the explanation
9:25of present prices. That is why the
9:27coordination between fiscal policy and
9:29monetary policy is so important in this
9:31framework. The Central Bank's actions
9:33need to be examined alongside fiscal
9:34effects and expectations regarding the
9:36sustainability of public liabilities.
9:38The other part involves the relationship
9:40between nominal interest rates, real
9:41interest rates, and inflation. The
9:43nominal interest rate is the announced
9:44rate, just like we have the Selic at
9:4613.75%today.
9:48The real interest rate considers the
9:50effect of inflation, discounting for
9:51inflation. And that is how you get the
9:52real interest rate.
9:54In a rough calculation, we discount the
9:55inflation from this nominal rate to
9:57think, right, about this real return.
10:00The Fisher relationship connects these
10:02magnitudes, and the Neo-Fisherian
10:04reading draws attention to the
10:05possibility of a positive relationship
10:07between nominal interest rates and
10:09inflation in the long term under certain
10:11model conditions.
10:14This allows us to think of a situation
10:16in which lower nominal interest rates
10:17are associated with lower inflation in
10:19the long term.
10:21And it is a different discussion from
10:23the inverse relationship that usually
10:24organizes the most common presentation
10:26of monetary policy.
10:27But the short-term and long-term effects
10:29need to be distinguished.
10:32An initial reduction in interest rates
10:33may produce a transitory inflationary
10:35pressure before the convergence
10:36predicted by the model.
10:39And that is the point where the
10:40composition and financial duration of
10:42the debt gain importance, because Lara
10:44Rezende's argument is that the presence
10:46of LFTs with remuneration linked to the
10:48daily rate reduces the strength of one
10:49of the initial pressure mechanisms on
10:51prices.
10:54Since the remuneration of a large part
10:55of the public debt is tied to the Selic
10:57and the duration of these securities is
10:59very short, in the mechanism discussed
11:01by him, this limits the appreciation of
11:02the debt associated with the interest
11:04rate reduction, thereby weakening a
11:06source of short-term inflationary
11:07pressure.
11:08Because imagine that you have a bond
11:10there that is yielding the Selic, it is
11:12yielding at a value of 13.75%.
11:14It is a short-term bond. And then when
11:16you reduce the Selic, you will also have
11:19a reduction in what you earn in relation
11:21to this bond. So this inflationary
11:23pressure in this relationship here is
11:25much smaller.
11:26And then the same characteristic that
11:28appears as a problem in other
11:29interpretations of monetary policy, this
11:31issue of the Selic and the duration of
11:33the bond, starts to function as an
11:35advantage in this proposal. It is
11:37dealing with real issues, with the
11:38actual dynamics of public debt in Brazil
11:40.
11:41And the reasoning then is as follows:
11:43very high interest rates increase
11:44financial expenses, worsen the debt
11:46trajectory, and can compromise
11:48confidence in its sustainability.
11:50And within this framework, the fiscal
11:52effect of interest rates can hinder
11:54inflation control itself.
11:56Reducing interest rates would decrease
11:58this pressure, improve fiscal conditions
12:00, and help stabilize prices.
12:03The composition of Brazilian debt would
12:05reduce part of the initial risk, while
12:06international reserves would be used to
12:08deal with exchange rate pressure.
12:10That is the logic that needs to be
12:12understood before you make any criticism
12:14.
12:15Then the question becomes whether the
12:17necessary conditions for this to work
12:19are present in the Brazilian economy,
12:21whether this framework makes sense, and
12:23that is precisely where objections from
12:25other economists come in.
12:27And here I want to bring up three main
12:29criticisms. I will first bring the
12:31criticism from Franklin Serrano and Luís
12:33Eduardo Melin, which were presented
12:35there on the Excedente blog. I will also
12:37bring José Luiz Oreiro's, and I will
12:39bring John Cochrane's own, as he
12:41analyzed André Lara Resende's proposal.
12:43Franco Serrano and Luís Eduardo Melin
12:45presented this criticism on the
12:46Excedente blog, and they acknowledge
12:48that high interest rates weigh on the
12:50budget and on income distribution, but
12:51they find the proposed exchange,
12:53monetary, and institutional design
12:55problematic.
12:56Why? The first objection is treating
12:58exchange rate pressure as an adjustment
12:59that could be absorbed at the beginning
13:01of the transition.
13:03A significant reduction in interest
13:05rates changes the relative profitability
13:07of Brazilian assets, and it makes the
13:10return on these public debt assets,
13:12indexed to the SELIC for example, much
13:14lower compared to foreign assets in
13:16stronger currencies.
13:18And with an open financial account,
13:20there could be continuous pressure for
13:23capital flight.
13:24If the pressure continues, the sale of
13:27foreign reserves must also continue.
13:30And reserves are finite. So, it is no
13:32use looking at the size of the reserve
13:34stock and thinking it is sufficient.
