Memo To: Lou Dobbs, CNN
From: Jude Wanniski
Re: A Nice Way to Do It
Dear Lou.... A few weeks back you responded to one of my e-mails asking me to explain the trade deficit from my perspective. Today, I'm going to address the issue that has had you on fire recently: The escalating problem of illegal immigrants to the USA from Mexico. I have been writing about how to turn things around for several years, where Mexicans living in the USA, legally or illegally, suddenly deciding to move back to their homeland.
If you talk to Pat Buchanan, he will confess that when he was running for President and promising to build a barbed-wire fence across the U.S.-Mexican Border, I told him it was a silly, losing idea, and the better way was to persuade the Mexican government to change its dreadful economic policies and adopt those that Ronald Reagan revived on behalf of us... policies that would cause the Mexican economy to explode, at double-digit rates similar to those we have seen in Russia and China, a veritable magnet for Mexicans in the Southwest to pack up and go home to share in the wealth. My old friend Pat, who never wants to do things the easy way, rejected my advice and hung in there with his thousand-mile fence, presumably backed with machine-gun towers. (Sigh) If you recall, his candidacy went down the drain bigtime, as Americans, even Republicans, aren't that hard-nosed.
If you check things out, Lou, you will find that for a brief period after NAFTA was passed, when Mexico had a wonderful finance minister named Pedro Aspe, the Mexican stock market was soaring, the economy was in the first flush of mega-growth, and at the Broken Border, as you call it, the net flow was from North to South. And the U.S. was suddenly running a trade surplus with Mexico, as it also became a magnet for financial capital. That all ended when the IMF and its friends in the Clinton Treasury (Larry Summers, now President of Harvard) persuaded the new government in Mexico City of Ernesto Zedillo (December 1994), to devalue the peso!! Someday a smart historian will delve into that event and write a book, as I believe it was the greatest financial scandal in American history, one that overnight impoverished tens of millions of Mexicans who had thought they were on the move.
But for now, Lou, I suggest you call Bill Mundell in California and ask him to come on your show, to talk about how to stop the flow of illegal immigrants to Mexico with supply-side economic idea. You may know Bill is the point man for the California initiative to have judges instead of politicos redistrict to restore democracy to California. He's also the son of Bob Mundell, the Canadian economist who was the prime-mover in reviving classical, supply-side economics. Bill is going to run for the Diane Feinstein seat next year, and one of his main planks he says will be to badger the Mexican President to hack away at their ridiculous tax rates, which hurt the poorest of people. You are a kind-hearted, compassionate fellow, Lou, and I know if you had to choice of solving a problem with guns and electrifed fences, or rapid economy growth South of the Border, you would choose the latter.
Here's a piece I wrote in this space on June 14, 2004, to Mexican President Vicente Fox. I never met him, but do know his finance minister, Francisco Gil Diaz, who did get the memo. I don't know if he shared it with Fox, but I share it with you.
The Mexico Summit
Memo To: Vicente Fox, President of Mexico
From: Jude Wanniski
Re: Exporting Your Citizens
Having had such high hopes for your tenure when you were elected in 1999, Mr. President, I am sorely dismayed that your economy remains in such sad shape that you have to negotiate with our President to send your unemployed to work here illegally. Nothing I saw in your meeting with President Bush indicates you are getting any closer to figuring out that as long as your tax system is so out of line with the US tax system, you will continue to export your people into the American Southwest and California. They are not leaving in search of lower tax rates, mind you. It is just that Mexico’s business class cannot form the capital necessary to sustain broader employment of your people at living wages.
As far as I can tell, your top income tax rate of 33% now applies at an income of about $20,000. In the U.S., the top rate is 38.6%, but that is not encountered until taxable income reaches $312,000. Your 25% rate is reached at $7230 and the closest U.S. tax bracket for a head of household of 27% is reached at $98,000. Your 10% rate is reached at $4114. The U.S. 10% rate is encountered at $10,000. Do you see what I mean?
Then there is your 15% Value Added Tax, which adds to the burdens of enterprise, a tax that the United States does not have at all.
If you check with your finance minister, Francisco Gil Diaz, he will tell you that I have been pestering him for the last four years to cut or eliminate your capital gains tax. There is a zero capital gains tax on shares traded on your stock exchange, I know, but you have to be a big company to trade on the Bolsa. If you are not big enough to be admitted to the Bolsa, you must pay capital gains at the ordinary rates. In other words, the system favors the elites and punishes the pool out of which you would expect to find entrepreneurs who someday might become big enough to compete with the elites. If you would eliminate the capgains tax, which I’m sure you will find brings in very little revenue to your government. This is because it encourages businesses to remain small or to find ways to avoid the tax. You would immediately find the Mexico stock market surging ahead, not because the elites would get a more favorable treatment than zero, but because the economy underneath them would be pushing up the value of all assets. Revenues would then increase dramatically on your income tax and your VAT tax, and you could then easily make provision to lower the burden of the VAT and income tax. I’d recommend you leave the top rate in place at 33% and increase the threshold to at least $100,000.
There are a great many other things you can do to catch up with the United States in the way you originally envisioned, President Fox. But this would be a good start. What you would find, even if you presented such a program to the legislature, that there would immediately be a hesitation of your citizens to leave the U.S., and in a short time there would be a reflow of Mexican nationals who are now struggling to make ends meet in California and the other Southwestern states.
Monetary policy is also something to consider, although here Minister gil Diaz has done a better job in stabilizing the value of the peso. You are always at risk, though, because of the floating U.S. dollar. Here is a memo I wrote to Paco Gil on July 23, 2001, "Those Unhappy Mexican Farmers.” It was written when your economy was suffering terribly from the monetary deflation caused by the Federal Reserve’s management of the floating dollar.
With best wishes for the remainder of your six-year term,