Nelson Barbosa: How the Pandemic Shook Faith in the Market

Nelson Barbosa—Professor at the Getúlio Vargas Foundation in São Paulo, former Finance Minister of Brazil, and member of INET’s Global Commission on Economic Transformation—talks to Rob about how faith in the free market is eroding under the COVID-19 pandemic, and how the crisis will impact globalization.


Rob Johnson:

I’m here today with Dr. Nelson Barbosa, professor at the Getúlio Vargas Foundation in São Paulo, Brazil, and the former Minister of Finance in Brazil. Nelson is also a commissioner on the Commission on Global Economic Transformation that is sponsored by the Institute for New Economic Thinking. Welcome, Nelson. Thanks for being here today.

Nelson Barbosa:

Thank you, Rob.

Rob Johnson:

So we’re talking, now, this is in early April. We just had the isolation, the Covid-19 virus is upon us. I’m just curious, as you look around the world, who is handling it right? How can we handle the reaction to this crisis? What do you foresee, both in Brazil, where you live, and around the world, as this unfolds?

Nelson Barbosa:

First, thank you, Rob, for the opportunity to talk with you in this podcast. It’s very hard to issue any opinion, definite opinion now, because we have still to reach the end of the beginning of this crisis. People are dealing with the first shock. Many countries around the world are still dealing with the lockdown. Only China is gradually coming out of the lockdown. We really don’t know yet what the best response is.

From what we see, from national experiences, it’s so far the best response seems to be a lockdown followed by massive testing. Obviously, some kind of investment, emergency investment in healthcare and all of the support that is needed for doctors and nurses to do their work. We don’t have, so far, a good idea how to go out of the lockdown in a gradual and coordinated way. China is doing that, but what is happening in China, I don’t think, is replicable to the western world, because of our differences in terms of political systems, legal systems, and the way society functions. But we will have to find a way to manage the lockdown, and then to come out of it in a manner that does not put public health at risk.

Rob Johnson:

Do you see governments responding with, you might call, a sophistication or deep understanding of where to target the use of public funds? Or are we, in essence, repeating errors from the past?

Nelson Barbosa:

Well, this crisis, as Paul Krugman has already pointed the many orders in the media, is a kind of disaster, a natural disaster, that requires a first response, a disaster relief. The main difference now is that the disaster is for the whole population. So the whole population needs a disaster relief, which is a magnitude that we haven’t seen in modern history, or maybe never in our history. This poses a great challenge.

In qualitative terms, the response should include some kind of income insurance, be that boosting the unemployment insurance for those who have formal jobs, which I believe is the case in most developed worlds. But also some sort of alternative income insurance for people that work in informal markets that do not have regular jobs. This is a major problem for developing countries. For example, in Brazil, more than 50% of the work is in the private sector working informal jobs. To reach those people, you cannot use the regular safety net of unemployment insurance. You have to think of something else. So I see all the governments in the world trying to boost their income insurance problems, and at the same time, trying to construct whatever new structures are needed in the middle of the crisis.

I think this has to be done quicker, and in a more ambitious way. On the other side, another form of relief is credit. Either by rolling over the existing debt, or adopting a debt standstill, or giving new credit for those in need. In this area, we know more, because of the global financial crisis of 12 years ago. We know the central banks can save the financial system pretty quickly. But that help does not necessarily get to the no financial system, to households, and to local administrations like mayors and governors of states. So something will be needed now, and I hope we learned the lesson that the central banks should be more affected in guaranteed credit lines for the no financial sector.

Rob Johnson:

Yeah, one of the people I interviewed this week described the situation where it would say, we might go a sequence of snapshots of balance sheets in different sectors. He described how it stats at the household, because people, for the public good, are being asked to stay home. If they’re not compensated, they can’t pay for their rents, etc. Then their landlord’s balance sheet deteriorates, then the bank that granted the mortgage balance sheet’s start to deteriorate. This is a prolonged crisis, it’s not transient thing of a couple of weeks, it just digs a whole, sequentially, in the balance sheets throughout the economy.