13:37One must consider for how long and
13:38against what volume of movement that
13:40stock would have to act.
13:43The authors also point out that an
13:45announced exchange rate defense, where
13:46the government says it will sell
13:48reserves to sustain that interest rate,
13:49can fuel speculation.
13:51And if agents anticipate that the
13:53Central Bank will sell reserves to
13:55contain devaluation, they can organize
13:57their operations taking this defense and
13:59its possible exhaustion into account.
14:01The second objection is that a rigid
14:03range for interest rates limits the
14:05response to exchange rate pressures,
14:07because if a crisis appears, does the
14:09Central Bank preserve the range and
14:10continue using reserves, or does it
14:12raise rates and break the announced
14:14guidance of lowering them?
14:16There would be the possibility of an
14:18exception authorized by the council, but
14:20the problem remains.
14:21The rule needs to be abandoned precisely
14:23when it is tested, or the defense
14:25remains concentrated on the reserves.
14:27For Serrano and Melim, there is an
14:29incompatibility between the exchange
14:31rate and monetary objectives of this
14:33configuration. And there is also an
14:35institutional critique.
14:37Would the new council concentrate fiscal
14:39and monetary decisions without the
14:40article precisely defining its
14:41composition and functioning?
14:43Who is going to decide these targets?
14:45What is the council's relationship with
14:46the elected government? And with
14:48Congress's budgetary decisions?
14:51Targets established for 4 or 5 years can
14:52reduce the capacity to react to changes
14:54in economic activity.
14:56And that is the issue of countercyclical
14:58action, the possibility of adjusting
15:00policies in the face of a slowdown or
15:02other changes in the conjuncture.
15:04And furthermore, they also contest the
15:06theoretical basis supporting this
15:08proposal.
15:09They question the explanation of
15:11inflation offered by the fiscal theory
15:13of the price level, the mechanism that
15:15links these future fiscal expectations
15:17to current prices, and the idea of a
15:19sustainability limit for public debt in
15:21the national currency.
15:23And their criticism does not amount to
15:25ignoring the cost of interest.
15:27They recognize the problem, but they
15:28reject the solution in the terms
15:30presented and defend alternatives that
15:31do not depend on a rigid range for the
15:33Selic.
15:34Another critique I bring here is that of
15:36José Luiz Oreiro, who also agrees with
15:38the diagnosis regarding the burden of
15:40interest and criticizes the idea that
15:42the Brazilian fiscal problem stems
15:44fundamentally from primary expenses,
15:46considering a structural reduction of
15:48interest rates necessary. The
15:50disagreement is also in the viability of
15:51the solution. For him, a drop of the
15:53intensity proposed requires facing the
15:55characteristics of the Brazilian
15:57monetary structure and the limitations
15:59associated with the real's position in
16:01the international system. One of the
16:03central points is the Selic indexing of
16:04the debt, and so when the Central Bank
16:06increases the rate, it also increases
16:08the remuneration of the bonds linked to
16:10it.
16:10And this financial income interferes
16:12with the transmission of monetary policy
16:14, in the way that holders of public debt
16:16respond to interest rate changes.
16:19And for this reason, Oreiro considers a
16:21reform of the debt financing structure
16:23necessary.
16:24The share of LFTs is not just a detail
16:26there that allows savings to be obtained
16:29more quickly. So here there is a very
16:31strong disagreement in relation to André
16:33Lara Rezende.
16:34This indexation, this share of LFTs in
16:36the debt, it is part of a financial
16:38organization that needs transformation.
16:41Another point is the international
16:43hierarchy of currencies. The real does
16:44not occupy the same position as the
16:46currencies issued by central countries.
16:48Capital movements consider international
16:50interest rates, risk, and asset
16:52profitability.
16:54Therefore, a sharp reduction of the
16:56Selic without complementary measures can
16:58cause capital flight and currency
17:00devaluation.
17:01And this devaluation can reach domestic
17:03prices and create inflationary pressure
17:05. There is also the risk of long-term
17:07rates rising even with a drop in the
17:09SELIC rate. The Central Bank reduces the
17:11base rate, but that does not guarantee a
17:13reduction in the entire interest rate
17:14structure in the economy if the Central
17:16Bank does not announce it will intervene
17:17in that as well. And depending on the
17:20reaction, the result might contradict
17:22the initial goal.
17:23Oreo revisits the Brazilian experience
17:25of interest rate reduction between 2011
17:27and 2013 to discuss the risk of a
17:28subsequent reversal.
17:30And an unsuccessful attempt to lower
17:32interest rates can end in new rate hikes
17:34and produce significant economic and
17:36political consequences.
17:40As an alternative, he proposes revising
17:42the inflation target to 4–4.5%,
17:43gradually reducing the indexation of
17:45debt to the SELIC, and expanding the
17:47regulation of international capital
17:48flows.
