Lessons Unlearned From Brazil’s Recession


As she was sworn in for her second term last week Dilma Rousseff publicly stated government spending would have to be cut. Yes, you read that right; the leader of the Workers’ Party just said her own administration is spending too much taxpayer money. It might be a day late and a few billion dollars short, but could it be Brazil’s president just had her Eureka moment?

ReaisYears of spending billions of dollars on stadiums and infrastructure for a 4-week event has left the Brazilian government with little to brag about. While the world has moved on to other things the World Cup’s relics lie mostly unoccupied in a land of poverty, police corruption and gang violence. After the artificial boom created by said event the bubble has definitively burst. Yet to hear one of South America’s most adamant cheerleaders of government intervention admit to it is remarkable to say the least.

Government figures show Brazil’s economy had already fallen into a recession before the World Cup even got underway. This year the central bank expects the economy to grow by a dismal 0.38 percent while inflation hovers north of 6.5 percent, well above the 4.5 percent target rate. Industrial production is forecast to expand by no more than 0.7 percent, with the country’s current account deficit widening to $78 billion. Predictable though the downturn may be, its sheer magnitude is forcing the Dilma administration to consider some rather uncharacteristic measures. Or is it?

The budgets of a few dozen ministries and some secretariats may be cut by one-third, reportedly amounting to some $700 million in savings, the new Finance Minister Joaquim Levy was quick to add expenses listed in the constitution will be unaffected – a constitution about as thick as Ayn Rand’s novel Atlas Shrugged, by the way. In addition taxes on imports, credit, cosmetics and fuel are set to be raised. To make matters worse, an income tax reduction already approved by Congress was recently vetoed by Dilma herself.

Naturally, the fact that Brazil’s tax burden of 36% of GDP is far higher than that of other middle-income countries cannot be allowed to keep failed economic policies from going full steam ahead. The logic on which excise taxes or protective tariffs on imported goods rest, i.e. that raising prices of certain goods discourages their consumption, suddenly loses all its validity when it comes to such activities as human labor or investment. Can Brazilians really be expected to keep working just as hard despite essentially working two out of five business days just to sustain a giant bureaucracy? Can a society really be expected to achieve any sort of meaningful growth when forty percent of its productivity is sucked out of it?

It is obviously too late to take all of the resources spent on the aforementioned projects and redirect them into the private sector, where they would have contributed to sustainable economic growth. It is not too late, however, to reverse the trend and stop adding fuel to the fire. Besides, imagine how much more expensive that fire will be considering rising fuel taxes!

As the famous quote attributed to Thomas Edison goes, “I have not failed, I’ve just found 10,000 ways that will not work.” The latter can also be said for the idea of taxing and spending one’s way to prosperity. Edison’s point, however, was that making mistakes can be useful if one learns from them. Unfortunately that message does not seem to have reached Brasilia.

Constitutionally Protected Corporatism


The seventh and current Brazilian Constitution dates back to 1988, when it was written from scratch by a Constitutional Congress elected two years earlier. It contains a whopping 250 articles making it about as thick as the Bible. As its length might indicate it was not exactly written in the traditional sense, for the purpose of outlining what government can and cannot do to ensure the rights of the people.

Drafted after a period of military dictatorship with a constitution that severely restricted the rights of the people while expanding government power, the current one is also known as the Citizen Constitution. Did the Constitutional Congress in the late eighties feel the need to allay people’s fear of having their rights stripped away anew? Perhaps, but entrusting the very same institution that trampled all over the rights of the people with a litany of new powers does not seem to make logical sense. Couple this flawed logic with collectivist egalitarian rhetoric and what results is not exactly a recipe for freedom.

OLYMPUS DIGITAL CAMERAMany classical liberals and libertarians understand the inherent contradiction in constitutionally protecting positive rights; that protecting someone’s “right” to force a doctor to provide healthcare services inevitably ends up violating the doctor’s rights. Yet much less thought seems to be given to the practical implications, not to mention how it warps the general perceptions of capitalism. Whether one calls it corporatism, crony capitalism, or state capitalism, it certainly is anything but capitalism. Yet it is written right into the “law of the land” and few seem to take notice.

