On Lara-Resende's Proposal to Reduce Interest rates in Brazil

André Lara-Resende's recent proposal (in Portuguese but you can use AI translation) to reduce Brazilian interest rates has generated considerable debate. He is certainly right that Brazil's high interest rates are the main cause of the rise of debt-to-GDP ratios. Brazil is on the wrong side of the Domar condition with GDP growth below interest rates (g < r), so debt should grow faster than output. He is also correct that the conventional argument according to which excessive government spending is responsible for the fiscal deficit is fundamentally misguided. Most of the nominal deficit results from interest payments, not primary expenditures. These are facts. On that we can all agree (hopefully).

The problem is that Lara-Resende, through a rather convoluted theoretical argument based on John Cochrane's Fiscal Theory of the Price Level (FTPL) and neo-Fisherian ideas, ends up accepting the conventional premise that Brazil faces an unsustainable debt-to-GDP ratio that must be reduced (my previous discussion of his theoretical views here and here). He proposes a peculiar way to lower the Selic (base rate) to approximately 7.5% within a year, to establish a rule limiting future interest rates, and use international reserves to contain the depreciation that might result.

A recent note by Franklin Serrano and Luiz Eduaro Melin, (see here; in Portuguese too), provides an devastating critique. Their central point is that Lara-Resende treats the exchange rate effects of lowering interest rates as a one time adjustment that can be managed with reserves. But with an open capital account, a sufficiently large reduction in the interest differential can generate persistent capital outflows. Depreciation creates expectations of further depreciation, encouraging additional outflows. The Central Bank would then be forced to sell increasing amounts of dollars to defend the currency, potentially exhausting its reserves (similar issue of my discussion with Huerta here).

Worse, Lara-Resende's proposal would prevent the Central Bank from using interest rates to counter these pressures, except under exceptional circumstances authorized by a new fiscal and monetary council. As Serrano and Melin note, this would tie the hands of the central bank, and might create the conditions for a crisis, where none exists.

This is particularly problematic because Brazil does not currently face an external constraint. I've made this point repeatedly on this blog, including during the crisis of 2015 (at least no one can say I'm inconsistent). Brazil has more than $360 billion in international reserves, and its relatively high interest rates have helped prevent destabilizing capital flight, preserve the reserves and control inflationary pressures, by avoiding runway depreciation (in contrast to neighboring Argentina, at least until recently; Argentina has depended on IMF and US Treasury loans, not reserves, BTW). This does not mean interest rates must remain at their current extraordinarily high levels. It means that the external consequences of lowering them cannot simply be ignored.

The difference with the Argentinean situation is crucial to understand the problems with Lara-Resende's proposal. I've often argued that Brazil does not grow faster because policymakers do not want to pursue the necessary expansionary policies, whereas Argentina can't grow without confronting its external constraint. Argentina lacks sufficient reserves and has recurrent difficulties obtaining foreign currency, and has done so by increasing indebtedness in foreign currency. Brazil has neither problem at present. Lara-Resende's proposal could create an external constraint where none currently exists. That would be quite an achievement!

Serrano  and Melin also question the theoretical foundations of the supposed limit to domestic public debt and the wisdom of transferring important fiscal and monetary decisions to a council with unclear democratic accountability. In this they follow functional finance principles that are well established. Brazil cannot be forced into default on public debt denominated in its own currency because of an inability to obtain reais. There are real constraints on economic policy, including productive capacity, inflation and the balance of payments. But there is no meaningful fiscal solvency constraint requiring the government to reduce the debt-to-GDP ratio. As Serrano and Melin emphasize, even the neoclassical literature does not establish the debt ceiling presumed by the confidence argument underlying Lara-Resende's proposal.

The obvious alternative is to expand public investment, increase real wages and social transfers, and promote faster economic growth. Public investment would sustain demand and expand productive capacity. Faster growth would also increase tax revenues and might even reduce the debt-to-GDP ratio. But that would be a consequence of successful economic policy, not its objective.

