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Brazil Goes All In on Stimulus

President Rousseff isn’t taking Brazil’s economic deceleration lying down. Her administration is responding to slow growth with massive government investment in infrastructure. It is also continuing to push interest rates down by strong-arming the country’s two largest national banks. The good news is that Brazil needs infrastructure and investment, so many of these projects are likely to have a positive impact. And it doesn’t hurt that, even though economic growth has slowed, Brazilian unemployment hasn’t budged from a historic low of 5.8 percent.

But more and more Brazilian observers think the government’s heavy-handed interference with market forces will prolong stagnation. The New York Times reports:

[I]n an echo of the debate about heavy government borrowing in the United States and Europe after the global downturn, Ms. Rouseff’s moves are starting to meet resistance in Brazil. Some experts fear that Brazil is becoming too dependent on government intervention to smooth the ups and downs of an economy that remains tied to commodity cycles; others fear that the creation of state-supported champions in the business world give the government even greater power to dictate policy shifts, potentially eroding Brazil’s exposure to market forces.

Supporters of the government’s stimulus push argue that previous errors mainly lay in Brazil’s uncontrolled foreign debt, an old monkey the country threw off its back after adopting radical fiscal and monetary reforms in the 1990s. Today’s administration is watching its borrowing carefully, they say.

But debilitating budgeting issues still loom large as Brazil attempts to ramp up a host of large investment projects at once, in time for the 2014 soccer World Cup and 2016 Olympics. Waste and inefficiency are already starting to creep in, as evinced by the fact that just a fifth of the $7 billion allocated for highway projects in 2012 has been spent.

The Brazilian government has tried policies like this before. They often work for a while, but the combination of corruption and inefficiency causes the policies to fail in the long run. Brazil is now going to have to see if this time is different.

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  • Jacksonian Libertarian

    Deficit spending is never a good idea, even for infrastucture which will gain a long term economic advantage for the economy. Since all Government deficit spending competes with consumers and businesses for the available capital, it crowds consumer and business purchases and investments aside, reducing demand and productivity enhancing business upgrades, and so growth. The best solution for a weak or declining economy is spending and tax cuts. This method pumps capital directly into the economy. An alterative method is to cut spending and payoff debt, this pumps money into the capital markets thus reducing the cost of capital to consumers and businesses.

    “There’s a reason it’s called Capitalism; it’s because Capital is what fuels it.” Jacksonian Libertarian

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