17:50He also advocates for a review of tax
17:52expenditures and more progressive
17:53taxation. The idea is to build the
17:56conditions to sustain lower interest
17:59rates. And the reduction must be
18:00accompanied by changes in the financial
18:02structure and in the relationship of the
18:04Brazilian economy with capital flows.
18:06One of the reactions I wanted to bring
18:08here is John Cochrane’s, which is
18:10interesting because he is one of the
18:11main theoretical references being used
18:13in Lara Rezende's proposal.
18:15And his assessment is more careful than
18:18a pure rejection.
18:19He acknowledges the sophistication and
18:21coherence of the argument.
18:23He admits that high interest rates
18:24without adequate fiscal support can
18:26aggravate difficulties in public
18:27accounts and contribute to inflationary
18:28pressures.
18:30He also recognizes the importance of the
18:32debt composition for the effects of
18:34monetary policy, but he asks if the
18:36conditions for its application are
18:37guaranteed.
18:38His main concern is fiscal
18:40sustainability. People need to trust in
18:42the state's capacity to produce a
18:43primary result in the future that is
18:45compatible with the debt. And for
18:47Cochrane, announcing targets for a few
18:49years is not equivalent to building
18:51lasting institutions. The commitment
18:53must survive changes in the situation
18:55and the difficulties that may appear
18:57over time. He also questions the
18:59hypothesis that the entire savings from
19:01interest rates would be preserved. The
19:03government could use the space gained to
19:05increase other expenses or reduce taxes
19:07. And if that happens, an important
19:08condition of the theoretical mechanism
19:10has already changed.
19:11Another concern is the difference
19:12between the nominal rate controlled by
19:14the Central Bank and the real rate.
19:16How much of the Brazilian real interest
19:18rate stems directly from the monetary
19:19decision, and how much is related to
19:21other risks?
19:22Would a drop in the SELIC produce an
19:24equivalent reduction in the real cost of
19:26debt, since it presents a problem of a
19:28simultaneous drop in nominal interest
19:29rates and inflation?
19:31If these two magnitudes fall by the same
19:33proportion, the real interest rate
19:34remains practically the same. And so,
19:37the transmission of the SELIC rate to
19:39other financing terms is also not
19:41automatically guaranteed.
19:43In the exchange rate dimension, Coin
19:45recognizes the risk of devaluation,
19:47questions the use of reserves to support
19:48the currency, and the concern is
19:50distinguishing a sustainable reduction
19:52in interest rates from a policy of
19:54financial repression that will
19:55accumulate imbalances.
19:57His preference is for coordinated fiscal
19:59, monetary, and microeconomic reforms.
20:02And so, therefore, the assessment
20:04recognizes the consistency of the
20:05proposal in certain models, but draws
20:07attention to fiscal and financial
20:08conditions that must exist in practice.
20:11I think it is important to preserve this
20:12distinction, right? Because you can see
20:14that they are different criticisms.
20:15Serrano, Melim, Oreiro, Cochener—they
20:17are not presenting exactly the same
20:19criticism, they are not starting from
20:21the same interpretations, and
20:23understanding these differences greatly
20:25improves the discussion. And just one
20:27last point regarding this issue of the
20:29criticisms and the debate, is that many
20:31people here in Brazil ridiculed it, they
20:34mock it. I will even comment on this
20:35later, right?
20:37And so, just so you can see, the author
20:39of the theory himself wrote a text
20:40debating with André Lara Rezende in a
20:42complimentary and critical way, without
20:44needing to resort to the kind of
20:46nonsense that some people here in Brazil
20:48, who are nowhere near the discussion,
20:50are doing, right?
20:52So, I think this is an important
20:53reflection.
20:55And so, guys, after presenting the
20:56proposal and these criticisms that I
20:58read and brought, which I thought were
21:00interesting to share with you, I want to
21:02talk a little bit about the repercussion
21:04of these ideas, because a very
21:06significant part of the reaction to this
21:08proposal by André reveals a very serious
21:10problem in the economic policy debate in
21:12Brazil, which is the combination of
21:14intellectual arrogance and a difficulty
21:16, a refusal to understand the
21:18interlocutor's argument.
21:21There are certain people out there who
21:22claim a kind of superior scientific
21:24authority and then treat a divergent
21:26interpretation.
21:28Someone who is thinking a little bit
21:30outside the box, differently, right, as
21:31something that doesn't deserve
21:33discussion, right?
21:35So, while they continue to present
21:37conceptions, many of them even outdated
21:39, right, as definitive truths about how
21:41things work and all that.
21:44The case of this automatic association
21:46of MMT with André's proposal is very
21:48revealing. The person looks at André's
21:50name, right, decides which theory he is
21:52defending without examining the specific
21:55foundations of the article; they confuse
21:57his intellectual trajectory with the
21:59basis of a specific proposal. And then a
22:01very curious and very revealing
22:03situation occurs.