The former Comptroller of the Currency of the United States, Gene Ludwig, and I had a conversation the other day. He said when you do a financial bailout, it’s because the financial sector has somehow been reckless or imprudent. You patch that up in the spirit of saving the system, because the financial sector can take the real economy down with it. But this crisis is more analogous to what they used to … Well, they still invoke. A notion called eminent domain. Let’s say we were going, I’m being facetious, if we were going to war with the aliens, and people came to your farm and said, “We need to build the landing strip and take the farmland.” Under eminent domain, they would compensate you.

Gene Ludwig’s argument is this is not like a financial bailout, this is where, for the public good, you compensate the households to stay home and not work, something they’re fully capable of doing. Then you have to take care of that propagation through the balance sheets. If you just treat it like a financial crisis, there is a whole lot of things that are destroyed unnecessarily by just protecting the financial institutions. I thought that was a pretty reasonable argument.

Nelson Barbosa:

Yes, it sure is. As I said, this is kind of a natural disaster. You need disaster relief. But you need disaster relief in this case to pay for people to stay home, to be able to bear the lockdown now. It’s a kind of public good, if you will. There is a positive externality. You pay people to stay home, you reduce the human and financial cost of the problem. I think that’s right. But, since this is also a sudden stop in economic activity, you also must be sure that there will be goods and services for people to buy with the purchasing power that they eventually receive.

That’s where some kind of coordination, supervision, planning, you name it as you prefer. But you need some kind of coordination to guarantee that the basic needs are attended to, in the sense that there is food that will reach the supermarkets, there will be medicine, there will be medical equipment at the amount necessary for people, doctors and nurses to work with. This is somehow analogous to a war economy in terms of looking how the productive and distribution system is working. But in a completely different way, because it’s coordination planning, and economy that has a huge part of it in a lockdown. So you have to have financial relief. But you also need some sort of coordination with the producers. I think the firms and the market economy can do that with the proper coordination and help from the government.

Rob Johnson:

It’s a very interesting time. For instance, at the time of the Great Depression, and the new deal, the reinvigoration in the United States in the faith in government by the Roosevelt Administration was a prelude to the preparation for World War II. The notion of the governments stepping in was welcomed, because there was great trust in government, and great, how do you say it, evidence, recent evidence of a great effectiveness. In the current circumstance, we are talking about, like you said, the analogy of the war economy, a bigger role for government to administer a crisis.

But it follows on 40 years of ideology, beginning, I’ll just mark with one marker, Ronald Reagan saying government is the problem, not the solution. The romanticization and the deification of free markets unfettered, and then as time proceeded, we had the crisis of 2008. Now I remember Joe Stiglitz saying to me, well, we’re going to get over that fantasy of free markets now, we can go back and balance things with the state. But after the TARP legislation, and as Joe called it, the polluters getting paid, we went through a place in the United States where occupying Wall Street on the left, and the Tea Party on the right, took hold. We saw the house transform to the opposition, this was during the Obama years, that became Republican controlled. The Senate became Republican controlled, and the next president after Obama was in the Republican party, and Donal Trump.

At this juncture, it feels like trust in governance is at a low end, whereas after the Roosevelt years of the New Deal, the country was enthusiastic, or at least amenable, to the government playing a larger role. I’ve been following very closely the equivalent of the emergency legislation, bailout legislation in the United States, and the political acrimony, and the suspicion, and the hostility that is alleged, almost every article pointing at different enemies on both sides of the aisle. But we’re in a very, very treacherous climate for the government to step up, and for that to be accepted by the people. My own instincts is that leaves a void for, essentially, unsavory oligarchy to hijack a great deal of the money for their own private purposes, rather than for public design.

Nelson Barbosa:

Yes, that’s the risk. I agree with you. This crisis comes at the period where we know this, after 34 years of neoliberal policies that produce positive growth, but also a lot of inequality and volatility. We are in the middle of a transition to soften that, nobody knows yet what it’s going to be. The monetization of government does not help. The countries that already had a comprehensive social safety net, and a public health system, will be able to deal with that better. The fact that the last 30 or 40 years, many governments of the world were precisely destroying that. It makes things only more difficult now.

