Former director of the Central Bank was at Unicamp to give the opening lecture of Economy Week
Economist André Lara Resende, former director of the Central Bank and one of the members of the team that formulated the Real Plan, opened the Economy Week on Monday night (12), an event organized by undergraduate students at the Institute of Economics ( IE) from Unicamp. Invited to speak about macroeconomics, Resende aligned his reflections with a topic that he has been defending and that has provoked widespread controversy among his peers: the Modern Theory of Money, also called Modern Monetary Theory (MMT, in English). One of MMT's assumptions, and which has caused greater resistance from critics, asserts that countries that issue their own sovereign currency do not face financial restrictions. In other words, no matter how large the expenses, they cannot become insolvent. “As for this issue, there is nothing to discuss. It's a logical question. The resilience impresses me,” he said. Before speaking to an audience that filled IE's “Zeferino Vaz” Auditorium, Resende received the Journal of Unicamp for the following interview, in which he offered more details about MMT.
Journal of Unicamp - What reflections did you bring to Economics Week, organized by undergraduate students from the Unicamp Institute of Economics?
André Lara Resende – The theme of my conference is the macroeconomic crisis. Macroeconomics, like all economic theory, is something that is constantly changing. The 2008 crisis should have forced a review of the macroeconomy. This review is still ongoing, but is met with enormous resistance.
JU – Is the current Brazilian political context an element that makes this review difficult at the domestic level?
André Lara Resende – I think not. Resistance is independent of the political circumstances of the countries. This resistance always exists.
JU – A topic that you brought to your conference, and which has been the subject of several of your articles, is the Modern Theory of Money or Modern Monetary Theory. For those unfamiliar with the subject, what are the principles of MMT?
André Lara Resende – Every time we give a name to a given theory, it helps in a certain way to organize ideas around them. On the other hand, it can also harm the understanding of what is being said, as it becomes a label. And the label tends to identify, without any reflection. Once labeled, the theory can be associated, for example, with a certain type of political position, which makes it even more difficult to understand the ideas that are being discussed. What is conventionally called Modern Monetary Theory, which I consider a bad name, since modern is already old, starts from the observation that monetary theory in a fiat currency system has very different implications from classical monetary theory. In the world of fiat currency, what shocks some trends is the statement that the government that issues its own currency has no financial restrictions. This, although it is a logical and irrefutable corollary, has generated enormous resistance.
JU – Critics of MMT say it is somewhat confusing. Is this position an indication of the resistance you refer to?
André Lara Resende – There's nothing confusing. To be honest, most of the reviews I've seen show that their authors didn't bother trying to understand. They didn't see it, they didn't read it and they didn't like it. This is obviously not acceptable from the point of view of an intellectual, academic position.
JU – Are the assumptions of the theory valid without distinction for all countries that issue fiat currency?
André Lara Resende – Any country that issues fiat currency is not financially constrained. When he spends, he inevitably issues currency. When you tax, you forcibly destroy currency. This link between fiscal policy and monetary policy was kept separate for a long time by conventional theory. Conventional theory itself, for two or three decades now, has understood that this decoupling is mistaken. Modern Monetary Theory, for better understanding how currency issuance works – the word issuance is bad; 'creation' is preferable – it debunks some of the theses of conventional monetary theory. From there, this has implications for monetary policy and fiscal policy.
Returning to your question, the fact that the government that issues your fiat currency has no financial constraints does not mean that everything is possible. The restriction of supply, of the reality of resources, continues to be a science of scarcity. You have to make decisions about resource allocation. When you increase public spending, regardless of whether you can finance it or not, this means that some other type of spending, if you are close to the limit of capacity, will no longer be made. These are technical and political decisions. Conventional theory, for some reason, argues that the decision is merely technical, but it is not.
JU – Different generations have witnessed economists and government officials say that a country's accounts are similar to a household's accounts. In other words, the principle is that you should not spend more than you earn or collect. MMT considers that the comparison is incorrect. Could you explain this understanding better?
André Lara Resende – Common sense says that we should all respect our budget restrictions. This is not true, and Keynes [John Maynard Keynes, British economist considered the “father” of modern macroeconomics] showed this clearly in his General Theory. He demonstrated that there is a fallacy of composition. What is true at the individual level may not be true at the aggregate level. Let's take savings as an example. When a person saves, they will have more income in the future. If the entire economy increases its savings rate, this can lead to a reduction in income and employment. Therefore, the behavior of aggregates is not the same as the microeconomic behavior of individuals. The hardest thing to understand is that, because currency is fiat, created when the government spends, the government does not have a financial constraint. He does not need to find sources of funds for his expenses. This goes against common sense, but it is a logical deduction from fiat currency.