There is a historical warning here. Dilma Rousseff's New Economic Matrix attempted to stimulate growth through lower interest rates, currency depreciation and incentives to private investment, rather than a vigorous expansion of public investment. That did not work (see here). After her narrow reelection in 2014, she made matters worse by appointing Joaquim Levy to reassure financial markets and adopting austerity. The result was a deep recession and a political crisis. Lula's fourth term should avoid both mistakes. Financial markets and much of the financial press are already demanding another round of fiscal adjustment. Lara-Resende correctly rejects that prescription, but his alternative risks introducing exchange rate instability in pursuit of an unnecessary fiscal objective.

Interview for Chilean Radio on Brazilian Elections

Here a discussion in Spanish (you can use closed captions in English), about the elections in Brazil, and some of the problems of the economy that Lula will have to face in his last mandate.

Keynes on Foreign Debt and the External Constraint

Challenge magazine has always been an important outlet for work that falls somewhere between academic papers aimed at economists and more journalistic pieces intended for a broader audience. Jeff Madrick, who served as editor for many years, also emphasized the magazine's commitment to publishing conventional and heterodox perspectives side by side, fostering a genuinely open and pluralistic space for economic debate. I first published an article there in 2000, on Keynes' views on exchange rates. Challenge is now back, under a new editorial team, and I was invited to contribute. My new article, which has just been published, examines Keynes' views on foreign debt and the external constraint, and draws some lessons for contemporary debates on these issues.

It's the economy, Lula! Lessons from a hard-fought victory

Lula won (whew!). Luiz Inácio Lula da Silva defeated Flávio Bolsonaro, son of the former far-right president, by 51.79% to 48.21% of the valid votes. It was the third closest presidential election since the return of democracy in 1989, surpassed only by the narrow victories of Lula himself in 2022 and Dilma Rousseff in 2014. It was also a historic reversal. For the first time since 1989, the candidate who finished second in the first round won the runoff. The victory is a relief for Brazilian democracy. But the fact that he came from behind, and that polls showed a dead heat until the very end, should be concerning.

The remarkable mobilization between the two rounds certainly mattered. The enormous street demonstrations, led in many cases by students and social movements, helped change the political atmosphere. So did the extraordinary social media campaign organized by André Janones, whose Exército do Lula on WhatsApp attracted more than ten million followers. The left demonstrated that it could challenge the far right in the digital arena, and the decline in abstention between rounds suggests that mobilization was critical to the result. These were central elements of Lula's comeback. But they do not explain why the election was so close in the first place. As I argued before the runoff, the fundamental problem was the economy.

Presidential elections are, to a considerable extent, referendums on the incumbent's economic performance. This is the central insight of Ray Fair's well-known econometric model of American presidential elections (more recent forecasts here, but for the house elections). Economic growth, inflation and periods of particularly strong expansion help explain the incumbent party's share of the vote. When the economy is doing particularly well, reelection is highly likely (think Clinton in 1996). When the economy collapses, or inflation is high, incumbents are usually defeated (Hoover in 1932, and Carter in 1980 would be the classic examples). The interesting cases are those in between, when economic performance is neither disastrous nor truly great, and the election can go either way (like Kamala in 2024). Fair's model is estimated for the United States, but the underlying political logic is relevant elsewhere.

That, I would argue, is precisely what happened in Brazil. Lula's third administration improved economic conditions. Employment recovered, the minimum wage increased, social programs were restored, and income tax relief benefited lower income households. Yet the recovery was not vigorous and, even worse, the economy was decelerating in the last year. GDP grew by 2.3% in 2025, and growth over the four quarters ending in the second quarter of 2026 slowed to 1.9%. Brazil was not in a recession, but neither was it experiencing the sustained prosperity associated with Lula's earlier administrations.

The central problem was the renewed commitment to fiscal orthodoxy. Fernando Haddad's fiscal framework, although less restrictive than the previous spending ceiling, continued to constrain the expansion of social expenditure and public investment. The government's determination to reassure financial markets limited its ability to accelerate growth and improve the material conditions of its electoral base. The fights within the PT's coalition about fiscal policy, that I discussed at the beginning of his third term, mattered.

The contrast with Lula's first two terms is instructive. Rising real minimum wages, expanding social transfers and public investment helped sustain growth, employment and the PT's popular support. Conversely, even Jair Bolsonaro understood the importance of putting money in people's pockets. His 50% increase in Auxílio Brasil (the changed name of Bolsa Família during his government) payments in 2022 almost secured his reelection despite the disastrous record of his administration.