But I think, because this is a health crisis, at least the importance of a national or semi national health system will become evident during this crisis. As they said, we still have yet to reach the end of the beginning. The curves are still going up. People will realize that it’s necessary to have public health systems to deal with crises like that. Maybe that’s going to be the opening door for a new wave or a new generation of modern social policies, which can be done more properly or more focused now, because they have all of this information and technology that makes the government able to at least manage its initiatives in a better way than say in the 1930s, or during the middle of the 20th Century.

What I want to say is that we have the intellectual means, we have the technological means, we have capital. There is no destruction of physical capital during this crisis. There is a risk for human capital, a very high risk. The governments are in place. The problems are really political. We are seeing that now in Europe, there is still quarreling about who had the suplus or deficit and why before the crisis, and that is stalling the response in Europe, again. We have a huge political challenge, especially in the western world, after decades of the predominance of no liberal policies or consensus. Now we have to come to devise a new approach of the learning from the mistakes of the past.

But I think this, believing that the market will solve this by itself is an illusion. What I see in some parts of the world, and especially here in Brazil, you asked me about Brazil, is a sense now that we should adopt all of the necessary measures. So now everyone is Keynesian again. Some are Keynesian just momentarily, which I call post traumatic Keynesianism, because of the shock. But people are already saying that all initiatives are just temporarily, things should go back to normal, to business as usual, say, next year. I think the magnitude of this crisis will not make that possible. I hope that this time, we do not go back to the same mistakes, as we did in the global financial crisis of 2008.

Rob Johnson:

It’s fascinating to me, because the Institute for New Economic Thinking, I think, is what I would call designed to address or challenge two failed romances. The first is the unfettered free markets will take care of things. The second is that you can always count on government to represent the people in the event that there is a failure in the markets. I think the pendulum swings back and forth, and at some level, we need to desacralize markets and treat them like tools. The other side, we need to recognize the, what you might say, both good and evil in human nature can be manifested in governance.

In the United States, if you look at surveys, most people distrust government because they think, according to Gallop, it’s a tool or creature of powerful economic interests, not a representative of the people. Maybe some of what needs to be reformed is the assentive structure around what elected representatives, how do I say, are incentived or inspired to look after. But getting to that place, where governance can play a big role, is also complicated by globalization. What we might call the mental model of the nation’s state is now encroached upon by capital mobility, keeping money offshore, technology, being very mobile, and yet people, what you might call the object of a healthy society, are largely confined within a nation state. Migration of people cannot flow as rapidly or without resistance as capital and technology do. How do we need to modify globalization in light of what we’re learning in this crisis?

Nelson Barbosa:

Well, as you said yourself, and many people as well, this did not start the financial crisis. This started as a sudden stop in the real economy. But it obviously already had very steep financial repercussions. We’ve seen capital outflows from the developing world much higher than what happened after the global financial crisis of 12 years ago. This shows us that the responses put in place were not very effective in reducing volatility. Exchange rates of emerging markets are depreciated a lot. Many, many countries are going to the AMF for help. This is because of the very globalized nature, high capital mobility that we have. Some capital mobilities is obviously necessary.

But if countries had put some preemptive policies in place, they will probably will have collected some taxes or fees on the capital inflows in periods of booms, to use, then, in periods of busts, like now. I think this is something that we should address better. We should also address better the need for an international financial response, because in advanced economies, the central bank can stabilize the financial sector of its own economy. It can, if it’s willing to do so. Also, guaranteed credit lines for the residents of its economy. But we don’t have a global central bank to do that. The IMF directly can do that, but it falls repeatedly short of its objectives because of political constraints, because of inadequate mechanisms. We will need something like that, especially for the developing world, which is still entering in the first phase of this crisis.

Covid-19 is reaching more and more lives in America, Africa, South Asia now. These countries will also have to have an internationally accredited assistance in the same way the central banks are helping their own economies. Something like that will have to be in place for the global economy. I believe that’s … The sudden stop in the global economy, with so many things concentrated, the production of so many things concentrated in some places is really the risks of global value chains, they are not well distributed. So I think after this crisis, many, many countries will reassess the advantages and risks of global value chains, of hyper globalization that puts the production of some strategic of essential goods in just one area of the world.

