“Technicality” My Ass: Fiscal Rules Matter

Dilma is being impeached over Brazil's version of our "bochinche parafiscal". Venezuelans, of all people, are on incredibly thin ice dismissing this stuff as a harmless technicality.

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The one thing about Dilma’s impeachment everyone seems to agree on is that the reason she’s being impeached isn’t really the reason she’s being impeached. The charges against Dilma are dry and technical. She’s charged with massaging budget numbers to avoid cutting spending in an election year, in violation of budget rules. Big whoop, right?

Wrong.

The details are…detailed. But Dilma is being impeached for the kind of politically-driven illegal spending that Venezuelans know only too well. The economics are clear: taken to their wildest extremes, the types of violations Dilma is accused of will yield the kind of macroeconomic chaos Venezuelans have been living with for some years now.

Here’s the short version. Brazil has a law in place to ensure that government spending doesn’t go haywire. The government is legally bound to run a primary budget surplus which means that, not counting the money it spends servicing its debt, it has to take in more in revenue than it lays out in spending on any given year.

That’s a tough fiscal rule – arguably, too tough – but in a country with a history of macroeconomic chaos set off by fiscal laxity there’s a decent case to be made that you’re better off with fiscal rules that err on the side of toughness. (Surprise surprise, before the current scandal hit, Dilma had been busy trying to weaken these rules.)

 
If Venezuela had had institutions strong enough and independent enough to boot Chávez out of office back when he started shaking down the Central Bank for a “millardito”  in 2004, Venezuelans would not be dying in numbers for lack of simple medicines today.

Dilma is being impeached for cooking the books to sidestep the primary surplus fiscal rule. Long story short, when she was up for re-election, it started to look like her government would miss its primary fiscal surplus requirement. But it was an election year, you sure as hell don’t want to cut spending then. (Sound familiar?)

So what did she do? She set up a Brazilian version of the bochinche parafiscal: taking some spending off of the government books and spinning it off to non-budget entities so it wouldn’t count as part of the government budget, but with the understanding that the government was still on the hook for it.

It’s a little as though Maduro was being impeached for shoving public spending off of the budget and onto Fonden, where nobody can scrutinize it.

Now, here’s the part that gets me: if a Frenchman wants to call that a “harmless technicality”, well, ok. France has never seen honest-to-God hyperinflation, perdónalos señor que no saben lo que dicen. If a gringo, or an Australian or an Irishman wants to say that? I get it. It’s wrong, but I get it.

But a Venezuelan? A Venezuelan in 2016!?

No, chamo, no.

We do not get to blithely snigger at up-tight Brazilians and their up-tight budget rules. Venezuela is living the ruinous macroeconomic consequences that are the logical endpoint of letting the government spend with no restraint right now. Today. Ahoritica mismo. 

Let me put it another way: if Venezuela had had institutions strong enough and independent enough to boot Chávez out of office back when he started shaking down the Central Bank for a “millardito”  in 2004, Venezuelans would not be dying in numbers for lack of simple medicines today. If we’d had the fortitude to say “up with this we will not put” when Chávez began shortchanging FIEM, otro gallo cantaría.

If we’d had institutions with the foresight to see that a government that doesn’t respect fiscal rules is a live danger to its people, we wouldn’t be in this mess today.

Personally, I’m all for what Brazil’s congress did today: they put a hard stop to fiscal irresponsibility before it spun out of control and began destroying people’s livelihoods.

Let gringos dismiss the charges against Dilma as technicalities if they want. We, of all people, don’t get to do that.

23 COMMENTS

  1. Naw, man. This is dangerous to Brazilian democracy as forcing CAP out in ’93 was dangerous to Venezuelan democracy. I am no Dilma fan at all, but I greatly fear the consequences of this impeachment.

    • Tried to buy medicines in Venezuela lately?

      What I greatly fear is the consequences of unchecked executives and out of control spending.

      • From Dilma being fiscally irresponsible to Brazil going through the same situation as Venezuela is really quite a stretch of an argument.

        • Well, honestly, Quico is right. But I just don’t have a good feeling about this, particularly if you are realistic consider that what everything knows – that Dilma is not really being impeached about this. If the MPs that are now voting to impeach her -and Brazilian society in general- understood the dangers of fiscal irresponsibility, then I’d be totally in favor of that. But it seems to me that this is not really the case.

          • Your lack of a “good feeling” about this is only because of a LatAm tendency value the “rights” of sitting presidents more than the rights of the people who have to suffer their rule.

            As far as I am concerned, LatAm politicians are guilty until proven innocent, and should all comport themselves as to be above all reproach. They have a lot of bad juju to overcome.

          • Asking ANY the LatAm society in general to have a good understanding of economics and fiscal responsibility issues, is to me, somewhat wishful thinking. Much of the recent pink tide populism could be boiled down to exploitation of the general voters ignorance of sound macro economics and fiscal responsibility.

            Just like my mom found clever ways of “disguising” vegetables when I was young so that I would eat them, I’m usually in favor of good economic and fiscal policy regardless of the form it has to be disguised in for el pueblo to accept it.

