Tuesday, November 25, 2014

Regime Change From Roosevelt to Rousseff

I've written another post for the Berkeley Center for Latin American Studies blog:
President Franklin Delano Roosevelt was elected in October 1932, in the midst of the Great Depression. High unemployment, severely depressed spending, and double-digit deflation plagued the economy. Shortly after his inauguration in March 1933, a dramatic turnaround occurred. Positive inflation was restored, and 1933 to 1937 was the fastest four-year period of output growth in peacetime in United States history. 
How did such a transformation occur? Economists Peter Temin and Barrie Wigmore attribute the recovery to a “regime change.” In the economics literature, regime change refers to the idea that a set of new policies can have major effects by rapidly and sharply changing expectations. A regime change can occur when a policymaker credibly commits to a new set of policies and goals.... 
In short, Roosevelt stated and proved that he was willing to do whatever it would take to end deflation and restore economic growth. As Roosevelt proclaimed on October 22, 1933: “If we cannot do this one way, we will do it another. Do it, we will.” 
Almost all politicians promise change but few manage such drastic transformation. In Brazil’s closely contested presidential election this October, incumbent President Dilma Rousseff won reelection with a three-point margin over centrist candidate Aecio Neves. Rouseff told supporters, “I know that I am being sent back to the presidency to make the big changes that Brazilian society demands. I want to be a much better president than I have been until now.” 
Rousseff’s rhetoric of “big changes” refers in large part to the Brazilian economy, which is plagued with stagnant growth, high inflation, and a strained federal budget. Brazil’s currency, the real, hit a nine-year low following Rousseff’s victory, and the stock market also tumbled. This market tumult reflects investors’ doubts about the Rousseff administration’s intention and ability to enact effective reforms. Investors viewed Neves as the pro-business, anti-interventionist candidate and are unconvinced that Rousseff will act decisively to restore fiscal discipline and rein in inflation. In other words, Rousseff’s talk of change is not fully credible in the way that Roosevelt’s was... 
Though Rousseff is taking some actions to improve business conditions, restore fiscal discipline, and reduce inflation, the problem is that they are being enacted quietly and reluctantly rather than being trumpeted as part of a broader vision of reform. The key to regime change is that the effects of policy changes depend crucially on how the changes are presented and perceived. Economic policies work not only through direct channels but also through signaling and expectations. For example, a small rise in fuel prices and a reduction in state bank subsidized lending may have small direct effects, but if they are viewed as signals that the president is wholeheartedly embracing market-friendly reforms, the effects will be much greater. So far, despite Rousseff’s campaign slogan — “new government, new ideas” — she hasn’t credibly committed to a new regime.
Read the complete article and my pre-election Brazil article at the CLAS blog.


  1. A Temin moment,
    or for Rouseff is it a Timid Temin moment or a Tepid Temin moment?

    What else matters? without getting expectations right nothing else works, and you can't expect to get them right. But its a start to know the model is wrong if you don't get them right.

  2. This must be the worst post ever,

    FDR induced inflation by drastically raising (double?) the price of gold in dollars. Had nothing to do with "expectations". He wanted to increase wages by increasing prices for farm-products (one third of US population made their living from farms). Had nothing to do with "expectations".

    As for Rousseff, I seriously doubt the average Brazilian gives a hoot about the markets; that's not the kind of changes she promised. They want an end to to corruption, which is the change she was referring to. Ending corruption (i.e. rents) will be bad for the "market", but great for the average Brazilian.

    Carola Binder is flaunting her biases (in this article) while demonstrating her lack of knowledge.

  3. If this is representative of the Berkley's "Latin American Studies", I recommend any students to look elsewhere for Latin American subjects.

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