I think we will see a rebalancing of world production, a relocation of world production, which can be done in a progressive way, creating more jobs, and having a more robust structure of prevention. Or it can be done through trade wars, through a new wave of protectionism. We can name it sanitary protectionism, where countries will adopt regressive measures that may harm the recovery.

Rob Johnson:

One of the areas people had very different views on right now is what this pandemic implies for climate change. Some are arguing that the wake up call from the Covid-19 crisis will invigorate the role of government that allows us to make the large scale transformations needed for a sustainable low-carbon economy. Others are arguing that, particularly of the depth and duration of this crisis is longer, that the burden on the finances of countries all over the world will be so extreme that it will be harder to mobilize or inspire the level of action visa vi climate disruption that we need.

One psychologist I was asking about this yesterday said … She thought that most people, after a crisis, like to go to a tranquil period and give them the long gestation period and the need to transform climate, we would be dormant for a long period that would be quite risky, because people don’t want to change their jobs, and change everything violently after they’ve been through a violent crisis. I don’t know how to sense that, but I’m curious what your perspective is? How will climate change be affected, and the response to climate change be affected by this crisis?

Nelson Barbosa:

Well, I think it’s going to open up opportunity. In this case, I am still optimistic, despite some governments in place right now which denied climate change, because I think at the end of the day, reality imposes itself. We are seeing now many, many governments that demonized the state, the social safety net, resourcing precisely to that to fight the crisis. So I think the public need and the public emergency will predominate on the responses.

On whether that will change or not the perception of the government, let me go back to one of your initial questions. On one side, we have the need for more government action, to manage the healthcare system, private or public. We have the need for more government actions to provide disaster relief. That will create in people, or that will make people remember that the government is still necessary, because it’s the only institution that can deal with that. The market itself cannot deal with that. This may open space politically for a larger political movement that extends that beyond this crisis and to climate change, to face climate change.

When we talk about public health, people perceive that as justified and as a necessary role for the government, even in the US. If you take the surveys, the polls, the response of people is that they would like to have a better public health system. I think that justifies the government quicker. During the last crisis we saw in the US some demonstrations by the extreme right, saying, “I don’t want the government to touch my social security. I don’t want the government to touch my unemployment insurance.” So people don’t perceive that as government. But they perceive that as goods.

So I think if the proper political action is done, especially increasing the coverage of the public health system, that can create more political justification for government actions in other areas. Having said that, increasing public debt will also be a problem. Public debt will go up everywhere around the world. That’s not the first time in the society to deal with that. We usually had that after wars. The solution came through a mix of low real interest rates, economic growth, which is a challenge now, and that’s where climate change can help, climate change will be politically feasible, if it is perceived as a source of income and employment politically. It’s not a degrowth strategy, it’s a transformative growth strategy that creates new jobs and new incomes for people.

Also, some sort of debt relief. This is how people dealt with these kind of problems in the past. This can be done again. To give one example, or to make one parallel with today’s crisis, after World War II, Europe was destroyed. People were asking European countries, or were expecting, at least in the first post war years, they were expecting the European countries to pay part of their debts, and reconstruct their economies at the same time. It didn’t take long for the main authorities, especially in the US, to realize that that was not possible. Then came the Marshall Plan. So there will be some sort of new Marshall Plan after this crisis. I have no doubt about that. The question is how large it is going to be. Is it going to be only for the developed world? Is it going to be really global? That’s one way to deal with the mountain of debt that will be generated.

Lastly, about the people’s insecurity after a crisis like that, how can you convince them to change jobs? Well, after this crisis, millions and millions will simply have no jobs. That’s where it starts. If climate change promotes more jobs, be that in better public health, or supports to public health workers, or generate jobs in preserving the environment, in new infrastructure investment, basically destroying the existing capital to build new capital that is more friendly to the environment, then people will perceive climate change not as a bad transformation, but actually as a good transformation, that generates jobs and incomes immediately, and a better infrastructure of production and consumption later.