22:04A formulation supported by the fiscal
22:07theory of the price level, which is
22:09developed within orthodox macroeconomics
22:11, is treated as an unfounded heterodox
22:13extravagance.
22:15The critic does not even recognize the
22:17existing controversies within the
22:19scientific field from which they are
22:21claiming authority.
22:22And look, folks, disagreeing with a
22:24proposal is part of it.
22:26We have just gone through several
22:27criticisms developed there from
22:28different perspectives.
22:30The problem is disqualifying an argument
22:32without understanding its references and
22:34, at the same time, presenting this
22:36attitude as a demonstration of
22:37scientific superiority.
22:39This impoverishes the conversation
22:40instead of discussing which assumptions
22:42are appropriate, which mechanisms work,
22:44and what difficulties arise in
22:46application. The dispute begins with an
22:48attempt to expel the interlocutor from
22:50the field of acceptable ideas.
22:52And to me, André's main merit is
22:54precisely placing the cost of interest
22:56at the center of the fiscal discussion.
22:59This helps dismantle the fiscal
23:00terrorism that presents an adjustment to
23:02primary expenses as the only possible
23:04response for the country, right?
23:07Because you see demands for cuts of 250
23:09, 300 billion, as if the size of the
23:11primary deficit proved by itself an
23:14exceptional situation of loss of control
23:16.
23:17But one needs to look at the numbers and
23:19the composition of the result.
23:21If you take IMF data with figures from
23:232025, Brazil is in fourth place among
23:25the 19 G20 countries.
23:27When we look at the primary result from
23:30best to worst. Among the countries that
23:32reported a deficit, Brazil's is the
23:34smallest at 0.13%.
23:36So, when comparing revenues and expenses
23:39excluding interest, the picture is quite
23:42different from that discourse of
23:44extraordinary emergency. This requires
23:46explaining where such a high nominal
23:48deficit comes from in Brazil. And here a
23:51circularity appears that is quite crude
23:53, right?
23:54When we show Brazil's primary deficit
23:55and show that it is small, the response
23:57is that the real problem is the nominal
23:59deficit.
24:00But then the main difference between the
24:02two is precisely the interest bill. The
24:04nominal deficit is high, largely due to
24:06the burden of interest.
24:08And then later, the same imbalance is
24:10used to justify the high interest rates
24:11.
24:13And so the interest bill produces an
24:14important part of the problem presented
24:16as justification for keeping that bill
24:17so high.
24:19If the explanation becomes that interest
24:21rates are at this level because of the
24:22primary deficit, you have to demonstrate
24:24why a relatively small result produces a
24:26response of this magnitude.
24:28And so this relationship needs an
24:29explanation. It cannot just function as
24:31a statement repeated infinitely until it
24:33becomes true. The point is that interest
24:35ends up being treated as an untouchable
24:37variable.
24:39The policy reorganizes the entire budget
24:41, destroys public service, destroys the
24:43State's investment capacity, but
24:44financial expenditure appears there as
24:46some sort of force of nature.
24:49And this presentation hides the
24:50political character of economic choices
24:53. There are priorities, interests, and
24:55distributive conflicts. An adjustment
24:57does not have the same effect on all
24:58groups in society. The way to produce
25:01this adjustment and distribute these
25:02costs is part of the political decision
25:04.
25:05Therefore, when a proposal is presented
25:07as a purely technical requirement, it is
25:09worth asking what choices are embedded
25:11in it.
25:12Defending an economic policy doesn't
25:14stop involving interests just because it
25:16comes accompanied by a discourse of
25:17scientific neutrality.
25:19For approximately three decades, the
25:21Brazilian discussion remained very
25:22focused on fiscal adjustment and
25:24spending cuts.
25:26The scale of financial expenditure
25:27received much less attention than it
25:29should have, and it is important to have
25:30economists willing to put this subject
25:32at the center of the debate.
25:33And André Lara Rezende is doing just
25:35that. That is also to his credit. Thiago
25:38Machado, who also frequently appears
25:40here on the channel, has made a very
25:41good contribution to this discussion.
25:44I hope his doctoral research produces
25:46new contributions, produces articles and
25:48books to be debated, because we need to
25:50broaden this conversation, examine these
25:52determinants of interest rates, because
25:54reducing everything to a permanent
25:56demand for cuts in public spending does
25:58not solve the problem at hand.
26:01And so, folks, another issue I think is
26:03worth us talking a little bit about is
26:05the construction of narratives regarding
26:07this debate. I find this very
26:09interesting. This is the moment I
26:11delight in, right, as I am a guy who
26:12really likes epistemology, who also
26:14really likes this process of
26:15constructing narratives, this
26:16construction of knowledge, this
26:18construction of scientific authority,
26:20right?
26:21And within economics, this is very
26:22curious to observe, very interesting to
26:24observe, even though most of the time it
26:26is done to ruin us, right?
