You ever have a thought that you were having trouble formalizing? I’m there, and not just because I just got through spinning my wife around and yelling, “Jeter! Jeter!” Rather, it’s because I’m trying to express an argument that I think is wrong.
Last week, I tried to understand why the Mexican federal government was busy cutting spending in the middle of a depression. GDP is down 10 percent -- that’s a horrendous number, in the full depression zone, far worse than 1995. Why would you cut spending in the middle of such a collapse, especially when the markets don't seem to be worried about the fiscal situation? It has gone so far to prompt Mexican Ph.D. students at Ivy League universities to start wondering if the Labor Party has a point when it runs ads saying that things would have better under AMLO.
Some smart observers whom I respect, however, support the government cuts. Gancho draws attention to a column by Macario Schettino, an economic historian. Schettino argues that Mexico's fiscal problem isn’t just a short-term problem caused by the Great Recession; rather, it’s a sign of long-term trouble, namely the decline of the country’s oil revenues:
“To respond to that we have only two options. One is to do the same as always, which we know how to do: fake change and place the country in debt. It’s a direct and, unlike on other occasions, short path off the cliff. ... The other path is more complicated. It implies recognizing the secular failure of a political project and making decisions of the same size as the crisis: historic.”
But why can’t you have it both ways? Run up the debt now, when doing so will prevent unnecessary suffering, and raise non-oil taxes later. There isn’t any economic problem with that. What I think Schettino fears is a political problem: without economic pain now and a very hard budget constraint, the Mexican political system won’t make the tough decisions until it is too late.
Of course, there is a slight contradiction in the sense that Mexico’s hard budget constraint is self-imposed. Right now, Mexico still has oil revenues (albeit slowly declining) and the markets remain willing to lend. Nothing is forcing (or even incentivizing) the government to refrain from borrowing more. To use a strained analogy, Schettino seems to view the Mexican political system as a recovering drug addict who just got into a serious accident. Painkillers would speed recovery and ease suffering, but he fears that their use could provoke a relapse. The argument is a stronger version of the suggestions some of my colleagues (notably David Moss and Aldo Musacchio) made against Argentina’s debt repudiation back in 2005: repudiation might make economic sense, but freedom from debt will also give the Argentine government freedom from the discipline imposed by the need to meet repayments. That could open the door to damaging irresponsibility later. In the Argentine case, Moss and Musacchio seem to have been more right than I was, as shown by the Argentine government’s subsequent faking of inflation statistics and general mismanagement under President Fernández.
While the Argentine example is a strong one, I am not sure of the general principle. Is a self-imposed constraint really a constraint? Is the Mexican political system really so sclerotic that it needs a crisis now to avoid a crisis later? And even if it is, why not wait for that hypothetical future crisis to arrive instead of plunging the country into a deeper depression now? None of this is to say that I think the Schettino argument is specious. It isn’t ... but I still don’t think it’s a good reason to cut government spending right now.
But I’ve been wrong before. Does Mexico really need to impose pain on itself in order to reform? Or is that just a good way to lose elections? Thoughts welcome.
I kind of suspect there's a pretty strong psychological element, too, stemming from 1994. You were there in 1994, right? I wasn't, but I get the feeling from people here that 94-95 was much scarier than today. The GDP figures today don't seem to frighten people (both regular people and economists) the same way that the devaluation and the bank failures and the exhaustion of the foreign reserves did. As such, it seems like that for a lot of people, the foremost goal isn't to mitigate the crisis that is already unfolding (or even winding down) so much as it is to do whatever is necessary to avoid a '94-style crisis.
Relatedly, I also think that given the decades-long end-of-sexenio pattern of large deficits ans subsequent crises, there is a stigma among responsible economists against deficits.
As far as Calderón's spending cuts, you have to wonder if he ever really considered spending the money. It's odd how he announced the plan in January, a few weeks from the pre-campaigns kicking off, and then announced the cuts just after the campaigns.
Posted by: pc | August 25, 2009 at 09:59 AM