Yesterday, I listened in the car to a very interesting program on the German radio about Brazil. It dealt with the impeachment of president Rousseff. The Brazilian senate decided to suspend the president from office for 180 days. After that the final impeachment process will start. We commented on these questionable methods before (see here). At the end of the program, came an interview with Thomas Manz from the Friedrich Ebert Foundation (the interview can be found here). The last question of journalist Christiane Kaess expresses her ideological belief very clearly. Kaess is by no means alone in this. On the contrary, it is extremely widespread. The fundamental lack of knowledge shows and it is all due to decades of neoliberal propaganda.

Kaess’ question and Manz’s answer were as follows:

Kaess: ‘Mr. Manz, we now have this political paralysis, instead of fighting the recession, which is obviously necessary. Which reforms does the country now urgently need and do you think that vice president Temer, who wants to follow a neo-liberal course, would perhaps be better placed, would he be the right person to solve the country’s economic problems?’

Manz: ‘No, I do not think that at all. First, the social and economic development of Brazil in recent years has been overall positive. It is not the case that the Labour Party governed the country badly in the last few years, the accusations to that effect are incorrect. The contrary is true! There is ample material to back this up. In the decade and a half in which the Labour party very strongly influenced the political development of the country, enormous progress was made in terms of social development. Massive programs were set up to fight poverty, even to the degree that Brazil became a role model in the international community in this regard. Apart from the fight against poverty, there were many other social improvements and they significantly contributed to the positive economic development of the country. What happened in Brazil is that the worldwide economic and financial crisis of 2007 hit the country later than elsewhere. Add to this the fall in commodity prices as a result of the slump in demand from China. These factors hit the country very badly and caused a recession. Once things go bad, it becomes difficult. Some mistakes in economic policy were made. I think that the Rousseff government, which followed pro-cyclical (pro-growth) policies for a long time, should have cut back a bit when the economy was overheating. But it continued to invest in infrastructural projects and it gave tax breaks to entrepreneurs and all of this burdened the budget.’  

This is a very good answer (Manz’s answers were good overall) to – how should I say it? – a sort of nonsensical question which has become ‘common’ currency nowadays. The researcher of the Ebert Foundation could even have gone much further and point out how Brazil suffered from speculation against its currency, a massive real appreciation of the Brazilian Real and the in high tempo increasing influence of capital markets in the country. He could have added that the hands of the Labour party had been forced by extremely conservative central bankers and finance ministers (see my article here), driven as they were by sheer panic of what happened in the capital markets. He could have argued that for years, even decades, Brazil’s Central Bank has pursued extremely restrictive policies, so extreme that no government could survive in the longer term because it is just not possible to cope with a real interest rate that is permanently higher than the rate of growth. Manz could also have mentioned Brazil’s dysfunctional private banking sector (for decades the banks demanded interests on loans that were completely absurd – see here). The only solution was to nationalise the banks, so that it would become possible to implement rational economic policies.

The question itself, however, is also interesting because it points to a serious problem. It tells us what many (or most) people, who have no idea about the macroeconomic context, believe nowadays. I do not want to accuse the journalist of anything, but the fact remains that in all sorts of contexts, the question whether ‘neoliberal reforms’ can improve the economy betrays a fundamental ignorance and naivety – not only of the population at large or journalists, but even of economists. The latter really should know better. Imagine what would happen if an elementary course on macroeconomics should be taught in secondary schools. Another course would be taught in higher education. This will not happen because ignorance is bliss to the system, which is of course neoliberal. Imagine what would happen if journalists and the population at large would be capable of reasoning in sensible and informed ways about the factors that determine their lives more than anything else. That would be great step towards democracy. If this would be the case, journalists, politicians and the general public that is interested in societal and economic affairs would never fall for these traps.

I experienced the same phenomenon again during the last two weeks when I travelled to Thessaloniki and to Zagreb. In discussions with economics the same ideas and remarks crop up again and again: there is, in effect, a substitute or a ‘better’ alternative to a stimulus policy aiming to increase demand, it is supply side economics and ‘structural (neoliberal) reforms.’ If it proves impossible, for whatever reason, to implement a stimulus program, working on the supply side and going for reforms are the only remaining options. This is wrong. I am not saying this because of ideological reasons. It is wrong because the thinking contains a fatal logical flaw.

A policy that stimulates the supply side, even if it is well intended, is always based on the assumption that supply will create demand (this is Say’s ‘law’).  On the other hand, a policy that aims to stimulate demand, is made on the assumption that supply – the total production – is given. The question is then how the productive capacity can be optimally utilised. What we see today in Brazil, but also in Croatia and in Greece, are underutilised economies in which current supply (production) is far lower than what the economy can produce. Policies that stimulate the supply side are unable to solve this conundrum: what is the use of increasing the productive infrastructure and the potential output when the existing infrastructure already works below its capacity? Policies that stimulate demand do recognise this problem and they solve it too: growing demand causes better utilisation of the existing productive capacities to the point that the supply that the infrastructure creates becomes insufficient at full capacity. Demand creates supply. In order to satisfy demand, companies will then invest in their productive infrastructure and the net result will be increases in supply, demand, investment, overall growth and tax revenue.

Any sensible person will on the basis of simple logic recognise that the problem of the underutilisation cannot be solved without measures to increase demand. Nobody, except the neoliberal ideologues would say that one could ignore the demand side and concentrate upon supply and that in the end all will be well. And even if new supply would create its own new demand, this still does not solve the problem that many became underemployed or unemployed because of low demand before new supply created new demand. The majority of them will remain stuck.

The problem is that decades long of neoliberal propaganda has managed to almost erase such simple but essential categories from thought. The problem of the underutilization of the economy and the low investment ratio that goes with it have been removed from the discussion and every problem has turned into one of insufficient supply or into a structural problem. And this is also wrong. We practically always have to deal with cyclical economic phenomena, which are problems of insufficient demand, and with diverse structural problems. Structural problems can and should also be solved, but when economic development does not solve the issue of insufficient demand, addressing structural problems will not lead to removing macroeconomic dysfunctions. The neoliberal agenda that does not deal with addressing the problem of insufficient demand can never succeed, whether this is in Brazil or anywhere else.

That the reactionary forces in Brazil are trying to oust the social democratic president on the basis of a flimsy case against her and with no new elections in sight is very bad. That consequently a neoliberal agenda will prevail in a country in which the social-democratic government suffered greatly because of global neoliberalism and at the end proved to be unsuccessful because of a neoliberal assault is absurd. The real tragedy is that absurdity has become an outstanding characteristic of our era.