The recent US $1.9 trillion fiscal stimulus package approved by the U.S. Congress is 58 percent larger than Mexico’s nominal GDP. It is greater than the economies of Brazil or Italy. It comes on top of the US $900 billion approved in December, and the US $2.5 trillion in Trump’s final year. The total US stimulus amounts to 27.1 percent of GDP. Only Japan offered greater stimulus (54.9 percent), but that figure includes hefty amounts to decarbonize its economy by 2050, a non-pandemic related issue.
There is no precedent for a tax boost of such magnitude, with the exception of World War II, when US public deficit went from 3 percent of GDP in 1940 to 13.9 percent in 1942, to 29.3 percent in 1943. In 2020, it was 15 percent and will be 16 percent in 2021.
The US possesses an “exorbitant privilege” (in the words of former French president Valery Giscard d’Estaing) over other economies, by having the printing press of dollars, a currency that will be the most reliable store of value for the foreseeable future. Those who predicted its demise better take a seat. As former US former Treasury Secretary Larry Summers put it: “There is no alternative: Europe is a museum, Japan a nursing home, China a jail, and bitcoin an experiment.” The US could finance an even larger budget deficit as it does so in its own currency. To top it all off, the demand for dollars for financial transactions went from US $1 trillion in 1970 to US $30 trillion today. The US is right to take advantage of the possibility of financing a huge deficit at rates close to zero.
At the end of the day, everything hinges on what the US does with that money. The country will be able to rescue a number of companies and small businesses that will be able to reopen and rehire personnel as soon as the pandemic subsides. If most of the US population is inoculated by May, the economy will grow 6.5 percent or more this year (it contracted a mere 3.5 percent in 2020). Pre-pandemic GDP is expected to recover by the end of 2021, including previously projected growth. The marginal rate of savings in the richest part of the pyramid is above 20 percent. We will see robust demand in the second half of the year thanks to huge pent-up demand.
Now the US is considering a new package to modernize infrastructure, which could amount to an additional 15 percent of GDP. Besides investing in roads, bridges, ports, airports, broadband access, and clean energy generation, some are suggesting aiding schools and funding research and development at universities and private entities.
Meanwhile, Mexico’s total fiscal stimulus was less than one point of GDP in 2020. Despite such frugality, it posted the largest deficit in 30 years, more than US $37 billion (about three percent of GDP). Mexico’s Public Sector Borrowing Requirements, the broadest measure of government indebtedness, reached 55.4 percent of GDP. It might take until 2024 for Mexico to return to the nominal GDP of 2018. It will be a wasted six-year presidential term.
For many reasons, it is unfair to compare the two economies. But let us understand the damage that the López Obrador administration’s policy of “austericide” has inflicted upon Mexico. Estimates show that 90,000 restaurants have closed permanently. That alone means the loss of hundreds of thousands of jobs. If we add to this the bankruptcy of companies, loss of tourism, and that the Mexican economy will have a tough time reopening this year (given the slow vaccine rollout), the outlook seems bleak.
Perhaps the biggest difference between Mexico and the US is in their conception of public spending. The core goal of the huge US stimulus was to keep afloat companies that will be able to invest again, compete, generate wealth and provide employment. The most recent goal is to modernize US infrastructure in order to improve competitiveness and investment attractiveness to boost the country’s growth and potential output. The López Obrador administration’s decision to prioritize investment in the Dos Bocas oil refinery in Tabasco and the Mayan Train in the Yucatán doesn’t increase Mexican competitiveness one iota. Instead, it depletes government finances, while pushing up the cost of financing for Mexican private companies.
Mexico will grow in 2021 by sailing in the wake of the huge American ocean liner. Let’s take care of the U.S.-Mexico bilateral relationship and, by the way, let’s understand that we have never needed more of Mexican companies’ investment. If only the López Obrador administration realized the damage it does by sabotaging them.
* Jorge Suárez-Vélez is an economic and political analyst He is the author of The Coming Downturn of the World Economy (Random House 2011). A Spanish version of this Op-Ed appeared first in Reforma’s newspaper print edition. Twitter: @jorgesuarezv