The constitutionally guaranteed “right to healthcare” apparently includes – among other things – free drugs for those suffering from hypertension, diabetes and asthma, as can be seen advertised in and around pharmacies here. While perhaps seemingly laudable at first glance, the true beneficiary of this constitutional provision is the pharmaceutical industry. After all, only their drugs are provided for free. This gives them not only a government-granted competitive advantage, but also an infinite revenue stream complete with heavily inflated prices. In that light it is no surprise that there are other reasons to believe the Brazilian government has a very cozy relationship with the pharmaceutical lobby.

Contrary to popular belief the average Brazilian, who might be thought of as the main beneficiary of a constitutionally guaranteed “right to healthcare”, is not at all helped by the situation. After all, since government has no money of its own to finance this system of cronyism, funding has to come from taxation, borrowing, or the printing press. While the former is not generally the preferred method for obvious reasons, the other two options are at least as detrimental to the people’s civil liberties and financial well-being. Brazilian inflation figures since the adoption of the current constitution serve as an indication of how the government likes to keep the scheme going.

In short, the constitutional provisions on healthcare and subsequent laws amount to nothing less than a giant handout to the pharmaceutical industry. Imagine running a business whose only customer consists of uninterested bureaucrats who don’t care how much you overcharge and whose end users have no clue how badly they are getting ripped off by the system. How easy it is to make a killing when the government is holding your hand!

It would serve Brazilian liberals well to emphasize this point when debating their detractors who claim to oppose corporate power.

The Inevitable Collapse of the Euro


An increasing number of reports have come out recently describing how governments, banks, multinational corporations and investors alike are preparing for a collapse of the euro. Meanwhile, European politicians are latching on to every conceivable measure to keep the single currency afloat and allay fears of a collapse. Our (elected and non-elected) leaders seem to be determined to prop up the euro at any cost, for “if the euro fails the idea of European integration fails”. Nonetheless, the real question is not if the euro will fail, but when.

Prior to the euro, there was a clear divide between those European countries that generally pursued responsible economic policies and those that pursued more “loose” policies. The difference, plain for everyone to see, was the strength of the currency. For instance, due to its stability the Deutschmark was the strongest European currency and was used in international transactions. Other currencies such as the Spanish peseta and the Italian lira were much weaker comparatively. As a result of this system, reckless spending and subsequent inflation were invariably exposed and kept in check by the devaluation of the currency in question relative to stronger European currencies. Nonetheless, Mediterranean countries traditionally ran much higher public deficits than Northern European countries.

This begs the question why these countries were admitted into the euro in the first place, despite their failure to meet the so-called convergence criteria of the sixty percent limit of public debt to GDP or the three percent limit on public deficits. Not only were these criteria not automatically applied, the Council of the European Union could still decide to admit countries to the Eurozone if a qualitative majority was reached. Belgium and Italy were admitted in this way, while other countries only met the criteria through accounting tricks. Even Germany did not meet the criteria[1].

The introduction of the euro brought with it major benefits for the southern countries. Though article 104b of the Treaty of Maastricht adopts a no-bailout principle, the implicit (now explicit) backing of the richer European countries reduced the interest rates southern countries had to pay on their government bonds. At the same time, interest rates on government bonds issued by the northern countries went up to compensate for the increased risk. This took away another incentive to curb deficit spending as budgetary discipline didn’t lead to higher interest rates to the extent that it used to. European banks bought Greek and other bonds because the ECB accepted them as collateral for their lending operations, wiping out any risk of non-payment in case of default. Therefore, issuing new government bonds is now practically the same as printing money, increasing the amount of euros in circulation and thereby inflation, lowering consumers’ purchasing power in the entire Eurozone