The point is not that campaigns, political organization or the defense of democracy are unimportant. Lula's comeback demonstrates exactly the opposite. The mobilization on the streets and online was crucial in an election that could have gone either way. But political mobilization is not a substitute for economic transformation. Better communication can help defend a government's achievements, but it cannot compensate indefinitely for their limitations.

Lula's victory has prevented the return of a political movement that openly challenged democratic institutions after its previous defeat. That is enormously important. Yet another close election, after the equally narrow result in 2022, suggests that appeals to democracy alone cannot guarantee the durability of a progressive coalition.

I hope Lula and the PT (in particular, since Lula, a once in a generation political figure, will not be around any more in 2030) have learned the lesson. The next administration should vigorously expand social expenditures and public investment, pursue sustained increases in the real minimum wage, and substantially raise social transfers.* These are not simply electoral instruments. They are the foundations of a more prosperous and equitable economy, and ultimately of a stronger democracy. Fiscal policy should serve those objectives rather than subordinate them to the demands of financial markets.

Lula has won his last election. The task now is to make sure that the next one need not be so close. It's the economy, Lula!

* I'm happy to have a conversation with those that think that there is no "fiscal space" to do that.

Talk on Inequality and Heteredox Economics

Talk organized by De América Soy at UNAM for a short program related to heterodox economics. My remarks start at around 2:38.

Carlos Bastos Pinkusfeld in conversation with Maria Monza and mysefl on Milei’s Argentina

The video of the Podcast from the Centro Celso Furtado. To some extent this conversation follows the promises by some of the members of the economic team of Fávio Bolsonaro to follow the Milei model for Brazil, if he wins the election.

 

It should be noted that it is doubtful that he would follow Milei's draconian fiscal adjustment. His more likely model is Trump and the use of the government machine for personal gains. In Portuguese, but you can watch with closed captions. 

Palley on th Western Media Portrayel of Russia (and Neoliberalism)

Tom's last post deals with how Putin has been portrayed in Western media. He argues that the hostile coverage reinforces what audiences already believe and raises the risk of an open conflict with Russia and its allies. This comes from his thinking of similar issues in economics. As he says: 

"I have been grappling with the problem of ideology (economic, political, geopolitical). How do we get people to reconsider narratives and beliefs which are held with such deep conviction, they automatically dismiss other ways of understanding?"

In other words, he thinks the media and political establishment also reinforce neoliberal beliefs despite their harmful effects. Worth reading.

Read full article here.

The "Nobel" Prize for the Counter-Revolution in Macroeconomics

The 2026 Sveriges Riksbank Prize in Economic Sciences (aka the Nobel) went to Robert Hall and Michael Woodford, for their contributions to the microeconomic foundations of macroeconomic stabilization. The prize is, in many ways, a celebration of the return to pre-Keynesian macroeconomics (including the Keynes of the Treatise on Money, before the General Theory). Not much of a Keynesian revolution left in what is called New Keynesian economics, if anyone had doubts.

Woodford is perhaps the most important representative of the Neo-Wicksellian model that dominates modern macroeconomics (misnamed New Keynesianism). As I noted before, the central idea is that the monetary rate of interest, controlled by the central bank, must be adjusted to the natural rate, determined by the real forces of productivity and intertemporal preferences. I discussed the return of the natural rate of interest a decade ago, noting that Woodford was particularly prominent in its rehabilitation (after it had been largely abandoned following the Keynesian Revolution and the capital debates).

The political implications were considerable. Independent central banks, committed to price stability and capable of credibly anchoring inflation expectations, would also provide the conditions for prosperity. The so-called divine coincidence suggested that price stability would be essentially compatible with full employment (and, with a little more wishful thinking, financial stability too). Fiscal policy was relegated to a secondary role. The central bank would do the heavy lifting. Keynes, of course, had abandoned the natural rate in the General Theory, precisely because there was no reason to believe that monetary policy could guarantee full employment. But who reads that book anymore? See also my discussion of Friedman and Lucas, and why the former was more important for this counter-revolution.

