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Michael Brandl > Macro Updates > Archives > November 2, 2006 November 2, 2006 Macroeconomics and Elections I: Brazil. This past week, Brazilian President Luiz Inácio Lula da Silva handily defeated former São Paulo governor Geraldo Alckmin in a run off election. Lula, often described as “left of center,” reached out to the Brazilian middle-class voters and Brazilian farmers. These two groups, along with his traditional base of the poor and working class, were enough to secure an electoral victory. Lula’s task now is to turn electoral promises into economic reality. Lula has promised to increase the rate of economic growth in Brazil and, in the process, create desperately needed jobs for the poor and unemployed working class. Making such promises is easy, but making them actually happen is very difficult. If Lula is really interested in creating jobs in Brazil, he is going to have to undertake some major structural reforms of the Brazilian economy. By most estimates, the Brazilian economy is hampered by excessive government regulation and extremely high tax rates. Government regulation is, of course, sometimes warranted, but more often, as is the case in Brazil, the regulation exists due to populist appeals and down right power grabs. Similarly, high tax rates need not kill off economic growth, if (and only if) those high tax rates result in extremely large quantities of high quality public goods. The Scandinavian countries are often held up as example of this, but let’s not forget that São Paulo is no Helsinki. And then there is the pension problem, Brazil’s public pensions are under funded. What makes this so surprising is that Brazil has a very young population. Usually you see under funded pensions with aging populations (e.g. U.S. and Western Europe), but in Brazil it is a problem of the state promising too much and collection too little. As a result of this, benefits will have to be cut or taxes raised, neither of which is going to be popular. Finally, if Lula is serious about creating jobs, he is going to have to tackle the issue of labor market reform and government corruption. Entrepreneurs are not going to take the risk of creating or expanding businesses and thus creating new jobs in an atmosphere of over-regulated labor markets and bribe-seeking government officials. Lula can talk about creating jobs, but actually doing it is going to take a great deal of courage and a lot of political capital. He may have the former, but, given the ugly Presidential campaign, it is unclear whether or not he has the latter. Macroeconomics and Elections II: United States. Elections in the United States are often determined by “pocket book issues,” or so the political scientists tell us. It is very difficult for the political party in power to maintain power, especially in off-year elections, if the economy is not doing well.Given that scenario, the ruling Republicans should have nothing to worry about. The U.S. economy is expanding nicely, inflation is under control, homeownership is at high levels—economically, every thing looks positive. And, yet, the Republicans are likely to loose control of one, if not both, houses of Congress. Why? Answer: the economy. The economy?! But isn’t the economy doing well? . . . Yes, but there are two major “economic issues” that worry Americans: One is the future of the middle class, and the other is the federal government budget deficit. Neither of which seems to be a topic of discussion by those running for office, but it appears to be on the mind of the electorate, if not consciously than perhaps unconsciously. Many in the middle-class in America worry that as the U.S. economy continues to grow and expand, the benefits of this economic expansion are not evenly spread across the population. Though CEO compensation continues to increase rapidly, many non-executives are seeing their pay increase slower than the rate of inflation. This, in economic terms, is a decrease in real wages. In addition, increasing health care insurance premiums, defaulting pensions and the threat from “outsourcing” are the worries of many Americans, even as the Dow breaks 12,000. Look at Alan Murray’s recent article in the Wall Street Journal or Larry Summer’s recent article in the Financial Times and you will hear much the same story—many Americans are feeling left out of the successes of economic growth and globalization. One wonders what the long term impact of these changes will be. Might voters start to turn against market friendly, pro-growth economic policies? Might they start to blame “foreigners” for their economic insecurities? Some argue we are already seeing signs of this over the “immigration debate,” The impact of such insecurities, however, could have widespread, negative macroeconomic effects. For a discussion of the not discussed budget deficit see the webcast at: http://media.mccombs.utexas.edu/MacroUpdates/Macro3.wmv CNBC interview. Texas and California economies larger than China? Really? See the interview I was part of last week: http://media.mccombs.utexas.edu/StreetSigns/StreetSigns-HiResWMV.wmv All the best, MBrandl |
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