The Brazilian fiscal cap still makes no sense

McDevite is not answering my call. I am sad. 

But I am not as sad as the people of the Federal Republic of Brazil, right across border from here! (“Here” is Uruguay, on my way to Buenos Aires. And while I am in parentheses and can be pedantic, allow me to point out that “federative” is not a word in American English and the proper translation of “federativa” is “federal.”)

Over in Brazil, Michel Temer is mired in a growing corruption scandal. His woes are compounded by his blatant reactionary conservatism. The man worked to keep women and black people out of his cabinet. He also shoved through a constitutional amendment that insures public spending will shrink no matter what over the next decade. All that plus corruption! Brazil is, once again, a mess.

Now come Filipe Campante and Dani Rodrik with a short essay reiterating just how incredibly stupid the fiscal handcuffs will be for Brazil. They draw a parallel with Argentina. By the 1990s, Argentine governments had racked up a long history of irresponsible monetary policy. So they decided that the best way to promise to no longer inflate would be to throw away the printing presses. The Convertibility Act stated that the Argentine central bank could only issue pesos 1-for-1 with the dollars it had on reserve. 

Of course, the fact that Argentina had no control over its monetary policy meant that an otherwise manageable mild balance-of-payments crisis turned into a depressionary nightmare. The country abandoned the link in a moment of political chaos. 

Campante and Rodrik make the point that the fiscal limit is as problematic as convertibility. If it succeeds in bringing down interest rates and sparking growth, then it will no longer be necessary ... but will by its past success be perceived as a vital totem and therefore be incredibly hard to remove even should it start to cause damage. Meanwhile, if it is unsuccessful it will unsuccessful because the limit itself will become an early focus of political conflict. Either way, Brazil will lose, unless it somehow manages to dodge all economic bullets over the next decade.

So I am at a loss as to why the cap might even be remotely a good idea! But I know people disagree with me. So, Lee Allston, Aldo Musacchio, and anyone else in the know, once again, could you please give me the counter-arguments? Surely I am missing something. 

Comments

[J.H.]

federative is not a word in American English? Or do you mean it's an obsolete or rare word? Because I can find it in the Merriam-Webster dictionary - https://www.merriam-webster.com/dictionary/federative (and it's in the 1913 Webster dictionary too - http://www.websters1913.com/words/Federative)

As for the cap...is there anyone who benefits economically or politically from the institution of the cap? In that sense the cap might be a good idea....just not a good idea for Brazil as a whole...

[Luciano]

The measures can be explained politically if not economically. During Lula's and Dilma's terms there was a concerted redistribution of wealth to the lower income brackets. The pre-Lula middle classes did not benefit much from these programs directly and they generally feel they are unfair. These measures play well to that portion of the population at the headline level even if the substance is not that positive.