There seem to be two global winds blowing in opposite directions: companies are merging like never before while nation-states from Spain to Iraq to the United Kingdom are threatening to break apart.
What if the United States bucked the trend of nation-states and instead went the way of companies? What if, for instance, the U.S. decided to merge with Mexico? Welcome to Amexico, with a population of nearly half a billion people and the best hamburgers and enchiladas in the world. Is this as crazy as it sounds? That’s the question we explore in our latest Freakonomics Radio episode, “Should the U.S. Merge With Mexico?”
The spark for this show came from a listener named Dan Woerner:
DAN WOERNER: “I was lying awake last night thinking about what might happen if the U.S. somehow incorporated Mexico. I’m not talking about waging war and taking over, but rather a mutually beneficial merger.”
There is of course some history to consider. After the Mexican-American War in the late 1840s, the U.S. forced Mexico to sign the Treaty of Guadalupe-Hidalgo, which gave the U.S. the present-day states of California, Nevada, and Utah, as well as parts of New Mexico, Wyoming, Arizona, Colorado, New Mexico–and Texas, which itself was originally part of Mexico.
This was of course more of a hostile takeover than, as our listener suggested, a “mutually beneficial merger.” But maybe it could be done differently this time around, with both nations benefiting. To find out, Stephen Dubner interviews former Mexican president Vicente Fox; former White House chief economist Austan Goolsbee; and Mad Money host Jim Cramer.
Cramer owns property in Mexico and a Mexican restaurant in Brooklyn. We asked him what advice he would give investors if there were an initial public offering for a U.S.-Mexico merger:
JIM CRAMER: Look, that IPO, I want everyone in and I’m willing to pay 20 percent above the price talk. Because I think people are short-selling Mexico because they think it is just a place where you just have lawlessness. They have not been to Mexico, they don’t realize the immediate premium this deal’s gonna go to. I want in that deal, and I’m also gonna buy in the aftermarket after it comes public.
Vicente Fox, who considers himself a great friend of the United States, is nevertheless not enthusiastic about a merger:
VICENTE FOX: I see that [as] close to impossible. It’s not the wish either of the United States and its wonderful people, nor is [it] the desire of Mexicans and our great culture.
These days, Fox spends most of his time on non-profit work at his presidential library Centro Fox. Even though he’s dead set against “one nation,” Fox does dream of a stronger partnership between the countries of North America:
FOX: We can have a union, a North American union, which will be much more than a trade partnership. … For instance, we should have a customs union, because right now we see products that are coming from China into the United States, and they come to Mexico taking advantage of the no-duty program that we have through NAFTA. And so that would be one advantage. If we could blend, mix, get together our financial systems, that would be again another engine to move our economies.
Austan Goolsbee had even less interest than Fox in a U.S.-Mexico merger. Among his objections: potential issues with a monetary union, the effects on U.S. wages, and the impact a merger would have on the federal government’s budget:
AUSTAN GOOLSBEE: The first thing to note is that median family income in Mexico … [is] below $5,000 a year. So given the fiscal setup of the U.S., if you’re going to add 60 million people who make less than $5,000 a year, under our current system, you’re going to have massive transfer payments and subsidies from what are now the United States to the new states that are formerly of Mexico. And in a way you could have cost saving the same way if you merged two companies. But most of the people in the U.S are going to say, “Wait a minute, wait a minute, cost saving in this context means that everybody in the U.S. is going to be paid less. Is that really what we’re looking for?”
You’ll also hear from MIT economist Daron Acemoglu, co-author of Why Nations Fail, in which he and James Robinson argue that the quality of a country’s institutions are critical to its economic success: “extractive” institutions hold nations back while “inclusive” ones propel them forward. What would be the institutional impact of a merger between the U.S. and Mexico?
DARON ACEMOGLU: There are examples in history where when you have two different parts of a single country [that] have evolved differently institutionally. Sometimes the extractive part dominates and poisons the inclusive part. Sometimes the inclusive part dominates and ultimately takes over the extractive part. So the example I would give for the former … is Italy, where the south of Italy has to a large extent made the north of Italy politically more inefficient … And then the example that you would give for the latter is the United States, where after a period of the extractive part, the South, dominating the political equilibrium through the Antebellum period … ultimately, after the Civil War…the northern institutions became more and more dominant in the South. … But you know, were Mexico and the United States to merge, which part would dominate? One cannot say with certainty. But you know, I think given that U.S. institutions are themselves shaky at times, it could go either way I guess.
