The Economist Turns its Back on Reality

 

False equivalency? You bet*

 

The Economist just published one of its lead articles on the Brazilian election, with the rather dramatic title "Brazil turns its back on the future." The basic argument is not particularly original. Brazil is a country with enormous potential, but it does not grow enough, spends too much, has too much debt, and now voters are faced with two dismal choices that are both equally bad. Lula on the left and Flávio Bolsonaro on the right.

 

There are many problems with the piece (where to start?). The most obvious is the strange equivalence between Lula and Bolsonaro's son. The article itself recognizes that Lula is a democrat and that Flávio questions the reliability of the voting machines and has suggested that he might not accept an electoral defeat. It also notes, almost in passing, that his main political proposal is essentially to pardon his father, who was convicted for his role in the attempted coup after the 2022 election. These things are not exactly equivalent to being old and not cutting government spending enough.

 

The discussion of corruption is even stranger. I have said this many times over the years, but it's worth repeating. There is simply no material evidence that Lula personally received money from the corruption schemes associated with Petrobras or anything else (e.g. the infamous apartment). His enemies looked very hard (and they had every incentive to find something). Lava Jato was one of the most extensive anti-corruption investigations anywhere in the world. The leaked conversations from the so-called Vaza Jato, and the subsequent decisions concerning Judge Sergio Moro's partiality, hardly strengthened the argument that Lula was convicted on the basis of solid evidence. My view has always been simple on this matter. If there was evidence that Lula personally pocketed money, after all these years somebody would presumably have produced it. The absence of evidence is not evidence against its existence, but it makes a pretty strong case. Many politicians have been caught with Swiss accounts and other hard to explain funds. Not Lula.

 

The contrast with Flávio is remarkable. The old 'rachadinha' investigation alleged that millions of reais had been diverted through employees of his office.** The case was eventually derailed by judicial rulings excluding evidence, not by the discovery that the underlying transactions never took place. More recently Flávio had to acknowledge his relationship with Daniel Vorcaro after recordings contradicted his previous denials. He had arranged financing from Vorcaro for a movie glorifying his father (you couldn't make this stuff up), and Reuters reported that messages obtained in the Banco Master investigation showed the two referring to each other as "brother." Flávio denies that there was any quid pro quo or illegal conduct (yeah, sure, and I believe in Santa Claus). Yet The Economist manages to subsume the whole thing under the proposition that Brazil has a generic problem of "entrenched corruption," for which Lula and Flávio are somehow equally inadequate responses.

To be clear, corruption exists in Brazil. It exists everywhere. I see no particular reason to think that Brazil is uniquely corrupt (certainly compared with a United States in which the current president has repeatedly blurred the lines between public office and his private business interests). The relevant question is who did what, and what evidence exists. Corruption cannot simply be invoked as a magic word to erase rather obvious differences. One is forced to conclude that the newspaper's (as they refer to themselves; it's a magazine) writers are too gullible, or they don't really care about corruption at all. This is just a smokescreen for their real issue: the "fiscal problem." Their economic argument is perhaps more conventional, but not much better. On the economics they are closer to Flávio's views (I mean the people around him; he has no views on anything). 

According to The Economist, excessive government spending raises debt, which raises interest rates, which crowds out investment and prevents Brazil from growing (the old Treasury view Keynes fought in the 1930s; truly nothing new under the sun). Therefore Brazil needs deep spending cuts. Something like Milei, which they also keep promoting as somewhat of an example for the region. Renan Santos (who?), the libertarian candidate, apparently has the ideas that "match the moment most closely." That tells you how out of touch they are, and also why this is a disguised defense of Bolosnaro's kid, who had Milei in the launch of his campaign (and has an Econ advisor promising deep cuts like Milei; or as promised by Elon Musk's failed DOGE).

Lula's problem, in my view, has been almost exactly the opposite. His government has been far too concerned with fiscal restraint. As I noted in my previous post, the government has accepted a fiscal framework designed essentially to constrain the growth of government spending, and the evolution of Bolsa Família is illustrative of how cautious fiscal policy has remained. If you accept a demand-led, view of growth (admittedly The Economist and most of the profession does not), this matters enormously. Government spending is one of the central sources of autonomous demand. If autonomous expenditures grow slowly, demand grows slowly, and induced investment will also grow slowly. There is no mysterious mechanism by which cutting spending produces the private investment necessary to accelerate growth. The confidence fairy has been around for a long time in discussions of Brazil (and has not acquired much empirical support with age).

Even the debt argument is somewhat circular. High interest rates themselves increase the government's interest bill and therefore public debt. Then the higher interest bill is presented as evidence that fiscal policy is unsustainable and government spending must be reduced. The political intention should be straightforward to understand. High rates transfer income toward rentiers, increase the fiscal deficit, and then the resulting deficit becomes an argument for cutting social expenditure. I discussed essentially the same mechanism recently in another context.

But the really egregious aspect of The Economist piece is political. The newspaper (okay I'll play ball) likes to portray itself as a defender of classical liberalism (although economically it has been closer to neoliberalism for a very long time). Yet when confronted with an election between a conventional center-left president who has respected democratic institutions and an authoritarian candidate who questions elections, wants to free the leader of an attempted coup, has a long history of corruption allegations (that are pretty credible), and comes from a political milieu with well-documented connections to Rio's militias (that he doesn't deny, BTW), the decisive issue apparently remains whether somebody is willing to cut government spending deeply enough. Fiscal austerity, it seems, trumps liberal democracy. That says considerably more about The Economist than it does about Brazil. Shame on them!

 

* There is a little joke on bets, that Lula tried to regulate, and now has forbidden. 

** There is also the issue of his chocolate store, with crazy high profits (and all involving cash deposits), used to launder the proceeds of the scheme. The funny thing is that there was a chocolate shop not far from my dad's apartment (that was in Buenos Aires, so no connection), that was always open, but over many years, I never saw a single client. And while other, seemingly more profitable, shops went out of business, this one persevered. I always joked that it was a front for something. Apparently it is true, chocolate shops are a good front for the mafia.