26:28Look at the construction of a headline
26:30from Valor Econômico that I will ask
26:32Pedro to put on the screen for you,
26:33which is as follows.
26:35Lara Rezende's proposal is a threat, is
26:37a threat to inflation and long-term
26:38interest rates, economists say.
26:40Lara Rezende appears on one side and the
26:43economists appear on the other.
26:45The way this divergence is presented
26:47gives the impression that André is
26:49outside the professional category of
26:50those responding to the proposal.
26:53We are talking here about an economist
26:55with a PhD from MIT, who played a very
26:57important role in formulating the Real
26:59Plan, and who, until recently, when he
27:02repeated the discourse and the mantras
27:04of the mainstream, was accepted, was
27:06heard, and was, uh, revered.
27:08And then, the disagreement with his
27:10current ideas, the shift he made in part
27:12of his discourse, doesn't erase that
27:14background, nor his trajectory in
27:16Brazilian economic policy, but he became
27:18a pariah, right?
27:20And so, uh, what stands out is the way
27:22that adherence to the consensus seems to
27:24function as a criterion for intellectual
27:26legitimacy.
27:27As long as the individual agrees with a
27:29certain orientation, that credential is
27:30recognized.
27:32And then, when he starts to question,
27:34when he starts to think a little outside
27:36the standard of what is being defended
27:37as consensus, a tendency appears to
27:39treat those ideas as something outside
27:41of serious economic discussion.
27:44And then there is an even more serious
27:46limit when that theoretical divergence
27:48turns into personal disqualification.
27:51Uh, just so you have an idea, right,
27:53Marcos Lisboa gave an interview to Globo
27:54News where he debates this subject.
27:57He calls it economic chloroquine and he
28:00calls it a scam.
28:02>> It’s not on. For Brazil to repeat these
28:04mistakes again, uh, it's not possible.
28:07It is possible. We like chloroquine,
28:09don't we? We like magic potions, right?
28:12So these, uh, scams happen all the time
28:15. Then suddenly, I'm going to cap the
28:17SELIC rate, it's possible to reduce it.
28:19We already tried that in the past during
28:20the Tombini administration. The Dilma
28:22government slashed the interest rate
28:24suddenly when inflation was above the
28:25target. What happened? Did employment
28:28grow? No. Job creation continued to fall
28:30. Did the economy grow more? No. The
28:32economy continued to slow down and
28:34inflation rose. This was on the eve of
28:37the 2013 crisis.
28:39You don't engage in a debate there,
28:40considering what has been presented, a
28:42problem with the model, with the
28:43evidence, with the application.
28:46And so, uh, an influential figure in the
28:47economic debate should be able to face
28:49the argument more by its content, right
28:51?
28:52A personal attack offers no scientific
28:54contribution whatsoever. It only shifts
28:56the focus of the discussion, moving away
28:58from the proposal to strike at the
29:00author, and it also demonstrates an
29:01enormous arrogance, uh, from a class
29:03that is already quite famous for its
29:04arrogance, right?
29:06And so, this same problem, we see people
29:08calling others flat-earthers, and then a
29:10bunch of people who, uh, love to show
29:13off because they are defending, uh, more
29:15mainstream theses, theses of what they
29:17call orthodoxy.
29:19And so, these people take this
29:21scientific and intellectual authority
29:23upon themselves and feel entitled to go
29:25around labeling André Lara Rezende as
29:27just anyone, as if he were a figure with
29:29absolutely no theoretical or
29:30intellectual credentials, right?
29:33And they don't even debate; they just go
29:35straight to disqualifying.
29:37And look, guys, all economic schools of
29:38thought need to undergo critical
29:40examination. The discussion will involve
29:42a series of assumptions and evidence.
29:44You have to discuss transmission
29:46mechanisms and practical consequences
29:47here. This applies to those within the
29:49consensus and those presenting a
29:51divergent interpretation. Claiming a
29:53position of scientific vanguard while
29:55rejecting the very debate is a
29:57contradiction. After all, how would this
29:59supposed vanguard get there anyway,
30:01right? Are we going to stay stuck in
30:03this, right?
30:04The quality of a critique is shown by
30:06the ability to face the foundations of a
30:08proposal and demonstrate its problems,
30:10not by how cleverly one insults the
30:12other.
30:13Moving on a bit from this commentary on
30:15the backlash, I wanted to present my own
30:17assessment, which is the following: I
30:18think Lara Rezende is right to place the
30:20cost of interest at the center of the
30:21Brazilian fiscal issue.
30:24We have a small primary deficit, yes,
30:26and a very disproportionate pressure for
30:28spending cuts.
30:30Meanwhile, financial expenses receive
30:32completely different treatment, and when
30:34there's talk of reorganizing the budget
30:36, certain expenses and benefits enter
30:37the discussion, like pensions, social
30:39assistance, and a series of other things
30:41.
