The US Should Take Lessons From Mexico

by , June 20, 2012

In the United States, the image of Mexico is abysmal and largely wrong. The average American seems to believe that Mexico is a destitute, quasi-socialist nation with rampant drug violence that is sending waves of illegal immigrants to the United States.

Although drug violence is a problem in Mexico — the country has had 34,000 drug-related deaths since Felipe Calderón took over as Mexican president in 2006 — it has overshadowed a much more positive story. The drug deaths have occurred because Calderón militarized what should have been a law enforcement issue, killing more people, and because drugs are illegal in the United States, so Mexicans buy arms (imported from the United States) to conduct this risky business. If the U.S. government allowed adults to control what they put in their bodies, this debilitating violence would evaporate immediately, as the drug trade would move from the dangerous shadows into the light.

More important, the bad publicity on the drug death toll has unnecessarily dispirited even Mexicans and eclipsed Mexico’s economic success story. Brazil, billed as an engine for Latin American economic growth, has also overshadowed the equally middle-income Mexico. Yet in 2011, the relatively open Mexican economy, which has increased competitiveness, outgrew its Brazilian counterpart, dominated by large state-owned industries, 3.9% to 2.7% and is expected to maintain that gap in 2012. Whereas Brazil, like the United States, has debt-burdened consumers, Mexico has had manageable debt, low inflation, 17 years of macroeconomic tranquility, and thus investors in the automobile, aerospace, and electronics sectors banging down the door to get into the country.

The developing world needs to pay heed to Mexico’s model of an open and free economy without excessive debt. The model promises much greater long-term growth than the state-centered Brazilian developmental orientation. The U.S. economic colossus, still in the economic doldrums because of excessive public and private debt, also needs to emulate its southern neighbor. For example, instead of increasing regulation on business — such as the financial and health care industries — the United States needs to fully deregulate markets and allow competition to flourish, thus bringing prices down.

Furthermore, the mounting American debt from yawning annual federal budget deficits of $1 trillion or more has to be slowed and then reversed, if the fiscal drag on the economy is ever to be removed and robust growth resumed. Instead, American politicians — both on the left and the right — scream hysterically about the country falling off a “fiscal cliff” on Jan. 1, 2013, if they are not allowed to renege on the $700 billion in deficit reduction they agreed to for 2013. The fiscal package to which they ultimately defaulted (originally merely a gun to their heads to compel agreement on milder budget cuts, which failed to come to fruition) is not perfect — it raises some taxes by not extending Bush tax cuts or payroll tax cuts and doesn’t protect middle-class taxpayers from the alternative minimum tax. But Congress doing nothing further would result in significant and necessary budget cuts, lead to real deficit reduction, and make politicians of both parties squeal with pain, which is an indicator that these are not the usual cosmetic or fake spending reductions.

Politicians from all stripes seem to be frantic about the impending across-the-board cuts — Democrats warn that cuts in domestic spending could be bad for the economy, and Republicans are screaming that defense cuts will eviscerate U.S. national security. All of this is hogwash.

At worst, the cuts might lead to another short-term recession, but reducing the economic drag of crushing government debt eventually would likely lead to vibrant and sustained economic growth in the longer term. Cutting the bloated defense budget — at record post-World War II highs with few potent threats to fight — even significantly would hardly put a dent in the U.S. status as the dominant military power on the planet.

The only way to meaningfully slash the budget in Washington is to do so across the board with “shared sacrifice” as the theme. That way, the lobbyists have a harder time wheeling and dealing their way out of the cuts. Historically, for political reasons, budget deficits are usually closed with a combination of tax increases and spending cuts. Although the default option is not perfect, congressional inaction promises the largest deficit and budget reduction. Paying heed to its southern neighbor’s success through frugality in debt management, Congress should do nothing and let the ax fall on New Year’s Day.

Read more by Ivan Eland