Memo To: Website Fans, Browsers, Clients
From: Jude Wanniski
Re: Fox’s Treasury Secretary, “Paco” Gil
It's about time! Great news from Mexico. Just when we were about to throw in the towel on Vicente Fox, the incoming President, he surprised us by picking Francisco Gil Diaz, 57, as his treasury secretary. Fox, who will be inaugurated this week, wants Mexico to grow at a rapid rate to close the gap in living standards with the United States. Only when that day comes will we be able to have the same kind of open borders with Mexico as we have with Canada. All his talk, though, has been about raising taxes -- until this appointment. If there is anyone in Mexico who knows how to keep its economy growing at high rates without inflation, it is “Paco Gil,” as he is called. Paco was one of the most important members of the Salinas administration, second in command at treasury when Pedro Aspe was in charge. He was also second in command at the Bank of Mexico when the peso was devalued in December 1994. He did everything he could to prevent it, but was overwhelmed by the new Zedillo cabinet, which wanted the peso devalued.
The New York Times describes Gil as a onetime student of Milton Friedman at the University of Chicago. In the ten years I've known Paco, he has never mentioned Friedman, always preferring to be identified as a former student of Robert Mundell, who taught at Chicago at the same time. I’m sure he admires Friedman’s celebration of free markets, but there is a critical difference. Friedman is a monetarist who prefers currencies to be managed by central banks according to his formula for quantity growth. Mundell, and Gil, are committed to price rules, where the market signals the central bank on what it must do to prevent currency fluctuations away from that price. Every time this century when Mexico began to grow at the higher rates that would be necessary to close the gap with their neighbors to the North, it has been unable to maintain the value of the peso relative to the U.S. dollar. Mexico’s rapid growth from 1988 to 1994 was built around the determination of the Salinas administration to keep the peso pegged to the U.S. dollar. The economy and the people were plunged into recession and high inflation when the government changed hands and the new team was counseled by the International Monetary Fund to devalue by 10%. Once the devaluation began, it raged on until it hit 50%, with an equivalent price inflation in the years that followed.
We have been telling our global clients that there was a small chance Gil would be chosen, but only last week did Fox swing that way. In any event, with Gil at Treasury, we expect the Bolsa once again to be a good investment. Paco Gil knows how to manage the peso and also understands the importance of supply-side tax cuts, especially on capital gains. Mexico has the potential of double-digit ANNUAL growth for the next decade and Fox has been promising 7%. It did not seem possible in the months since his election, as he talked only of raising taxes to balance the budget. With Paco Gil at Treasury, we would bet on rapid growth. It will not be easy, as legions of Mexican economists trained by Ivy League Keynesians insist that growth is inflationary and that the economy already is “overheated.” Next thing you know, Mexicans who abandoned their country to earn a living in the United States, legally or illegally, will be going home to even better jobs.