Politics Makes Strange Bedfellows

After PRI Senator Manlio Fabio Beltrones' break with his party's position in favor of President Calderon's modified Income Law (LIF), it might be surprising to see Beltrones making common cause with the PAN on the Expenditures Law (PEF). The answer to the riddle is to be found in the distribution of expenditures between the federal government and the states.

PRI governors want the states to gain more control over spending. The PAN wants the present tilt conserved. The Oportunidades program is a battleground. Had the Administration's proposed 2% "contribution to combat poverty" been approved, some of the funds raised would have gone to Oportunidades, an effective program administered by Sedesol. As it turns out, the trade-off the PRI has presented the PAN is either to reduce the proposed funding for Oportunidades or allow the states to administer the program. According to news reports, the PAN has opted for the former.

By law, the PEF has to be approved by November 15. Congress does have the option to extend the deadline to December 31. What happens if Congress approves a budget which President Calderon vetos? If Congress does not pass a new budget, one acceptable to the President, by December 31, the 2008 budget will remain in force.

Stock Market Returns in the US

Here's an interesting fact....

Annual real returns (including dividends) on the S&P 500 under the previous four US presidents are as follows:

Reagan 10.08%
Bush I 10.16%
Clinton 14.35%
Bush II - 5.81%

Pemex's investments: in or out of the budget?

This year, Pemex's investments are included in the public sector finances, which explains why we've seen increases on the order of 75% in real terms in public sector investments at the same time that companies complain that the infrastructure program hasn't taken off. However, the section on expenditures in the 173 page "Perspectives and Economic Agenda for 2010-2015" document that complemented the 2010 budget presented to Congress last night consistently cites expenditures excluding Pemex's investments.

Net: Read the definitions closely. The government includes Pemex's investments when it wants to emphasize that it's implementing an expansionary fiscal policy. When the deficit will be uncomfortably large, as is the case in 2010, the numbers the government presents excludes investments by Pemex. Voila! A public sector borrowing requirement of about 4% of GDP is a deficit equal to 0.5% of GDP. Both statements are true: the former includes borrowing for Pidiregas and Pemex's investments; the latter does not.

Consistency?

The contrast between President Calderon's third Informe and the budget proposal presented to Congress six days later is striking. The 2010 budget proposal combines higher taxes and flashy expenditure cuts that don't attack the root of the problem with a deficit -- hardly a signficant reorientation of the public sector finances or the dramatic call for action of the Informe.

President Calderon laid out his Administration's "top ten" priorities for the remainder of his six-year term yesteray in his third Informe. It's clear he's aware of what needs to be done to boost Mexico's sustainable long-term growth rate. Can he do it?

Following is Banamex's summary of the 10 points.

1. Concentrar la fuerza y recursos del Estado para combatir la pobreza;
2. Universalizar la cobertura de servicios de salud en el ámbito nacional;
3. Promover una educación de calidad para garantizar una salida definitiva de la pobreza;
4. Llevar a cabo una profunda reforma de la hacienda pública que sustituya los decrecientes ingresos petroleros con fuentes alternativas de ingreso, que racionalice el gasto, amplíe la base gravable de manera sustentable y combata la evasión fiscal;
5. Reformar la estructura de la economía nacional para volverla más competitiva y fortalecer su capacidad generadora de empleo. Esto implica emprender una profunda modernización de las empresas del sector energético, que ya requieren una segunda generación de reformas y mayor firmeza para actuar contra intereses corporativos;
6. Reformar también el sector telecomunicaciones para hacer realidad la convergencia y abrir paso a una mayor competencia;
7. Modernizar el marco legal del empleo para promover una mayor productividad sin afectar derechos adquiridos de los trabajadores;
8. Desarrollar una reforma regulatoria de fondo para que el gobierno tenga una regulación base cero, que elimine costos de transacción tanto para los ciudadanos cuanto para las empresas;
9. Profundizar y ampliar la lucha contra el crimen organizado mediante el fortalecimiento del Estado de derecho pero también apelando a la participación coordinada de ciudadanos y gobiernos estatales;
10. Emprender una nueva reforma del sistema político para pasar del objetivo de “sufragio efectivo” a otro de “democracia efectiva”, donde la pluralidad no implique parálisis.

Income Distribution in the US

Here's the link to a study on the evolution of income distribution in the US. 2007 was a good year for everyone, especially for the super rich, the top 0.01% of the income distribution (almost 15,000 families whose income was at least US$11.5 million).

http://elsa.berkeley.edu/~saez/saez-UStopincomes-2007.pdf

PRI redux

Since 1997, the president's party has lost the mid-term elections. This year was no exception. President Calderon's personal popularity didn't translate into a vote for the PAN.

The magnitude of the PRI's victory was startling. The PRI not only is expected to more than double its number of seats (from 106 to 233-237), it won five of the six gubernatorial races. The PRI's gains came at the expense of the PRD, which lost 55 seats, and the PAN, which lost 64 seats. Although the Greens picked up 4 seats, the other small parties lost 17.

The correlation of forces in the new Chamber of Deputies will be radically different. The PRI replaces the PAN as the largest single party. If the PRI can count on the votes of the Greens, it will have an absolute majority. The PAN will not even have the votes to sustain a presidential veto in the Chamber, which controls the budget. The election results boot the PRD out if its second force" slot into a distant third, with half the number of seats (72) as the PAN's 143.

Abstention was high -- 55.3%. Three out of five Mexicans (60.9%) opted out, if those voters who cast blank ballots are included. Almost as many Mexicans chose to cast a blank ballot (5.6%) as voted for the PT and Convergencia combined (6.2%).

Will the PRI's victory make the passage of the much-needed reforms more or less likely? That depends on how the party's leaders read the costs and benefits of enacting reforms in the 2012 elections. If the PRI believes that voters will blame Calderon and the PAN for unpopular reforms such as a levying value-added tax on food and medicines, then we could see the fiscal reform for which technocrats have waited so long. Otherwise, we'll be in a holding pattern until Mexico's next president takes office 3 1/2 years from now.

Are Cabinet changes in the offing? Probably, considering the PAN's dismal performance at the ballot box and that pre-election polls gave the Cabinet only a 35% approval rating.