Rob Johnson:

That’s very sensible, I think. Having a unified goal around what is needed for society that provides stimulus to aggregate demand will, how would I say, potentially create a consensus behind a public participation in that transformation. If it’s alleviating no jobs, as opposed to forcing and changing jobs, the resistance would be diminished as well. So I think you’re finding the balance very well. Let me turn more to the, what I’ll call, intellectual or INET agenda. The transformation of ideas, the transformation of the modes of thought that are inspired. There is a famous German philosopher, Jürgen Habermas is paraphrased to have said that elites will legitimate if they can, coerce if they have to, and accommodate if they must.

The idea of legitimation of an unfettered free market, now, appears to be in tatters. It’s in tatters around the ramifications of globalization, it’s in tatters related to the diseases of despair. It’s in tatters related to the pandemic. So how will we put together … What is the vision that you see, what you might call should animate the textbooks of the future? I think we can start teaching the young people a different paradigm that then has been in the textbooks going back to the first edition of Paul Samuelson. I’m just curious what you think the building blocks are in how to address that challenge?

Nelson Barbosa:

Thank you, that’s a very hard question. I’ll try to make a summary of everything that we have been discussing, what I think is most important now. Even though this is a sudden stop crisis, the reconstruction will not happen by itself. There will be needs for more demand policies. Also, demand policies, not only to raise income and employment, but to raise income and employment in the right way, in the proper sectors, and promoting the kind of restructure of production consumption that we needed already before the crisis, that we’ll continue to need now. This opens up more intellectual space to evaluate the role of the government, to have a more pragmatic approach to government failures, because there are government failures, and there are market failures.

We should not abandon some policy just because they could go wrong. Monetary policy could go wrong, but people did not stop talking and defending monetary policy. A defense policy can also go wrong, people did not stop talking and analyzing defense policies. The same holds for social insurance, the same holds for public policies on health and education. I think this may open space for a more pragmatic approach to these kinds of policies. I believe there will be some long-run consequences or permanent consequences.

Now it became clear for me that people finally realize that we need the global social insurance system, especially income insurances. Not only employment insurance, but income insurance, for everybody. This is the first step for some initiatives that can later be developed into a full universal based income. Now we will be having the government sending checks to people, as disaster relief, as they usually do in localized areas when there is a disaster relief. The difference is that that’s now the whole economy.

After this, people will obviously ask the question, “Well, can the government do that on a lower scale permanently?” Having just seen the government doing that in the last two or three months, people will ask the question whether or not that’s possible in a more permanent basis. So this opens the space for a discussion of universal based income, that economies have been debating for decades. This is also opening up discussions about new ways of monetary policy. We are now having a new round of quantitative easing, which is necessary. But that saves the financial markets, not necessarily the financial institution.

We will see a more active role of central banks in direct lending to the no financial sector using the financial institutions. But that’s a new way of doing monetary policy. It basically says that if the banks are not functioning properly, this central bank will step in and take part of their roles. This already happened after the global financial crisis, but it did not lead to large central transformation. Now, second time in less than almost a decade, I think people will start thinking about that again.

There is this issue of management that we are seeing in the US and other countries. A central bank will not only target the short run interest rates, but also the yield curve. We also probably see some initiatives of employment of last resort after the lockdown, because the economy will not, as I said, recover on its own. So there will probably be some new sources of employment to fight the consequences of this crisis. Remember that in the US, after 9/11, the US increased the mode of public employment in your Homeland Security agents or something like that. These kinds of crisis, they tend to create new roles for the government, or we force some roles that already exist, creating this kind of employment.

This can be done in a proper way. There will be need for better investment. I think this can change the perception of policies and what the government can do intellectually. There is, as you know yourself, and the INET has been publishing for many years, there is a huge literature on what the government can do, what are the risks, what are the benefits? I think now we’re probably going to see more space for this kind of discussion after this crisis. It’s not guaranteed that this will work, that people will be convinced by that. But a crisis like this opens the space for the debate.

Rob Johnson:

I agree. I think that’s the, which I might call, the light at the end of the tunnel that we can explore in response to this. One of the things that, as evidence of our conversation today, is that people’s mode of learning is changing very rapidly. I have two daughters in 2nd and 5th grade. Of course, the last two weeks, my 2nd grade daughter has learned how to create the touch logon on an iPad, work on the website of her school, do read along videos, dance videos, and so forth, the school provides, join class meetings on Zoom. She’s learned how to … We put in passwords and so forth, how to activate stored passwords. It’s remarkable. In about six school days, not including Saturday and Sunday, her facility with online learning, at age eight, is just stunning.

