Mexico’s Unexpected Fiscal SanityTags Global EconomyTaxes and Spending
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When one hears about a regime that’s engaging in a surprising amount of fiscal restraint, one does not usually think “Mexico.” Yet in recent years, Mexico’s leftist leader Andrés Manuel López Obrador has become, in the words of one Latin American publication, “a fiscal hawk.” Even as calls for greater spending have increased during the economic stagnation and as destruction of the covid-19 crisis has grown, López Obrador has continuously avoided advocating for increased spending.
If you believe the official numbers, Mexico is now the third-worst-hit country from covid-19 in terms of total deaths. The economic devastation that has already occurred is nothing short of disaster. After initially resisting the calls for a lockdown, the Mexican government implemented large-scale restriction in April. The combination of this shutdown, the fact that Mexico’s GDP was already on the decline, and the decline of demand for Mexican goods in the US threatens to plunge an estimated 10 million Mexicans into extreme poverty. All of this has led to a growing demand for government spending. President López Obrador, however, has not acceded to this growing demand, at least not to the level that other countries have. He has held firm that the use of "so-called countercyclical measures" only serves to “deepen inequality and encourage corruption that benefits a few.” López Obrador's “austerity” has now been compared to that of Ronald Reagan and Margaret Thatcher. His aversion to “stimulus” and easy money is unheard of in mainstream US politics. When was the last time you heard a critique of the US’s central bank, explaining how expansive monetary policy favors the richest in society—outside of libertarian circles, that is?
His opposition suggests that President López Obrador may understand the tendency of these programs to lead to corruption and benefit those who can lobby the government for support. Additionally—and importantly—he has shown an aversion to spending, at least some of the time, but that’s more than we can say for the US or most of the world’s regimes during the current crisis.
In April, López Obrador implemented a hiring freeze, announced the abolition of ten government departments, and implemented a 25 percent cut in government salaries. Despite sweeping condemnation, President Obrador has maintained his aversion to increases in government spending and a semblance of sanity when it comes to the government’s response to the impending economic crisis. The New York Times in June condemned him for “reject[ing] huge stimulus packages, even as millions of Mexicans risk falling into poverty.”
These cuts in government spending, while small, will assist Mexico in making a faster and stronger recovery from the deepening economic downturn. For evidence of the benefits of this austere approach, we can look to the Depression of 1920. This depression began in 1920 with a drop in GDP by about 24 percent and a rapid increase in unemployment by about 8 percent. These numbers rival those of the first year of the Great Depression, which saw a GDP decrease of 8.5 percent. The 1920 depression lasted about eighteen months, but the 1929 depression lasted about ten years. What was the difference? Government action. In the Great Depression, there was manipulation from the federal reserve, a vast increase in government spending, and the implementation of a network of social welfare programs. In the Depression of 1920 however, the government actually raised interest rates, decreased spending, and paid off government debt, allowing for a speedy recovery. The choice facing governments today is clear: Do you want a temporary downturn or a decade-long depression?
[RELATED: "The Forgotten Depression of 1920" by Thomas E. Woods]
The Mexican government is, obviously, not handling the impending economic problems perfectly. They have implemented a federal loan program and, as mentioned earlier, continue to use government orders to force businesses to close their doors. This does not mean, however, that López Obrador doesn't deserve some credit for the actions the regime has taken that are fiscally sound. The inclination to avoid spending probably won’t be enough to save Mexico from the pain that is looking more and more unavoidable. But it will allow their economy to recover faster than it would otherwise. At a time when economic conditions look so bleak and governments all over the world are moving boneheadedly in the wrong direction in regard to spending this ought to be celebrated.