By the IMCO Staff
In economic jargon, fiscal and monetary policies are known as demand policies. In other words, they have the ability to alter the goods and services that are demanded in an economy, but they do not necessarily manage to alter —increase would be desirable— the productive capacity. Both affect economic performance, and all that this implies, such as wages, prices and production, but in the short term, because in order to change what an economy can really produce, more fundamental changes are needed, structural changes whose impact is seen as it passes. time.
Both policies must be made with the knowledge of the risks and benefits that each entails. None is harmless. They are a bit like antibiotics, they can solve a condition if they are well prescribed, but they are likely to have some side effects. Increasing public spending in a time of slowdown or frank stagnation can reactivate production, improving employment levels; but its impact could be temporary and there is the possibility that prices will rise as a consequence, mitigating — or sometimes eliminating — the benefits that the fiscal antibiotic could have generated.
If fiscal policy has its degree of complexity, that of monetary policy is significantly higher. Deciding how and how much to spend, how and how much to tax, and how and how much to borrow is not a trivial task. While these decisions are being made, incentives are affected (that term that economists cannot do without) and modifying people’s behavior.
Monetary policy has its degree of science, but much more of art. It is more complex to know how much money has to be put into the economy so as not to slow its growth, but without generating inflation. Equilibrium matters and is difficult to achieve. You must not only consider the current conditions of an economy, you must have estimates of future growth and the expectations that all economic agents have, including, of course, the population as a whole. In integrated economies, such as the case of Mexico with the North American bloc, the objectives of the central bank must also consider the performance of trade partners and recognize the link that exists between the monetary policies of countries where there is a relevant trade exchange. And among many things to consider, the central bank must fulfill its most important function: to maintain the purchasing power of the currency.
Inflation is the most regressive tax there is. It affects more those who dedicate a larger fraction of their income to consumption and those who keep their wealth – whatever it may be – in cash. Few phenomena are as complex and harmful to a society as overflowing inflation. In this sense, the autonomy of the central bank, Banco de México in our case, is essential. Monetary policy has to be kept separate from fiscal policy. The fiscal prosecutor cannot issue instructions to the monetary one, nor vice versa. Fiscal policy can change its objectives so that they are in accordance with the Government. In turn, hopefully it will always be considering economic stability as an intrinsic purpose; but monetary policy has to transcend administrations. It should not respond to the Executive, it must respond to the country.
Banco de México has been characterized, even before gaining its autonomy, as being a great talent trainer. The development of the necessary technical capacity has gone hand in hand with the complexity of its task. Their profiles must be technical. They must have the ability to analyze data, figures, complex situations, detaching themselves from political phobias and philias. Difficult task, no doubt.
President López Obrador formalized an announcement that was already expected. Before the end of the term of the current governor, Alejandro Díaz de León, the president indicated that he would propose to the Senate the appointment of the current Secretary of the Treasury, Arturo Herrera, to the position that will be vacant in December. I do not understand the need for the president to make an announcement of this magnitude six months before the deadline. The anticipated announcement seems counterproductive to the agendas of both institutions.
Arturo Herrera has shown himself to be an accommodating treasury secretary to the wishes of the president. In the most difficult months of 2020, it was essential to grant more fiscal support. With the figures for employment, poverty, drop in income, and deaths from covid, the need for more support was evident to anyone, without falling into the false story of not indebtedness. I guess the secretary knew, maybe the president didn’t listen.
We also know that the austerity policies implemented by the current Administration would be the envy of any neoliberal textbook. But we also know that these cuts have not only cost efficiency and capacity, they have also cost lives. The “light” handling of the figures by the Secretary of the Treasury launched some warning signs. Suffice it to remember that at the closing of the National Banking Convention in March he assured us that by May there would already be 80 million Mexicans vaccinated. In monetary policy you cannot commit such trivialities. Accuracy is key.
Banco de México’s operation is carried out through its governing board, always supported by a team with undeniable technical knowledge. I hope that through that governance of one of the most relevant institutions in Mexico the autonomy and independence of the central bank will be maintained. This is not an exaggeration. If that autonomy and independence were lost in practice, deteriorating inflation would come sooner or later. Mexico does not need to return to that.
There is not space enough here to properly comment on the change in the Ministry of Finance. Suffice it to mention that a little Keynesianism, in times of economic crisis, could go down well… because at the end of the day, to quote the greats, in the long run we are all dead.
Centro de Investigación en Politica Publica (IMCO)