I’ve seen a huge, huge upsurge at INET in the online viewing, kind of learn economics at home agenda, that Matt Kulvicki from our staff has been inspiring. As you said, there is a huge literature, and at some deep and longterm level, INET is aspiring to create an alternative economics library that’s freely accessible online. In other words, at zero cost you can have access to all of these debates, and thoughts, and people to enlarge your imagination. I guess, since nobody’s head is confined to a cage, and in the area of social media, people are, how do I say, enlarging the spectrum of the debate. So I think all in all, there is a great deal of potential now for evolving the way we thought about social organization, social design. Hopefully INET can help play a role, along with the Vargas foundation, and many other kindred spirits.

Nelson Barbosa:

Oh yes. For sure. I think now, when people are socially isolated, but digitally connected, much more than before the crisis. Precisely because you need these digital technologies to manage this crisis, to manage social isolation. Obviously, when people learn these new technologies, they will use that, not only to deal with this crisis, but further issues. We have, as I said, on the bright side, this crisis is very serious, but we have the technology, we have the resources, the capital resources, the monetary resources, to deal with that, and have information.

People can access information they want quicker now, we can coordinate things, and information flows more freely. Even if the large media does not show that, show all of the sides of the debate, people can find that online. I think it’s a huge opportunity, it’s a necessary action for INET to really continue it’s very good work, and showing all of the sides of the debate, and being diverse, promoting plurality at this point, and political and economic thinking.

Rob Johnson:

Nelson, one of the things that I’ve enjoyed in this conversation is feeling the balance that comes from your intellectual development and the fact that you’ve had very, very profound responsibility as the Finance Minister of Brazil. That kind of polish and deepening of the wisdom reminds me of my old teacher, Rudy Goldbush. I was an undergraduate at MIT, and I think your coauthor and former teacher Lance Taylor was in that same set of offices at the time. But Rudy once said to me, “The role of the academic is to expand the imagination of what is possible. The role of the investor or the government leader is to choose what is the right model.”

As I listen to you today, I’ve enjoyed very much how you see both in the realm of the intellect, alternatives, your imagination is very developed and broad, and at the same time, by having shouldered that responsibility, you have kind of an uncanny sense of what feels like the right model for this time. Probably the thing I grinned most widely about in our entire conversation was right at the start, where you acknowledged that nobody can really know. The humility that accompanied that, I think, adds great credibility. So that’s a long winded way of saying thank you, thank you for being here today, for being commissioner, and for carrying the weight that you do in the realm of economics.

Nelson Barbosa:

Well, thank you, Rob. Thank you for your words, and thank you for this opportunity, and for all of the work that you are doing through INET. I think it was already very important, and is even more important now. As you said, from my background in economic policy, I think we should be open to alternative intellectual things, alternative ways of dealing with the crisis, and be very honest in the risks and benefits of each alternative. Because it’s very often economists usually emphasize the benefits of whatever they prefer, and downplay the risks.

We should recognize both for people to know precisely what they’re choosing, or what is the implications of each course of alternatives. If you treat people fairly and be honest on the risks and benefits of each alternative, I think we will be able to construct more solidarity and most trust in the government. I, again, thank you very much for his opportunity to talk with you and everybody that’s at INET during this crisis.

Rob Johnson:

Well, I’m looking forward, as this unfolds, to checking in with you from time to time. I can promise the guests here that there will be subsequent chapters as we go down the road, where you and I will talk on this podcast again. Thanks for today, and we’ll see you again soon.

Nelson Barbosa:

Thank you.

About the Host

ROB JOHNSON serves as President of the Institute for New Economic Thinking.

Johnson is an international investor and consultant to investment funds on issues of portfolio strategy. He recently served on the United Nations Commission of Experts on International Monetary Reform under the Chairmanship of Joseph Stiglitz.


About the Guest

NELSON BARBOSA is a professor at the Getúlio Vargas Foundation in São Paulo and the former Brazilian Minister of Finance.