It may not be much consolation for Americans, but Washington is not the only place using fuzzy math to try to hide a spending addiction. Brazilian politicians are employing similar tactics.
Economist Raul Velloso, one of this country's most trusted analysts of Brasilia's fiscal accounts, discussed one example of the chicanery here last week in an address to the 23rd annual "Liberty Forum" organized by the free-market Institute for Entrepreneurial Studies.
Mr. Velloso told the conferees that when the planning ministry of Workers' Party President Dilma Rousseff announced earlier this year that it would slash 50 billion reais ($31 billion) of projected spending in the 2011 budget, it left journalists and analysts unclear as to whether this meant a real reduction in government outlays from the year before. Brasilia was not forthcoming. So Mr. Velloso made a quick trip to the finance ministry's own website to resolve the confusion. By comparing the new number with actual 2010 spending, it was easy to see, he said, that the much-touted "cut" was really an increase of 9.5% in primary (not counting debt service) spending for 2011.
The point is that while politicians may try to obfuscate, the Internet and the demands of global capital markets are making it harder for the government here to hide what it is really doing. This reality is going to be important to Brazilians in the months ahead because inflation is picking up and without a change in the current policy mix it is likely to continue to climb.
The trouble started with former President Lula da Silva's decision to sharply increase government spending and to expand credit through the Brazilian development bank in 2010 as a means of juicing the economy ahead of the presidential election. That worked. His chief of staff, Mrs. Rousseff, won. But now Brazilians are paying the price.
In March, annualized inflation hit 6.3% compared to a central bank target of 4.5%. Many analysts want the government to tackle inflation by cutting government spending. Holding down the value of the real to protect manufacturing won't make Brazil more prosperous.
But Mr. Velloso told me that public-sector wages and government transfer payments, such as old-age pensions and welfare programs including the "bolsa familia," now account for around 75% of primary spending in the budget, and that Mrs. Rousseff is showing no interest in cutting back on any of these. That's not surprising, since they are key to her political power.
Controlling public-sector wages and benefits is important to the future of Brazil, but pure austerity is not the only way out of the problem. A stronger real would also damp a rising price level. And that could easily be had, in the short run anyway. The trouble is that a decision to embrace a strong real would require rethinking Brazilian industrial policy. Here too Mrs. Rousseff, even if she were so inclined, would meet political resistance.
Brazil is now a world-class competitor in resource markets. It is a net exporter of oil and minerals and also a powerhouse in agriculture. This has made the country a hot spot for foreign investment. It must also be noted that one reason why the country is so competitive in things like soybeans is that producers have been allowed to import technology from around the world to improve output. As dollars have flowed into the country, the exchange rate has been strengthening.
Yet the mighty real is a hardship for Brazil's manufacturing because domestic producers depend heavily on a weak currency to make their products competitive abroad. Why this is so, after six decades of industrial policy ostensibly designed to make the country a global player in manufacturing, is a lesson in how not to approach economic development.
High levels of tariff and non-tariff barriers—which admittedly are much lower than they were two decades ago—have only made manufacturers less capable of competing in foreign markets. Stifling labor regulation, high rates in a complex tax code, and the government's practice of using tax revenues to feed political constituents instead of plowing them back into infrastructure also hamper Brazilian competitiveness.
The final blow is high interest rates, which paradoxically are a byproduct of the government's efforts to hold down the inflation it creates with government spending. Those high rates act as a magnet to pull in hot money, thus driving up the value of the real. The central bank has tried to combat this by buying up dollars. Mr. Velloso told me the cost of this intervention equaled about 1.4% of GDP in 2010.
This whack-a-mole economic policy is not sustainable if Brazil wants to claim its rightful role in the global marketplace. The smart thing to do would be to let the exchange rate strengthen, watch inflation and interest rates fall, and allow Brazilian producers to hire, fire, earn profits and import as is necessary to be competitive. Politicians don't want to accept this rite of passage, but as Mr. Velloso points out, the 21st century is not going to give them a choice.