Recessions

The past several months have been exceedingly enlightening. To observe the manner in which Europeans have (half heartedly) conducted the Greek crisis or Americans writhing in anguish so as not to fall into default compelled me to reflect on our own financial crises of the past decades. The conclusion I arrived at is that we have a great export product that we not only have not yet understood, but whose transcendence we don’t even recognize.
Whatever their origins, fiscal crises acquire a dynamic that, sooner or later, no one can stop: governments manage and orchestrate them or end up overwhelmed by them. In nearly all cases, our crises originated externally: a large balance of payments disequilibrium, usually the product of excessive external borrowing, led to a devaluation that, on raising the Mexican peso value of the debt and of the associated interest, caused a crisis in the public accounts. Once the government’s income became insufficient for settling external commitments, the country was pressed to resort to creditors or to multilateral entities for financing its daily activities and, ultimately, to renegotiate the debt. Such negotiations always entail an adjustment of the economy to guarantee that the necessary volume of foreign currency will be generated to comply with respective pact. In Europe or the U.S., the origin of the crisis was distinct but the result is the same: an unsustainable imbalance.
The problem is that governments don’t always recognize that their options are limited. The case of López-Portillo in 1982 is paradigmatic: not only did he not recognize the necessity of acting decisively and immediately in the economic policy ambit, but also that his responses included political decisions (such as expropriation of the banks and exchange controls) that continue to hound us to date. Over time, and with the extraordinary experience that we appropriated in crisis management, the government learned to respond in immediate fashion and with enormous clarity of purpose. It learned that, under these circumstances, fiscal adjustment is inevitable and that it is much less costly to execute out immediately and in the least amount of time possible because this permits that, although the resulting recession be harsh, the economy begins to recover in a matter of months.
No recession is pleasant, but what we have been able to observe, in Greece as well as in the U.S., suggests that there has been much more wisdom among Mexican technocrats than we have come to recognize.
Although the circumstances are radically different, Greece and the U.S. are very similar in one dimension: in that their currencies are internationally recognized (both are reserve currencies), a factor that has allowed them to believe that they can maintain permanent fiscal imbalances at no cost. The case of the Greeks is particularly extreme because, for them, adjustment appears somewhat unnecessary as long as it’s the Germans who are paying. The case of the U.S. is pathetic because they have acted as if their power status is permanent and inalterable. Neither has come to realize that its objective situation is not distinct from those that we experienced in Mexico between the seventies and nineties and exactly for the same reason: spending like a drunk sailor money that they did not have.
The U.S. case is critical for us due to the fact that the only part of our economy that really works is that of exports, and these depend on the health of the economy of our neighbors. From our perspective, it is key that they return to the growth path. What isn’t obvious to me is that they are on the road to achieving this because they haven’t carried out any adjustment and, in their political process, they are conducting themselves in exactly the same fashion as we did in the seventies.
In very simplistic terms, the cleavage that exists in U.S. society with respect to the economic challenge is reduced to how important the debt and the fiscal deficit are for the economic future. For President Obama, what was important was to stimulate growth in order to, with greater economic activity, eventually reduce the deficit and pay off the debt. For the Republicans, above all for the Tea Party group, the fiscal stimulus approved in 2009 was a failure and had no effect other than raising the deficit and the debt. In the end, the agreement arrived at was perhaps the worst of all possible accords for both sides: President Obama ended up distanced himself from his Democratic base while the reduction in the deficit will be quite modest. That is, what’s probable is that there will not be a recovery in the short term or a solid base for a recovery down the road.
I am not an economist but I have experienced all of the crises that have affected Mexico from the seventies. What I have observed is what’s been most costly is denial, the pretension that nothing’s happening, that everything can be postponed, or that, as President Ruiz-Cortines would have said, problems resolve themselves or with time. It is evident that it is better for the economy to grow than to be paralyzed; however, if our experience demonstrates anything it is that sustainable recovery cannot be acquired with public finances in permanent disequilibrium. To pretend, as many Keynesians and many Democrats feign to do, that ceiling-less spending can continue on and that it is not necessary to address the long term liabilities of entitlements (pensions and health programs) is to live in denial. In view of its being the most important economy in the world, and key for us, this denial is extremely dangerous.
The political conflict that lies behind the U.S. fiscal disaccord is not essentially about the economy. While there is a part of U.S. society that sees in the government a solution to its problems (what in fiscal terms implies a tax hike), for a broad sector of that same society values of the first order reside in things like frugality and a smaller and less intrusive government. In an ideal world, the best, for them and for Mexico, would be for the Americans to resolve their differences with greater economic growth that would be accompanied by a systematic reduction of the deficit and the debt. Our experience suggests that this can only be attained with an adjustment at the beginning and not with wagering for success by the increased-spending route.
Our “export product” is evident: fiscal stability is the precondition for anything else. Most Mexican politicians learned as much the hard way. Maybe we could teach some of this to our lost neighbors.