For what it’s worth, we aren’t the only people thinking about a much closer relationship between the U.S. and Mexico (and, while we’re at it, Canada). Last month, a Council of Foreign Relations Task Force headed by David Petraeus and Robert Zoellick put out a report called “North America: Time for a New Focus,” which argues that it is “time to put North America at the forefront of U.S. policy.” As they write:
“Here is our vision: three democracies with a total population of almost half a billion people; energy self-sufficiency and even energy exports; integrated infrastructure that fosters interconnected and highly competitive agriculture, resource development, manufacturing, services, and technology industries; a shared, skilled labor force that prospers through investment in human capital; a common natural bounty of air, water, lands, biodiversity, and wildlife and migratory species; close security cooperation on regional threats of all kinds; and, over time, closer cooperation as North Americans on economic, political, security, and environmental topics when dealing with the rest of the world, perhaps focusing first on challenges in our own hemisphere.”
Stephen J. DUBNER: If you’ve been paying even a little bit of attention to the news lately, you will have noticed a worldwide trend. You might call it “Independence Fever.”
MEDIA CLIP: The polls have closed in Scotland and…the vote over independence went down to the wire, closer than a lot of people imagined.
MEDIA CLIP: And a plan to split California in six different states is one step closer to a vote this morning.
MEDIA CLIP: Hundreds of thousands of people gathered in Barcelona…to demand the right to vote on independence from Spain.
MEDIA CLIP: Now Catalonia is not alone in the battlefield for sovereignty. Another Spanish region, the Basque country, is also seeking a referendum on independence .
MEDIA CLIP: In Iraq, the president of the country’s autonomous Kurdish north…has asked the regional parliament to prepare for a referendum on independence.
DUBNER: But while countries are threatening to break apart, companies are moving in the opposite direction:
MEDIA CLIP: U.S. fast food giant Burger King is in merger talks with Canadian coffee and donut chain Tim Hortons. If the deal goes through, it will create the world’s third-largest fast-food chain.
MEDIA CLIP: Dollar General has gone hostile in its bid to buy rival Family Dollar.
MEDIA CLIP: America’s two biggest cable companies announced a $45 billion merger.
MEDIA CLIP: Three of the four largest German deals ever have happened in 2014. And we’ve seen $61 billion dollars’ worth of German companies buying US companies this year.
MEDIA: CLIP: But here we are again, and it’s just another example of an M&A frenzy.
DUBNER: Is it really a frenzy?
Jim CRAMER: We’ve had three multi-billion dollar deals just in the last week. I see a lot of cross-border deals.
DUBNER: Yeah, it’s a frenzy. You know that voice, don’t you?
CRAMER: Yep, I’m Jim Cramer, and I am the host of “Mad Money with Jim Cramer,” the co-host of “Squawk on the Street,” and I’m also the markets commentator for TheStreet.com.
DUBNER: We had Cramer on the line because we had a question: if all this consolidation is good enough for companies, why not for countries? That is, rather than “Independence Fever,” why not “Merger Fever”? This came from a listener named Dan Woerner who recently sent us an e-mail. He wrote: “I was lying awake last night thinking about what might happen if the U.S. somehow incorporated Mexico. I’m not talking about waging war and taking over, but rather a mutually beneficial merger.”
DUBNER: Now, last year, Jim, you said, quote: “I think Mexico is a great buy.” I believe you were talking about a Mexican index fund, maybe some individual stocks, but I wonder, Jim, if that goes for Mexican stocks, do you think it might go for Mexico as a whole? Do you think maybe we Americans should think about acquiring Mexico?
CRAMER: Well, I think that if currency matters, yes, we ought to! The dollar is way too strong at 13 pesos. If we make that acquisition then I think our gross domestic product goes up, our workforce will be, uh, I’d say energized, and there’s a country with tremendous natural resources that we’d be able to exploit. Uh, I sure wish we’d do it!
DUBNER: And what if there were a stock offering for this merger, for this new conglomerate called Amexico, or maybe MexAmerica?
CRAMER: Look, that IPO, I want everyone in and I’m willing to pay 20% above the price talk. Because I think people are short-selling Mexico because they think it is just a place where you just have lawlessness. They have not been to Mexico, they don’t realize the immediate premium this deal’s gonna go to. I want in that deal, and I’m also gonna buy in the aftermarket after it comes public.
ANNOUNCER: From WNYC: This is FREAKONOMICS RADIO, the podcast that explores the hidden side of everything. Here’s your host, Stephen Dubner.
