I was in Mexico last week. Mexico has many problems, not the least of which is declining oil production, low school graduation rates and drug-induced violence. But on the fiscal front, the country is outperforming the United States. Mexico’s government has developed and implemented better macroeconomic policy than has the U.S. government.
Mexico’s economy contracted sharply during the global downturn, with real gross domestic product (GDP) plummeting 6.2 percent in 2009. But growth roared back, up 5.5 percent in 2010 and 3.9 percent in 2011, with output reaching its prerecession peak after 12 quarters—three quarters sooner than in the U.S. Mexico’s industrial production passed its prerecession peak at the end of 2010; ours has yet to do so.
Now hold on to your seats: Mexico actually has a federal budget! We (the US) haven’t had one for almost three years. Furthermore, the Mexican Congress has imposed a balanced-budget rule and the discipline to go with it, so that even with the deviation from balance allowed under emergencies, Mexico ran a budget deficit of only 2.5 percent in 2011, compared with 8.7 percent in the U.S. Mexico’s national debt totals 27 percent of GDP; in the U.S., the debt-to-GDP ratio computed on a comparable basis was 99 percent in 2011 and is projected to be 106 percent in 2012. Imagine that: The country that many Americans look down upon and consider “undeveloped” is now more fiscally responsible and is growing faster than the United States. What does that say about the fiscal rectitude of the U.S. Congress?
Here is the point: As demonstrated by the relative and continued, inexorable outperformance by Texas—which is affected by the same monetary policy as are all of the other 49 states—the key to harnessing the monetary accommodation provided by the Fed lies in the hands of our fiscal and regulatory authorities, the Congress working with the executive branch. As demonstrated by the fiscal posture of Mexico, a nation can effect budgetary discipline and still have growth.