30:42Other issues don't enter the
30:43conversation, right?
30:44So we have to think carefully about the
30:46magnitude of these things.
30:48For example, we can consider tax breaks
30:49and fiscal benefits as an instrument for
30:51cuts.
30:52It is possible to do that. We can cut
30:54parliamentary amendments, super-salaries
30:56, and judiciary privileges—those
30:58expenses associated with these more
30:59privileged segments of the civil service
31:01. It is possible to carry out a spending
31:04reduction, a review that won't attack
31:06the poorest. Yet that doesn't occupy
31:08such a prominent position in the debate
31:10.
31:11This adjustment always appears as a
31:13reduction in the space for social policy
31:15and public investment, right?
31:18And I'm not saying that any and all
31:19primary spending needs to be preserved.
31:22The budget, as I said, can be organized
31:24and adjusted, but the question is who
31:26will give up resources, which expenses
31:28will remain protected, and which groups
31:30will bear the burden of the adjustment.
31:33And so, guys, the interest bill also
31:34needs to be part of this conversation.
31:37It makes no sense to treat this expense
31:39as a variable over which economic policy
31:41has no capacity to act.
31:43The benchmark interest rate is the
31:45result of decisions. The debt financing
31:47structure can also undergo changes. The
31:50budget that funds services, social
31:52policy, and investment is under constant
31:55pressure.
31:56Yet, the portion that pays debt holders
31:58often appears as an obligation that
32:00shouldn't even be debated.
32:02And this difference expresses a choice
32:04regarding the allocation of public
32:05resources. That is why I consider André
32:08Lara Rezende's contribution important,
32:09because he puts this at the center of
32:11the debate. And he asks the painful
32:14question that many people don't like to
32:17hear. How much of the fiscal imbalance
32:19comes from the financial cost that the
32:21high-interest economic policy itself
32:23helps to produce? Now, acknowledging
32:24this merit does not resolve the question
32:26of the proposal's feasibility. On this
32:28point, I agree with most of the
32:30criticisms presented by Oreiro, Serrano
32:32, and Melim. The exchange rate is a
32:34significant limit to reducing interest
32:35rates to the intensity being advocated.
32:37André Lara Rezende acknowledges this
32:39risk.
32:39The problem is that, in my assessment,
32:41he excessively diminishes its relevance
32:43by presenting reserves as a response to
32:45this transition.
32:47It is one thing to face temporary
32:48exchange rate pressure, but another to
32:50sustain a policy against continuous
32:51capital flight.
32:53If the pressure continues, the Central
32:55Bank needs to keep using reserves. And
32:58then, for how long? What is the effect
32:59on the country's external vulnerability
33:01? And what happens if the market starts
33:03betting exactly on the erosion of that
33:06intervention capacity with reserves? So
33:08my disagreement lies primarily there. I
33:10agree that Brazil needs to reduce
33:12interest costs, but I think it is
33:14necessary to face the conditions that
33:15allow for sustaining this reduction.
33:18Otherwise, there is a risk that an
33:20attempt to lower the Selic rate will
33:21produce imbalances that end in a new
33:23rate hike.
33:25And the first point I think must be
33:26faced is the indexation mechanisms of
33:28the Brazilian economy. The Real Plan
33:30managed to address hyperinflation, but
33:33that did not make all mechanisms that
33:35carry past inflation into current
33:37inflation disappear. Think of a rental
33:39contract where the adjustment tracks an
33:41inflation index. Part of the price
33:43increase that has already occurred
33:45becomes a reference for the next
33:46adjustment. This is a thing, a
33:48peculiarity of Brazil.
33:50Even if economic conditions change, the
33:51contract continues to carry that
33:53previous inflation.
33:54These mechanisms have a historical
33:56origin in an economy with very high
33:58inflation. Protecting contracts and
34:00income from the loss of purchasing power
34:02was a fundamental concern.
34:05However, the persistence of this
34:06structure today, with low inflation,
34:07helps reproduce a portion of inflation
34:08over time and creates pressure for
34:09higher interest rates, right?
34:12And that is the mechanism of
34:13inflationary inertia. Some prices rise
34:15because other prices have already
34:16increased before. So you keep carrying
34:18that forward, right?
34:20This creates a difficulty for monetary
34:21policy because the economy continues to
34:23transmit past inflation while the
34:25Central Bank tries to control current
34:27inflation.
34:28A discussion about structurally lower
34:29interest rates needs to consider how
34:31this works, right?
34:33So, a second point is the structure of
34:34public debt, as a significant portion of
34:36bonds follows the Selic rate.
34:40rate, it also increases the remuneration
34:41received by those who hold these
34:43securities. And look at the difficulty
34:45this creates. Monetary policy seeks to
34:47restrict activity through interest rates
34:48, but at the same time, it increases the
34:50financial income of those who hold these
34:51bonds. And there is a regressive
34:53distributive effect as well, an
34:55interference in the very transmission of
34:57this policy. And you cannot discuss the
34:59effectiveness of interest rates without
35:01considering who pays the cost and who
35:03receives this additional remuneration.