[MUSIC: Phil Symonds, “Baraka”]
DUBNER: So, not that this will happen but: what if the U.S. and Mexico were to merge? There is, of course, some relevant history to examine. You may recall the Mexican-American War in the 1840’s.The U.S. won and, under the terms of the Treaty of Guadalupe Hidalgo, Mexico turned over more than half its territory. This includes what is now California, Nevada, and Utah, as well as parts of New Mexico, Wyoming, Arizona, Colorado — and Texas, which itself had earlier seceded from Mexico; but parts of Texas were still disputed at the time of the war. The Treaty called for the U.S. to compensate Mexico $15 million for all this property. Adjusted for inflation, that’s roughly 400 million current dollars. Which means the U.S. got all that land for less money than it cost to make the movie Avatar. Now, granted, Mexico didn’t have much bargaining power; it had just lost a war. So this wasn’t so much a merger as a hostile takeover. But what about this idea of a more modern, more win-win merger between the U.S. and Mexico? Jim Cramer already owns some property there.
FEMALE VOICE: If someone said to you, viewer, “Hey, I’m gonna go buy houses in Mexico,” you might think that…
FEMALE VOICE: …you were a little crazy…
CRAMER: Totally insane.
FEMALE VOICE: Okay…
CRAMER: Well, I did a real estate deal, yes. I have some property in Mexico…it’s San Miguel de Allende… And San Miguel has got to be one of the nicest places I’ve ever been in.
DUBNER: Cramer loves San Miguel so much that when he opened a Mexican restaurant in Brooklyn, guess what he named it?
FEMALE VOICE: We’re here at Bar San Miguel, the latest Mexican restaurant to hit Carroll Gardens, Brooklyn. Also known as the latest investment by Jim Cramer. Jim, thanks so much for having us here!
CRAMER: Britney, I’m glad you’re here… Well, cheers!
DUBNER: So Jim Cramer is pretty much a Mexico fanboy – which you’d already know if you watch him on CNBC.
CRAMER: When you take a global view, alright, things stagnant. But there are still some bright spots out there. And believe it or not, one of the brightest is Mexico! That’s right, Mexico has been getting its act together!
CRAMER: Tonight, we’re moving on to another country that’s kicking butt in the World Cup: the great land of Mexico!
CRAMER: And the Mexican auto business? Wow. It is on fire.
CRAMER: Think Corona, Modelo, Pacifico, which is by the way, my favorite.
CRAMER: Holy cow, man, guacamole…Ah, jeez, I can’t suspend guacamole. What am I supposed to put out, ketchup?! ketchup?!
CRAMER: Here’s the bottom line: there are still countries that are in great shape. And Mexico, despite all that publicity about the gangs and the terror, I got to tell you something, Mexico is in better than shape than almost every country on earth!
DUBNER: Okay, you get the picture? That’s why we went to Cramer with our proposal:
DUBNER: Let’s pretend for a minute that you, Jim Cramer, are representing the U.S. in this takeover/merger effort, whatever you want to call it. And that you’re sitting down, talk to Mexican President Nieto and maybe the Mexican Congress. Let’s hear your pitch on why this could be a good idea. I mean, the basic rule of economic transactions are: transactions happen when they’re good for all parties involved. So, let’s hear you describe why this merger could really lift all boats, Mexican and American.
CRAMER: Alright, well first I’d start out with some bona fides. I own a lot of land in San Miguel de Allende, which is in the center of the country in, yeah, Guanajuato State. I also own a Mexican restaurant where I’m trying to make a deal right now to import Mezcal and Tequila, so I regard myself as a friend of Mexico, not as an imperialist that wants very much to take the country over. My experience in Mexico are twofold. One, it’s got the best healthcare system I’ve come across, because it’s not tied into worker employment, so that would be something we could import. Second, the workforce is remarkable, and since many of our cars, and the Toyota and the BMW are being made there I’d like to bring that manufacturing back to the United States. The way you would do that is to incorporate with Mexico. In the interim, Mexico’s phenomenal, phenomenal resources have not been able to be exploited because the government has been dealing with entrenched interests. We can come in and change that dramatically, because suddenly Exxon is a Mexican company…Natural resources, by the way, have always been linked with great powers. Our natural resources are so, would be so bountiful if Mexico and the United States were joined, that I think you’d recognize that we are once again going to be a continental powerhouse. We could learn a lot from Mexico. Jeez, I think it’s a great country.
DUBNER: Talk for a minute about what a merger would do for the American immigration issue and how much of that issue is really Mexico?