Money market interest rates in the southern countries fell, too. Coupled with the loose monetary policy pursued by these countries this caused a real estate bubble even before the introduction of the euro. The bursting of this bubble was a major blow to Spain’s economy. The single currency also boosted exports from northern countries to the peripheral countries as those goods had become cheaper. The resulting spending spree served to further increase the gap in competitiveness between highly competitive countries like Germany and southern countries, which were not competitive due to strong labor unions, inflexible labor markets and high wages[2]. The money that went to these indebted countries as part of the EU rescue package added fuel to the fire by pushing up wages and prices, besides contributing to a further rise in inflation in the Eurozone.

Moreover, the Mediterranean countries effectively run the Council of the European Central Bank, which consists of the directors of the ECB and the heads of the national central banks of all of the member states. Since all hold the same vote and decisions cannot be vetoed, the fiscally conservative northern countries are in the minority against the southern countries which tend to have higher debts and inflation. In other words, the Latin countries are in control, leading to a similar tendency of deficit spending by the ECB and, again, inflation. After all, no incentives have been built into the system to pursue fiscally responsible policies. The southern countries are literally living off of the wealth of their rich northern neighbors.

In addition, profits accrued from interest-bearing assets held by national central banks are remitted to the ECB which then remits them back to central banks based on population and GDP – not the assets owned by the central banks from which they came. As such, the system represents a redistribution of wealth from richer central banks with more assets and smarter investment strategies to banks with fewer assets and/or less optimal investment strategies. The Bundesbank, for example, recorded €68.5 billion in profits in the ten years prior to the introduction of the euro compared to €47.5 billion in the ten years thereafter[3].

In reporting on the sovereign debt crisis, mainstream media habitually leave out the fact that Goldman Sachs helped Greece get into the euro by helping the government cover up its true debt. Derivatives and fictional exchange rates were used to disguise loans as swaps, circumventing EU admission criteria. Furthermore, Greek, Spanish, Portuguese and Irish finance ministers were bribed by Jacques Delors, then Commission president, who promised “large increases in EU structural funds in return for their signatures on the [Maastricht] Treaty”[4].It thus turns out that, behind the scenes, there were lots of powerful helping hands involved with the birth of the euro..

Today European banks and governments are more intertwined than ever, making the collateral damage of default incalculable. French and German banks hold most of the Spanish debt while also being particularly exposed to Greek, Irish and Portuguese debt. Spanish, Italian and Portuguese banks are now buying their own governments’ bonds as French and German banks are seeking to offload them.

For the abovementioned reasons it is to be expected that the power-hungry bureaucrats in Brussels, the politicians and the bankers will try to keep the Ponzi scheme going as long as possible, increasing the pain all Europeans will feel when the house of cards that is the euro finally comes crashing down. However, we are already way past the point of no return and the sad truth is that nothing can be done to fix the euro anymore. The final trigger will either come from rioters in the southern countries refusing to go along with ever-increasing austerity measures or from people in the northern countries demanding that their governments stop subsidizing the south.

The early years of the euro were like a party where everybody got drunk on cheap booze. Now, however, we are dealing not only with the hangover; we are finding out that we went way over our budget and that we welcomed some shady characters to the party that never should have been invited in the first place. The time has come for us to realize that the party was a bad idea from the start. The euro is a dead horse. The sooner we acknowledge that, the better.


[1] Savage, J.D. (2005). Making the EMU. The Politics of Budgetary Surveillance and the Enforcement of Maastricht. Oxford: Oxford University Press.

[2] Bagus, P. (2012). The Tragedy Of The Euro. Auburn: Ludwig von Mises Institute. pp. 50-51.

[3] Bagus, P. (2012). The Tragedy Of The Euro. Auburn: Ludwig von Mises Institute. p. 46.

[4]Conolly, B. (1997). The Rotten Heart of Europe. The Dirty War for Europe’s Money. London: Faber & Faber. p. 198