Tuesday, March 12, 2019

Lara-Resende and MMT in the Tropics

So André Lara-Resende, who I discussed here before, is again writing on the crisis of macroeconomics (in Portuguese and you might need to have a subscription), and now instead of embracing the Fiscal Theory of the Price Level (FTPL), has supposedly embraced Modern Money Theory (MMT). Many US MMTers cheered this as a demonstration of the reach of MMT in other countries. I would be less cheerful.

Lara-Resende, let me explain to non-Brazilian readers, was a student of Lance Taylor at MIT, and then a professor at the Catholic University in Rio, being a key author of inertial inflation, an heterodox view of inflation, that was central for the failed Cruzado Stabilization Plan back in 1986. He then participated in the successful stabilization of the economy with the Real Plan, when Fernando Henrique Cardoso was the finance minister in 1994, and during the latter's presidency a short lived president of the development bank (BNDES, in the Portuguese acronym) -- and not the central bank as many in the US have suggested (that was Persio Arida, his frequent co-author on inflationary inertia). Btw, he fell as the head of the bank because he was recorded in conversations with the president (Cardoso) on issues related to the privatization process of the telecommunications sector, in which they seemed to favor a particular group. The development bank during this period was essentially used to promote privatization as a part of the so-called Washington Consensus policies. Also, by the 1990s all the economists from the Catholic University had adhered to the Washington Consensus, and moved away from heterodoxy in the same way Cardoso distanced himself from Dependency theory, and still remain essentially aligned with neoliberal policies to these days. Lara-Resende included, as we will see.

Note that he does say that the four pillars of the new macro are that money and taxes are connected, that the government has no financial constraint, but only a real (capacity) constraint, that money is endogenous (the central bank sets the interest rate), and that the Domar rule holds and stability of debt-to-GDP ratios require the interest rate to be lower than the rate of growth. He also says inflation is all about expectations, and the Quantity Theory of Money (QTM) does not hold, something he had already said in his previous op-ed. Many (too many) interpreted this as being Chartalist Money, Functional Finance and Endogenous Money and as such as a version of MMT. Including some analysts in Brazil, with whom I fully agree on their critiques of Lara-Resende's policy conclusions, like the sharp critique by Guilherme Haluska here (also in Portuguese). Note, however, in my previous post on him, that he thought that the FTPL was an heterodox view of the macroeconomy, and he is explicit in his new op-ed that his ideas follow from his last book, in which he defends the FTPL.

In his book what he refers to "heterodox" is the experience with alternative monetary policies after the 2008 crisis, meaning Quantitative Easing, simply because it does not follow the QTM. In his words, from the 2017 book: “The result of the heterodox policies of the central banks in advanced economies, after the financial crisis of 2008, raised serious doubts about some fundamental points of the foundations of macroeconomic theory" or in the original if you don't trust me as a translator (I don't): "O resultado da experiência heterodoxa dos Bancos Centrais dos países avançados, depois da crise financeira de 2008, levantou sérias dúvidas sobre alguns pontos fundamentais da teoria macroeconômica." He does say that one of the pillars of the new macro paradigm is in his 2017 book, but my guess is the ideas are essentially the same. He used the language of MMT, and cited Knapp and Lerner to promote the same neoliberal policies of the 1990s, and the same ideas he defended a couple of years ago using FTPL.

So it is clear that the pillars are essentially of some weird New Classical story of the FTPL, in which fiscal dominance is central to the argument, and there is endogenous money, because of the neo-Wicksellian twist in modern macro. Yes, the QTM does not hold, but it is the expectations about future inflation that matter, and those are tied, in Lara-Resende's views, to fiscal policy (or at least were two years ago). The argument is the fiscal dominance one, that monetary policy has to deal with the unsustainable debt, so inflation is a fiscal phenomenon, and fiscal adjustment is needed. He was and is for austerity! He does use an MMT rhetoric and cites Abba Lerner for sure (more on that below), and that's a testament of the current relevance of MMT and its role in shaping the Bernie and Ocasio-Cortez's progressive views (something positive as I noted in my last post).

His argument is that Brazil is on the wrong side of the Domar stability condition, and, hence, the debt-to-GDP ratio is increasing (in domestic currency), and that something has to be done about it. Not sure why. Note that I always say that in domestic currency there is no default, and one of my complaints about MMT is that they do not pay attention to debt in foreign currency (at some point Warren Mosler was against capital controls and for flexible exchange rates, since the former were not necessary and the latter would solve external problems). But Brazil is not borrowing in foreign currency, and is sitting on top of a mountain of foreign reserves (something like US$ 380 billion, last time I checked, someone correct me if I'm wrong). Then he argues that inflation is all caused by excess demand in the developmentalist period, the period from the 50s to the 80s. However it is unclear why that is still a problem, or why there was excess demand, if it wasn't as a result of fiscal policy.

Fiscal reform, and, in particular, the pension reform are needed not to raise revenue (here is an MMT theme), in his view. He suggests that the reasons are that the pension system is unfair, and that in Lerner's fashion [sic] tax cuts are needed to promote the reduction of bureaucracy and allow for the expansion of more effective private investment.* These should be complemented with trade liberalization, a lower interest rate with a digital currency (bitcoin?) and fiscal adjustment, because the State is "bloated, inefficient and patrimonialist" (in the original: "Estado inchado, ineficiente e patrimonialista").

With friends like these, who needs enemies?

* It's true that Brazil has relatively high levels of taxes, in comparison to developing countries, but the problem is not that they are high, per se, but instead that they are regressive.

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