Bringing about a recession

Luis Rubio

1971 was the year that things slacked off. After two decades of experiencing growth rates of more than 6% on average, that year was considered to be one of recession because the growth rate was only 3%. That’s how much things have changed… The politicians’ response was to “stimulate” the economy through heightened public-sector spending, financed by foreign debt and printing paper money, that is to say, inflation. That’s how the era of the crises, recessions and, but by a hair, hyperinflation was born. 2013 seems like that 1971 and, as the budget illustrates, the government appears to be ready to put the same losing formula into practice.

The rhetorical package that accompanies the fiscal reform bill is grandiose in scope: productivity, growth, attack on inequality and unemployment insurance. Sounds attractive but, as George Orwell said, “Political language is designed to make lies seem truthful and murder respectable, and to give an appearance of solidity to pure wind”.

Comments on my previous article show that there is more doubt than assuredness about the direction proposed for adoption. What follows is a summary of the commentaries that I received, all from experts above reproach.

First, “While the bill is fundamentally for the purpose of achieving universal social security, it is noteworthy that the proposed budget increase between 2013 and 2014 is 520 billion pesos, but that only 20 billion of these are slated for universal social security. One would have thought that, in terms of priority, resources would have been allotted for unifying the financing of the various health services, but this issue –which today shows the most severe distortion— is now presumably firmly on the back burner. Not utilizing new resources to remove the distortion created by the differences in the manner of financing contributory and noncontributory health regimes is an omission difficult to understand.” Unless, that is, that the real objective is merely to increase spending; it wouldn’t be the first time…

Second, “The proposed universal pension is not in reality a universal pension. It is a pension conditioned to being in the world of informality. Formal workers have no right to it… Since the Popular Insurance is a benefit financed by general tax collection for the informal (that he perceives as free), but that he/she forfeit if they obtain formal employment…, another incentive is added to the incentives already in place that preserve informality in existence: a program for retirement pensions (whose is to be legislated and the retirement age lowered from 70 to 65). It is difficult to think that this will not contribute to increasing informal employment. The empirical evidence that we have gleaned from similar programs is that it will and that the labor participation rate might well be reduced. By way of these two routes, productivity will be penalized”. That is, there is a flagrant contradiction between the bill presented and the diagnosis of the government itself with respect to the urgency to raise productivity as a condition for accelerating the rate of growth of the economy.

Third, “Unemployment insurance really isn’t that at all; it seems to be more like severance pay insurance. The key point here is that this insurance program is created without modifying the dispositions of the Federal Labor Law (FLL) in matters of indemnities due to dismissal or seniority premiums. It also does not modify the problematic of justified or unjustified firing from a job. With regard to the proposed law, workers who voluntarily leave their job have the right to receive the benefits of the new insurance. On the other hand, Mexico will now have two parallel mechanisms in place to protect workers against shocks: the FLL dispositions already in force and this new insurance. It is difficult to think that in the future it will be possible to modify the FLL to reduce the contingent liabilities to the formal enterprises deriving from hiring formal workers when the principal mechanism that would have been utilized for changing these FLL dispositions –introducing unemployment insurance— has already been used. On not reducing the contingent business costs, it is also hard to see how this new insurance will contribute to formality”.

Fourth, “the bill proposes a net increase in employer’s contributions (art. 25, 36, 106 and 107 of the Social Security Law), which does not solve the essential problem: to equalize care costs among various providers. It’s right there where the pressure on spending will be greatest in the next few years. Today we do not know how much the medical services cost in the IMSS, ISSSTE and state health systems that are financed by the Popular Insurance. There are no certainties on the health sector budgetary requirements, since all that we know is the expenditures of each institution, not the cost of each service or the estimates related to epidemiological changes. The proposal resolves the short term IMSS financial urgency -which would otherwise exhaust its reserves in 2016 – but does not solve the underlying problem”.

Fifth, in “the proposed unemployment insurance INFONAVIT is left astray, instead of taking it into the health component of the bill or else increase contributory pensions. This creates more labor distortions because it makes more liquid the contributions in the short term”. In this context, it cannot be ignored that there might be another possible motivation for the proposed approach: “those who turn 18 from 2014 will be covered by a trust fund at Banxico, just the group that will be voting in 2018 for the first time …”.

“In sum, the reform is not meant to finance a ‘universal social security’ program, but instead to justify both increased employers’ contributions as well as granting new benefits, whose cost will increase over time and will be added to the growing cost of already existing programs. The fiscal resources of the proposed bill will be used for other expenditures and neither modifying the functioning of the health system nor its financing is proposed. Given the growth that is being observed in the provision of services it will be impossible to return to registering a zero deficit within the time-frame established in the bill (2017). In the current international scenario this sounds too risky”. “And all this without considering the liabilities of health and pensions of the states, PEMEX and CFE”. In other words, there is neither structural reform nor a solution to pending problems, just more public spending.

The proposal is to return to the seventies: mushrooming deficits, without healthy and sustainable financing, which will not contribute to the growth of the economy. Ignoring the cause of the crises of the past decades -an economic strategy anchored on deficits and debt- that today’s younger generation never saw except in indirect fashion- is the best way to provoke one… We don’t learn.