Hall's contribution was central to a parallel transformation of consumption theory. His rational expectations version of Friedman's permanent income hypothesis suggested that consumption followed a random walk, responding to unexpected changes in permanent income rather than current income. This was taken as a major advance over the old Keynesian consumption function. Yet, as I discussed in a post on Duesenberry, the earlier relative income hypothesis had considerable empirical support and provided a socially grounded explanation of consumption, with important implications for income distribution and effective demand. Hall's subsequent work also found very little evidence of intertemporal substitution in consumption (rather inconvenient for the theoretical foundations of the New Keynesian IS curve).

The older structural macroeconometric tradition was also discarded, even though, as Ray Fair has argued (and I noted in my discussion of Romer's criticism of modern macro), it offered a more promising framework for studying actual macroeconomic relationships. Evidence on the importance of housing, household debt for consumption, not to mention the permanent effects of demand on output, suggests that much was lost in that transition.

It is worth remembering that even the old Neoclassical Synthesis (before the 1970s) retained important elements of the Keynesian Revolution. The Keynesian consumption function, and the relevance of income distribution for aggregate demand, remained central to macroeconomic analysis. And while the Synthesis accepted the existence of a natural rate of interest and a tendency toward full employment in the long run (at least in principle), it took seriously the imperfections and institutional obstacles that prevented the economy from getting there. The old structural macroeconometric models reflected precisely that pragmatic concern with the actual functioning of the economy. In that sense, the rational expectations counter-revolution was a step backward even from the rather limited Keynesianism of the Neoclassical Synthesis. It replaced imperfect but empirically grounded models with theoretical (supposedly elegant; whatever that means) ones grounded on individual behavior that assumed away many of the problems the older tradition tried to understand (not exactly an improvement, if the objective is to explain how capitalist economies actually work). And, perhaps more importantly, it derailed potentially more fruitful directions of research.

None of this means that Hall and Woodford made no significant contributions. They have certainly been very influential. But technical sophistication and scientific progress are not necessarily the same thing. The irony is that the “Nobel” celebrates as a revolution what was, fundamentally, a return to the ideas that the Keynesian Revolution had challenged. A counter-revolution, indeed (and one that has been remarkably successful in shaping economic policy).

On Economic Traditions and the Sociology of the Knowledge

Marx & Smith vs Weber & Bentham 

I often use Randall Collins’ book Four Sociological Traditions in my class discussions and in my own work on the history of economic ideas. Collins’ discussion of economics as the first social science is instructive about how disciplines become autonomous from other fields. Economics emerged earlier than the other social sciences as an independent discipline, in his account, because states had practical reasons to collect information about taxation, trade, population, and public finance. Mercantilism created a body of empirical and administrative knowledge, and later writers, starting with William Petty (he cites François Quesnay and then Adam Smith rather than Petty), transformed these concerns into a more systematic intellectual discipline. Economics was able to establish itself institutionally before sociology because it had both practical applications and a relatively clear object of study.

Collins then shows how economics became increasingly professionalized during the nineteenth century. There is an extensive literature on that (on the American case see Coats, 1988). Classical political economy initially developed partly outside the universities, especially in Britain. In Germany, however, economics became more firmly tied to state administration and university training (on the German Historical School see Kurz, 2016). Later, marginalism and neoclassical economics helped turn economics into a more abstract and specialized academic discipline. Collins’s broader point is that the content of economic theory cannot be separated entirely from the institutional settings in which economists worked.

For Collins, ideas are produced inside social networks and institutions. Intellectual change occurs when institutional spaces open up, when new professional roles become available, and when communities of scholars compete over problems, methods, and prestige. In that sense, the rise of the social sciences – economics and, more interestingly, sociology itself – is a sociological phenomenon. The community makes the discipline.

Read rest here.

Anwar Shaikh (1945–2026)

 

With Anwar and Costas Lapavitsas at a conference in Tulsa

I was very saddened to hear of Anwar Shaikh’s passing. Anwar was one of the most important Marxian economists of his generation, perhaps together with David Gordon and Duncan Foley, at least in the US, both his colleagues at the New School.* He spent his career defending and developing the surplus approach in the broadest sense, against both mainstream economics and much of heterodox economics.

I disagreed with him on many things. On the theory of value, on Marx’s law of the tendency of the rate of profit to fall, on Say’s Law, and particularly on the determination of real exchange rates and purchasing power parity. In fact, an entire chapter of my PhD dissertation was devoted to his theory of exchange rates, which I regarded then, and still regard, as the main Marxist approach to the subject. The thesis was also critical of both mainstream and Post Keynesian theories of exchange rate determination, btw. I also disagreed with him on a number of policy questions, including the causes of inflation in many Latin American countries. These were not minor differences.

