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.

The Brazilian Election and Central Bank Independence

From my post at the Berkeley Center for Latin American Studies (CLAS) blog:

Brazilians will head to the polls on October 5 to vote in a tight presidential race. President Dilma Rousseff’s leading challenger is Socialist Party candidate Marina Silva. A key component of Silva’s economic platform is her support for a more independent central bank. Central bank independence, long a topic of interest to economists, is now capturing wide public attention — and for good reason...

You can read the rest at the CLAS blog. There is also a lot of interesting material there about the economics, culture, and politics of Latin America. For example, there's a video of a recent CLAS seminar by Professor João Saboia on "Macroeconomics, the Labor Market, and Income Distribution in Brazil." I wrote an article on his lecture that will appear in a forthcoming issue of the Berkeley Review of Latin American Studies. Since CLAS is a collaboration between professors and graduate students in many different departments at Berkeley, there is a great mix of material there on cinema, literature, the environment, policy, etc.