How Brazil Got the Worst Austerity Program in the World

by Benjamin Studebaker

Brazil’s new president, Michel Temer, has introduced austerity via constitutional amendment, freezing Brazil’s state spending at 2016 levels for 20 years, allowing it to increase only at the rate of inflation. This is really dumb–if Brazil’s population grows, or Brazil has an economic crisis, or Brazil has to go to war, it will be trapped within 2016 fiscal parameters. So as its population grows, the same level of spending will be divided across ever larger numbers of people, and if Brazil gets into major trouble it will only be able to pay for emergency measures by lashing social spending. To make matters worse, the amendment disallows its own repeal for a 10 year minimum, so there is nothing anyone in Brazil can constitutionally do about this ridiculous rule until 2027. But you know what makes this even more incredible? Temer was never elected president of Brazil in the first place. What follows is the bizarre story of how Brazil’s broken constitution empowered a man committed to an absurd political agenda.

Until recently, Brazil’s president was Dilma Rousseff, from Brazil’s center-left Workers’ Party:

But following a corruption scandal she was impeached and removed from office, and that means she was replaced by Michel Temer, from the center-right Brazilian Democratic Movement Party:

Now, you might be thinking “wait a second–why are the president and the vice president from two different parties?” This is because Brazil’s constitution does not require the president and vice president to come from the same party. Like the United States, Brazil’s president and legislature are elected separately. Unlike the United States, Brazil’s lower house (the Chamber of Deputies) is elected based on proportional representation, while its president is elected through a run-off system similar to that of France. This means that Brazil has a multiparty system at the legislative level but its alternative vote system eventually produces a binary two party choice at the executive level. In an attempt to bridge this, competitive presidential candidates sometimes choose someone from another party as their running mate so as to smooth future legislative cooperation.

But what happens when there’s trouble in the coalition? What happens when the president’s party and the vice president’s party start to split? In that situation, the vice president’s party starts to have an interest in working with the opposition to impeach the president, and the larger the ideological gulf between the president and the vice president, the stronger this incentive becomes. And indeed, this is what happened–Rousseff accused Temer of plotting against her:

They now are conspiring openly, in the light of day, to destabilize a legitimately elected president.

And indeed, once Temer replaced Rousseff, tapes were leaked in which his new ministers discuss the plot:

Jucá: We have to stop this shit. We have to change the government to be able to stop this bleeding.

Machado: The easiest solution would be to put in Michel.

The “shit” to which they refer was likely two-headed. On the one hand, they hoped eliminating Rousseff would defuse an anti-corruption investigation which implicates much of Brazil’s political class. On the other hand, getting rid of Rousseff allowed Temer to implement a reactionary agenda. Without the backing of the Brazilian Democratic Movement Party, Rousseff’s rump coalition lacked the votes necessary to resist impeachment.

In a country with a functional constitution, the vice president comes from the same party as the president so that the impeachment mechanism cannot be used to sneak in major policy and ideological changes. In the United States, impeaching Barack Obama or Donald Trump has limited utility. Obama’s opponents don’t like Joe Biden all that much better, and Donald Trump’s opponents don’t really like Mike Pence. So when an American president gets impeached, we know it’s for serious reasons–the opposition usually has little to gain politically from the ascendance of the vice president. Indeed, sometimes vice presidents are even more effective at pursuing the president’s policy agenda than the former president himself, as was the case when Lyndon Johnson took over for John F. Kennedy.

Because of Brazil’s muddled constitution, no one can ever be confident that Rousseff wasn’t impeached for substantively political reasons. The willingness of the new president to deviate massively from Rousseff’s policies only feeds these suspicions and has led many people to label this transfer of power a coup. And who’s to say it isn’t a coup? To the naked eye, it can easily look like one. At the same time, because removing Rousseff brings about major policy change, the Workers’ Party and its supporters are incentivized to back her even if she’s guilty–if she goes down, they lose the presidency.

So Brazil’s constitution both incentivizes the party in power to ignore administrative corruption to preserve their hold on the executive branch and it incentivizes the party with the vice presidency to plot with the opposition in what looks like a coup. In this case, all of this allowed a president with a deeply demented economic agenda to take office without an election. Indeed, Temer is already unpopular–in polling, he is currently projected to get less than 5% of the vote in the first round of the 2018 presidential election, and he would lose in the second round to any plausible opponent. So Temer was never elected president and will likely never be elected president.

It’s clear what needs to happen institutionally–Brazil’s constitution needs to be re-written to get rid of Temer’s bonehead amendment and require the president and vice president to come from the same party. This would prevent the vice president from conspiring with the opposition and encourage the president’s party to take corruption allegations more seriously. Otherwise this could easily happen again.

In the meantime, Brazil needs a real plan for dealing with its economic crisis. Its been in severe recession for some time now:

brazil-gdp-growth-2011-2016

The way out is not an arbitrary and destructive spending limit–like many countries with inadequate economic diversity, Brazil has been hit hard by the commodities collapse. More than a quarter of its export economy relies on things like iron ore and petroleum:

brazil-economy-by-sector

When a country’s economy is insufficiently diversified, it’s vulnerable to market shocks which can lead to stagflation. In Brazil’s case, because it relies so heavily on commodities, a collapse in commodities prices forces it to either defend its currency with contractionary budget cuts and high interest rates, which make the recession worse, or defend its workers with stimulus spending, which under these supply-constrained conditions produces inflation and allows the currency to fall, helping exports but frustrating investors. In both scenarios, major problems will persist until Brazil’s economy either becomes more diversified or commodities prices recover. Rousseff was letting the inflation rate run high to defend workers; Temer wants to defend the currency and let employment and the welfare state go to seed. Neither option is ideal, but the Rousseff option distributed the pain more evenly and enables the state to make large-scale investments in the development of alternative economic sectors, while the Temer option insulates the rich and obstructs public investment. To make matters worse, by making promises about spending 20 years from now, Temer prevents Brazil from changing its fiscal policy when commodities prices recover or Brazil achieves sector diversity. That makes his plan more than just right wing–it’s flagrantly short-sighted. Brazil would be better off developing additional sectors and eating some inflation in the short-term. After all, it’s already well down from peak:

brazil-inflation

Unfortunately, it looks like Brazil’s wealthy people would rather subject the rest of the country to two decades of ever-increasing misery than run 10% inflation for a couple more years. The price for Brazil’s poor and working people will be steep.