      • Let’s face it. Sometimes there are no GREAT paths to choose from. Impeachments tend to get messy. Unchecked executives are usually even messier. The only great option would be to not be where we are today. But unless someone’s got a time machine in their pocket and forget to mention it, Brazil (and Venezuela) ran out of great options a while ago. I’m not even sure there’s any good ones left.

        I burned the hell out of my hand recently and had to scrape part of the damaged area. It hurt, A LOT. I’d much rather have left it alone. But that too would have hurt down the road. The only good option was not to get burned, and that ship had already sailed. Which meant I had to choose the lesser of two uncomfortable options and get started on recovery.

        Without a doubt, a Dilma impeachment will have some uncomfortable consequences. But I can’t imagine them to be worse than the long term ones of leaving it alone and “hoping” the burn will get better on its own.

  2. The sweet ironies of life: it took a beautiful maniac like Chávez to wipe the academic smirk off of our collective faces. Thanks to him, center right no longer seems like the way angry old people think.

    We got to see what good intentions look like when out in the world colliding with facts, and it weren’t purty. He’s like Jesus: burning away the original sin. Now that we know, all we really want from government is the unsexiest of sanity.

    By us, of course, I only mean politics nerds. But you gotta start somewhere.

  3. Can’t agree with you on this one, but then again I am one of those Australians about which you warned us so idly. 🙂 There’s nothing intrinsically bad about government deficits as long as they are managed responsibly with regard to the broader macroeconomic circumstances. I think it unwise to take such a potent macroeconomic stabilisation tool (see Australia’s stimulus during the Great Recession for instance) off the table with a rigid fiscal rule (discretion based on the current economic circumstances is desirable).

    So what then ought to be the check on expenditure out of control? The Ballot Box.
    The Venezuelan puclic had plenty of opportunities to boot Chávez (or his protégé) from office, when it was clear his administration was driving up inflation with excessive deficits. In the 2004 recall referendum when inflation was recorded at 21.75%, in 2006 when inflation was recorded at 13.65%, in 2012 with inflation at 21.54%, and in 2013 when inflation was recorded at 39.52%. They chose not to, if they had (as you put it) “Venezuelans would not be dying in numbers for lack of simple medicines today.” People get the policies they vote for, however unwise those policies may be, but that’s democracy for you.

    • I agree, it’s very likely an overly rigid rule.

      But guess what, if you’re a president and you think a law is bad, you have to change it before you get to ignore it.

    • Love that old Mecken saying ” people always get the government they deserve , and they get it GOOD and HARD !!” …problem is that the follies and delusions of a too often ‘misguided’ mayority get to make decisions which disastrous results for every one in a country, even those who knew better , trust in the spontaneous wisdom and practical vision of mayorities in countries with very low standards of education to read thru the foibles and deceits of overly ambitious pols is almost always misplaced. Democracy is like a great car , which can perform wonderfully in the hands of an experienced pilot and disastrously if placed in the hands of a bold and ignorant driver.!! Maybe we should insist on political candidate to provide credentials of their ability to manage the resources of a state reponsibly before allowing then to run for office just as we require people to pass tests to show their driving capacity before giving them a drivers license.

      • Unfortunately, this problem is not limited to people in “countries with very low standards of education.” In their just published “Democracy for Realists” gringo academics Christopher Achen and Larry Bartels show conclusively that even in as well-educated and puritanical country as the U.S. it is wildly unrealistic to expect that even the most well-informed voters will be able to “read thru the foibles and deceits of overly ambitious pols.” Here are Achen and Bartels making a presentation based on their book at a recent academic conference: https://www.youtube.com/watch?v=7nGwfD5OWJs

  4. We should also take a step back a remember the institutional consequences brought to our own democracy by removing an elected President for charges of questionable merits. I would think twice before jumping so hastily on board the impeachment train.

    • I think we should think twices if we are still going to let this thinks happends in our region. We need to start saying enough if enough, and Brasil has tried to do so with corruption and “super goverment power”. Lets see hoz its turns out.

  5. Quico I suscribe 100% with your views posted here. ILLEGAL Fiscal irresponsibility ought to be grounds for sacking governments in Brasil and anywhere else in the world, especially when it comes tainted with corruption..

    What escapes me is: who’s calling that a technicality? Do you have some links on this?

  6. As a venezuelan, I am up for it. Why? Well, I expect this will lead to more international pressure against Maduro et all. The enemies of my enemies are my allies. Of course this could backfire, but in the short-medium term it can be good for us. As far as I know, the Congress in Brazil is just as legitimate as the executive power. So…maybe the impeachment is political “en el fondo”, but it is not ilegal and it is built on solid enough facts. No one can rightly say it is a coup.

  7. “France has never seen honest-to-God hyperinflation…”

    In 1914, the franc was worth the equivalent of 3.5 euros in 2007; by 1944, the franc was worth about 0.17 euros; by 1948, 0.025 euros. In 1960, the “new franc” replaced the existing franc, at 100 to 1 (about 1.45 euros). By 1984, the new franc had dropped to about 0.24 euros.

    The aggregate inflation across this period was 1,458,400%; about 14.7% per year.

    I guess that’s not “hyperinflation”, but inflation at that level, sustained for many years, has the same effect. The lobster still gets boiled.

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