JU – The central government creates the currency. What do states and municipalities look like in this context?
André Lara Resende – States and municipalities do not have the issuance capacity. They are subject to a financial constraint. Therefore, they do not have the same flexibility as the central government. You can spend well or spend badly. Some restriction on current expenses, especially on personnel, makes perfect sense. This is because there is an inevitable demagogic political tendency, adopted by public figures who want to increase their area of influence, of hiring people in the public sector, swelling it. This type of public employee tends to organize themselves from a corporate point of view to obtain advantages. This increases current expenditure in the budget. This flattens what is left for investment and transfer spending, since the government has an important role in transferring income. If the government spends everything on operating the public machine, it becomes incapable of fulfilling all its obligations.
JU – Is a different understanding of the deficit and the consequent reform of Social Security possible in light of MMT?
André Lara Resende – The Social Security deficit in Brazil is a fact. Social Security became increasingly deficient. This was evident 15 years ago. I led a study group to propose pension reform. At the time, we estimated that Social Security would become unviable between 2010 and 2015. There are two main reasons for this deficit. The first is demographic. The pay-as-you-go system, with which active workers contribute to the payment of retirees' benefits, is initially highly surplus, especially when the population is growing and young. As a demographic shift occurs, a situation in which the population ages and more people are retiring than entering the job market, this system tends to become deficient. This is normal and has occurred all over the world. In Brazil, this change was faster.
The second reason is that sectors with political strength have organized themselves to extract social security benefits far above the contribution. People benefiting without contribution time, with a reduced minimum age and receiving the last salary incorporated with various benefits, things that do not exist anywhere in the world. This combination of demographic reversal and corporatism that acquired advantages made the system unviable. It would need to be renovated.
JU – The articles published by you in the press about MMT had a lot of repercussion and caused controversy. How are discussions on the topic going at the moment?
André Lara Resende – My articles this year are a continuation of the articles in the book I published in 2017, entitled “Interest, Currency and Orthodoxy”, in which I already discussed these issues. Since then, my articles have actually caused quite a bit of controversy. Regarding the articles in the book, I even understood the controversy. As for the more recent issue that the government issuing fiat currency has no financial constraints, there is nothing to discuss. It's a question of logic. The resistance impresses me.
JU – Do you identify the reasons for this resistance?
André Lara Resende – Is weird. I think there is a political combination of vested interests. These political interests do not seem to me to be consciously organized. This is serious because they are unconscious interests. And there is also a psychological factor, from the point of view of economists, who see this as a loss of status and power. Economists are perceived as highly competent technicians, who speak a mathematized, hermetic language. When someone points out that they have been saying the wrong thing for many years, they resist. From an intellectual point of view, and this is what happened to me, it is necessary to analyze the propositions and, if necessary, admit that I was wrong. When you use knowledge as a weapon of political power and influence, you feel threatened by the demoralization of the thesis you defend. This largely explains the resistance.
JU – How important is it to bring reflections of this nature to an event like this at the Unicamp Institute of Economics, which is organized by undergraduate students?
André Lara Resende – I think it's very important. This discussion, and I have been consciously doing this, has to be done in forums that are interested in debating ideas. One of the things I'm criticizing is the idea of depoliticizing economic theory. As someone has already stated, the dangerous homage that macroeconomics pays to politics is to make it invisible. My concern is to write and discuss my ideas in academic and intellectual environments, and not in political environments.
Service
André Lara Resende's lecture opened Economy Week. The economist's speech was complemented by comments from two professors from Unicamp's Institute of Economics (IE), Simone Silva de Deos and Daniela Magalhães Prates. In the first's opinion, the event organized by undergraduate students is of an excellent level. “Starting with the idea of inviting André Lara Resende to discuss a very important academic topic that has implications for proposing equally relevant policies. The rest of the program is also incredible, as it covers very interesting topics such as neoliberalism, pension reform, industry 4.0 and many others. The students are to be congratulated on the initiative”, he considered. The event continues until next Friday (16). The complete schedule can be accessed at this address. http://www.eco.unicamp.br/index.php/noticias/2003-semana-da-economia-2019
