Popular discontent in Brazil

A recent article about middle class protests in Brazil had some interesting explanations for the events, which I’d like to share. The analysis cited three main reasons for the protests.

First, infrastructure improvement didn’t keep pace with improvement in people’s homes & offices i.e. growth rate of people’s income exceeded growth rate of economy. This caused discontentment in middle class.

A high growth rate of purchasing power implies fast income growth and/or higher credit availability. Then there are two ways discontent can grow. One, when economic conditions stop improving. This can be via stagnation in wages, or reduction in credit availability. Discontent can also brew if rate of improvement of economic conditions is not sufficient i.e. growth rate of economic conditions could be positive, but slower than negative forces, so that overall situation deteriorates. E.g. wage growth rate could be positive but still lower than consumer or asset price inflation. So the situation is effectively contraction in income. A salient feature of US style capitalism is an increase in inequality. A few people benefit from asset price inflation, while majority pays the price. This produces a sense of injustice, thereby exacerbating discontent.

Second, income of boom years was consumed and not invested. So a lot of improvement in people’s condition was short term and didn’t carry through in lean period. People also borrow more to keep the party going as long as possible, which means that when the party ends, not only do wages get pressured, debt burden hurts too.

Third, related to previous two, is consumerism, wanting to consume more and more. People got everything they want easily (via credit) and not being able to do that any longer made them angry.

It is interesting to note significant role of credit in this story. Looked one way, credit provides an ability to consume more than one can afford. Governments of major countries are promoting the same with easy money. However, we already know how this movie ends. If we compare the response of governments with what an individual would do, most countries do not fare very well:

		US	EU	JP	CN
1	Increase income (Create production capacity)	X	X		√
2	Control costs	X	√	X	X
3	Save money	X	X	X	X
4	Reduce debt	X	√	X	X
	Else
5	Get more debt	√	√	√