I also think that some of his work was creative and important in many respects, and closer to my views (not just issues of conflictive distribution associated to the surplus approach). His critique of comparative advantage influenced my understanding of the topic (also here). His work on the welfare state is something I often cite and use in classes. And his paper on the humbug production function was perhaps his most famous work.

Whether I agreed or disagreed with him, that never diminished my respect for him. Anwar was intellectually honest, genuinely pluralistic, and always willing to engage seriously with arguments with which he disagreed. That is rarer than it should be in economics. He believed deeply that alternative traditions in political economy had to be developed rigorously and confronted with both theory and evidence.

His work kept alive a broad classical and Marxian tradition centered on production, distribution, competition and the social surplus. The questions he insisted on asking were important ones, and his willingness to argue about them openly made heterodox economics better. He will be greatly missed.

PS: Bard College has an archive with his papers that is worth exploring.

* Sam Bowles would be another possible name, but I don't think he considers himself a Marxist anymore (and he might be right). I would also not put analytical or post-modern Marxists at this level. These are obviously debatable views.

Osvaldo Sunkel (1929–2026)

Osvaldo Sunkel, one of the last great figures of the original Latin American structuralist tradition, has passed away. A central figure at ECLAC, his work ranged from the structuralist theory of inflation and the historical-structural method to dependency, transnational capitalism, and environmental questions. Esteban Pérez Caldentey's biographical essay rightly presents him as an essential reference for Latin American economic thought, whose work remained concerned throughout with the specific historical and institutional conditions of development in the periphery.

Sunkel belonged to the extraordinary generation formed around ECLAC in the 1950s. His recent oral history for ECLAC is a wonderful account of that intellectual milieu: of studying development when there was barely yet a literature on the subject, and of the emergence of a genuinely Latin American way of thinking about development. ECLAC. 

For me, the loss is also personal. One of the reasons I decided to study economics was reading Sunkel's little book on the historical process of development and underdevelopment while still in high school in Rio, assigned by the geography teacher, Clóvis Dottori. The idea that development and underdevelopment were part of the same historical process, not stages in a linear progression from one to the other, was a revelation. The industrialization of England, and the deindustrialization of India were part of the same process. That was in the 1980s.

In the early 2000s we invited Sunkel to a conference in Rio, and I was fortunate to get to know him more closely afterward. The book Esteban and I wrote together is dedicated to him. A major loss for Latin American economics, and for me the passing of someone whose ideas helped set me on the path I followed.

Trump and Rubio fight to sway Brazil’s election and control the hemisphere

By Mark Weisbrot

One of the most important elections in recent Latin American history will take place Sunday in Brazil. Incumbent president Luiz Inácio Lula da Silva has recently been emphasizing the issue of national sovereignty. One reason: The challenger, Flávio Bolsonaro, has the strong backing of the Trump administration — and the U.S. has been intervening heavily on his behalf.

In the last few months of Brazil’s election campaign, Trump has met with Bolsonaro at the White House, imposed new tariffs on Brazilian goods and tried to send State Department officials to Brazil. (Both Brazilian and American officials said the presence of Trump administration operatives would cast doubt on the integrity of the voting there.)

A letter last week to Secretary of State Marco Rubio from 31 members of Congress documented additional hostile actions and concluded that “the United States is acting as an agent of interference and destabilization.”
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The election is forecast to be very close, and the sovereignty issue could be persuasive for swing voters.

Trump’s intervention undermines a basic and generally cherished right to self-determination, as well as the right to democracy itself. It is even clearly illegal under the Charter of the Organization of American States, to which the United States is a signatory.

Read rest here. 

Reflections on academic tenure prompted by events at The New School

By Thomas Palley

The New School is a historically progressive US academic institution that has fallen on hard times. Recently, it has been in the news because it has fired several tenured professors, invoking financial distress and institutional reorganization as grounds therefor. That has prompted some public debate.

Below are some brief thoughts on that debate. I think it has been a missed opportunity. It should have been used to discuss how to govern academia and remedy the system’s existing glaring failings. Instead, it has been used to tacitly defend the system.

Read rest here.