35:05The debt structure plays a role in the
35:07functioning of monetary policy and
35:09income distribution.
35:10In the case of André's proposal, he
35:12wants to use this to reduce interest
35:14rates and inflation, but this might have
35:16a problem.
35:17I think this needs to be changed; this
35:19structure has to be changed. That is why
35:21a reform involving these points is
35:23important. The proposal needs to address
35:26the dependency of public financing on
35:28the Selic rate. The goal is to build a
35:30financial organization that will allow
35:32for working with lower interest rates in
35:34a sustainable way. And the third point
35:36is the exchange rate. The Brazilian rate
35:38exists within an economy that maintains
35:39financial relations with the rest of the
35:41world.
35:42Those who decide where to invest funds
35:44consider the return on Brazilian assets
35:46in comparison to other possibilities, in
35:48addition to the risks involved. And the
35:50real occupies a subordinate position if
35:52you look at the international hierarchy
35:54of currencies. So Brazil does not have
35:56the same freedom as a country that
35:57issues a central currency in the
35:58international financial system, as is
36:00the case with the United States.
36:02Therefore, a very intense reduction in
36:04the Selic rate that decreases this
36:06profitability compared to U.S. rates
36:08specifically ends up disincentivizing
36:10investment here in Brazil and may
36:12encourage capital flight.
36:14So, this outflow puts pressure on the
36:16exchange rate, and that can generate
36:18inflation in Brazil. So, this chain of
36:20events needs to be considered. Falling
36:23interest rates can create exchange rate
36:25pressure, which can fuel inflation, and
36:27later you might have to raise rates
36:29again.
36:30The initial reduction ends up
36:32compromised by the effects it helped to
36:34trigger, unless you burn through foreign
36:36reserves to hold it, which would also be
36:38a problem, because while they have
36:39intervention capacity, they have a
36:41limited stock to face persistent
36:43pressures.
36:44So, Brazil could end up more vulnerable
36:47in this process.
36:49That is why I defend a calibrated
36:51reduction according to exchange rate
36:52conditions, along with measures that
36:54reduce this vulnerability.
36:57So, sustaining lower interest rates
36:58requires addressing the Brazilian
36:59economy’s relationship with
37:01international resource flows.
37:03You also have to think about the issue
37:04of economic growth, because when we are
37:06discussing debt-to-GDP, we need to think
37:08about both sides of this relationship.
37:11The size of the economy is also
37:13important; an expansion of productive
37:15capacity and improved conditions for
37:17growth also improve tax collection,
37:19which helps to ease this pressure on
37:21public accounts through a different path
37:23than austerity.
37:25Investment plays an important role in
37:27this construction.
37:28The economy, therefore, needs to expand
37:30its ability to produce.
37:31Economic policy needs to create
37:33conditions for this process, and
37:34lowering interest rates should be part
37:36of a broader development project that
37:38will strengthen the base upon which
37:40public accounts are organized.
37:42There will be a structural change in the
37:44economy, and if the debate is restricted
37:46only to spending cuts, growth ends up
37:49being treated as a secondary issue.
37:51But an economy that struggles to expand
37:53its production also faces more
37:55difficulty in stabilizing the
37:56debt-to-GDP ratio.
37:58And this project also needs to address
38:00competitiveness and the Brazilian
38:01productive structure. A consistent
38:03industrial policy, articulated with
38:05investments, can expand the capacity to
38:07produce and export goods with higher
38:09value-added.
38:11Export diversification matters because
38:13it improves the conditions for
38:14generating foreign currency for Brazil,
38:16and it needs to strengthen the ability
38:18to obtain external resources through
38:20production and sales abroad, reducing
38:22balance of payments vulnerabilities.
38:24This has a direct relationship with
38:25interest rates, right?
38:27Because the greater the dependence on
38:29foreign capital inflows—attracted by
38:31high financial returns—the harder it
38:33becomes to reduce those returns without
38:35creating exchange rate pressure.
38:38So, expanding and diversifying Brazil's
38:40export capacity helps build a different
38:41external condition, precisely to allow
38:43for lower interest rates without this
38:44exchange rate pressure.
38:46And then this interest rate reduction
38:48gains support in a more competitive
38:49economy, with a greater capacity to
38:51generate foreign currency and less
38:52reliance on that high interest rate
38:54differential, right?
38:55So you have to have an investment policy
38:57and an industrial policy participating
38:59in this discussion.
39:01Uh, and I think there needs to be very
39:02strong coordination between a
39:04well-crafted fiscal policy, a
39:05well-crafted monetary policy, and an
39:07industrial policy to change the
39:09situation of the country's economic
39:11structure.
39:12And each one has its own function, but
39:14the results depend on the relationship
39:16between them.
39:18Fiscal policy needs to organize public
39:20accounts and finance development.
39:22Monetary policy needs to consider
39:24economic stability and exchange rate
39:25conditions and reduce interest rates.
39:28And industrial policy and investments
39:29need to expand the productive capacity,
39:31competitiveness, and productivity of the
39:33economy. An isolated decision on the
39:35SELIC rate does not replace this entire
39:36set.
39:37We need to build the conditions to
39:39reduce interest rates and preserve this
39:41reduction over time with growth and less
39:43external vulnerability.
39:45That is the difference between
39:46recognizing that interest rates are too
39:48high and evaluating how to lower the
39:49rates in a sustainable way.
39:51The diagnosis is indispensable, but the
39:53path depends on the concrete
39:54characteristics of the Brazilian economy
39:56.
39:57And I want to end this discussion by
39:59revisiting Lara Resende’s career,
40:00because there is a localized debate here
40:02that is interesting: in an effort to
40:04disqualify his current ideas, there is
40:06even an attempt to diminish his
40:08participation in the Real Plan.
40:10I've seen people commenting to me that
40:11he just offered a few minor suggestions
40:13regarding the Real Plan.
40:15And honestly, guys, there is a history
40:16behind this contribution that fits
40:18perfectly with this debate here.
40:20During the 80s, André Lara Resende and
40:22Pércio Arida developed proposals for
40:24monetary reform that became known at the
40:26time as the Larida Plan.
40:28And the discussion about an indexed
40:30currency helped build the foundations of
40:31the formulations that would later be
40:33part of the architecture of the Real
40:34Plan.
40:35In the implementation of the plan, the
40:38URV, the Real Unit of Value, functioned
40:40as a virtual unit of account during the
40:42transition. And so there is a trajectory
40:44of development between those proposals
40:46from the 80s and the design adopted
40:48later.
40:49And, guys, reducing this participation
40:51to an irrelevant contribution erases
40:53precisely this intellectual work, an
40:56intellectual work that is at the base of
40:58what was built later, the Real Plan. And
41:01one interesting thing is that these
41:03ideas faced resistance. The
41:05stabilization proposal didn't emerge
41:07surrounded by unanimity among economists
41:09, did it? You had a lot of criticism
41:12regarding the original proposal of this
41:14indexed currency in André and Pérsio's
41:16text.
41:16Uh, there was a lot of distrust
41:18regarding the Real Plan.
41:19Even the IMF didn't believe in the
41:21success of the Real Plan, and yet the
41:23Real Plan was successful in tackling
41:24hyperinflation.
41:26And this contrast between the resistance
41:28and the later result helps to understand
41:30the problem of treating a dominant
41:31interpretation as if it were a
41:32definitive truth.
41:35The consensus of an era may represent
41:36the most accepted knowledge at that
41:38moment, but it can be wrong, folks. Okay
41:41? Acceptance does not offer a guarantee
41:43that this explanation is correct.
41:46The history of knowledge involves
41:47questioning, revisions, and ideas that
41:49faced resistance before proving their
41:51value.
41:52This doesn't turn anyone who opposes the
41:54consensus into someone who is right.
41:56Disagreeing with the majority is not a
41:58certificate of being correct. An idea
42:00needs to be examined by its foundations
42:02, its consistency, and its capacity to
42:04explain and address concrete problems.
42:06André Lara Rezende's participation in
42:08the Real Plan does not prove that his
42:09proposal is correct. I just explained
42:11why I disagree with it, but the fact
42:13that it contradicts a dominant
42:14interpretation also doesn't prove it's
42:16wrong.
42:18It is necessary to discuss the argument
42:19, what the proposed mechanism is, what
42:20conditions it requires, and what the
42:22merits of this argument are.
42:23What happens when the proposal
42:25encounters the structure of the
42:26Brazilian economy? Where are the
42:27problems there, and what changes would
42:29be necessary? That is the work of a
42:31critique. Calling someone a flat-earther
42:33or belittling their track record doesn't
42:35answer any of these questions. Science
42:37requires questioning and a willingness
42:39to recognize one's own mistakes. And
42:41when a group treats its interpretations
42:43as truths immune to criticism, the
42:45debate stops advancing, and no, we are
42:47no longer producing science. Anyway,
42:49folks, that's it. I hope you enjoyed
42:51this commentary. If you did, leave a
42:53like down below. I'll leave my social
42:54media in the description, my Telegram
42:56channel, my WhatsApp channel, my
42:57Substack page, and my Discord server.
42:59Big hug and see you next time.

About this transcript

This page contains the full transcript of O "terraplanismo econômico" do André Lara Resende by Frederico Krepe, generated from the public captions YouTube serves with the video. The transcript has 7,720 words across 1,368 segments, with the original timestamps preserved so you can click any line to jump to that moment in the embedded player.

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