CRAMER: Well I think actually the Mexican immigration has died down. I think there are a lot of other countries in Latin America that have used Mexico as a bit of a cut-through. But, uh, I just think…I dunno maybe because I’m partial because I go to Mexico so many times during the year. I think that what would happen is that we would have an influx of workers who work so hard that it would actually drive down U.S. wages. So I think that what people would be afraid of, in our country, is the importing of the deflation of the labor force. But at the same time, of course, I believe the labor force in Mexico…they’d be paid more, given the fact that there is a minimum wage that is certainly, in our country, double what I see many Mexicans make. That would be a boon for Mexico.
[MUSIC: Jessica Lurie, “The 43rd Day” (from Tiger Tiger)]
DUBNER: So Jim Cramer likes the idea of some kind of Mexico-U.S. merger, which makes sense, as he’s an American who happens to be a huge fan of Mexico. Now if only we could find a Mexican who is a huge fan of the U.S., someone with connections, with maybe political heft…
Vicente FOX: Morning everybody, hello. This is Vicente Fox from Mexico.
DUBNER: Vicente Fox Quesada is a former President of Mexico. His election, in the year 2000, ended the 71-year run of the Institutional Revolutionary Party, or PRI.On most dimensions, Fox was considered a reformer. These days, he and his wife Marta tend to his presidential library, which has programs dedicated to education, leadership, and expanding opportunities to the poor in Mexico.
DUBNER: You were president of Mexico from 2000 to 2006, talk to me for a moment about what you tried to accomplish during that time, especially as it relates to the United States and its relationship with Mexico.
FOX: Okay, number one purpose of my term was to stop the frequent and every- other-year crisis, devaluations, mammoth inflation that we suffered in Mexico as well as Latin America. So my purpose was to bring in stability and to converge on fundamental variables with [the] U.S. economy. All of that did happen. With deficits of well over two digits, I brought them down to zero in my term, which was one of the great accomplishments. Number two, my dedication together with Marta was to the poor… And number three, yes, to build up a very strong relationship with North America.
DUBNER: Given those accomplishments and given the state of the world now both on a political level and on a corporate level, corporations keep consolidating, that is the nature of capitalism, countries sometimes merge, sometimes split. I’m wondering if you could imagine a scenario, President Fox, whereby the U.S. and Mexico could in some way join to become a single nation?
FOX: I see that close to impossible. It’s not the wish either of United States and its wonderful people, nor is the desire of Mexicans and our great culture…But apart from that, what we do have to commit more and more every day is to work together, to work together for a better world….And that’s what we’re working on through NAFTA. I think that the tight relationship, the excellent relationship between the people in the United States and the people in Mexico is not yet met at the level of governments. At the level of governments we still have differences, for instance, on migration. I think that there is a lot of misleading positions, a lot of shortsighted positions in relation to migration lately in United States…
[MUSIC: Das Vibenbass, “The Beast” (from Animals & Robots)]
DUBNER: So President Fox isn’t nearly as gung-ho as Jim Cramer about a more intense relationship between the U.S. and Mexico. But years ago, things were different. In early September of 2001, Fox was invited to address a joint session of Congress.
Sergeant at Arms of the U.S. House of Representatives: Mr. Speaker, the president of the United Mexican States.
FOX: Honorable members of the U.S. Congress, the political change currently under way in Mexico is the most powerful reason why we are now able to establish new forms of friendship and cooperation with the United States. We’re ready to turn this change into the seed of a better future for both of our countries… Years ago, the United States Congress faced a difficult decision and chose to vote in favor of a greater integration with Mexico through the North American Free Trade Agreement. The partnership between Mexico and the United States is still incomplete.
DUBNER: Fox called on Congress to update its immigration policy.
FOX: There is one crucial fact that we must not lose sight of: migration flows respond to deep underlying economic incentives, are all but impossible to stop and must, instead, be regulated. Mexico is, therefore, seeking an agreement that will lend greater security and orderliness to the migration flows between our two countries.
DUBNER: But five days after that speech, President Fox’s agenda was back-burnered.
COURIC: We have a breaking news story to tell you about. Apparently, a plane has just crashed into the World Trade Center here in New York City….
DUBNER: Priorities changed. Immigration reform — and a closer integration of the two countries — were set aside.
FOX: We all understand the threat…that September 11th imposed on the people and the nation of the United States, and of course fear became priority issue within the relationship. But it’s true that fear will not solve our problems, that fear is not a good advisor in our relationships.
DUBNER: A few months before his speech to Congress, President Fox did an interview with PBS. He made the point that Mexico had what the U.S. really needed – a young and vibrant workforce. With American boomers starting to retire in huge numbers, the U.S. would need help in funding their retirement. Fox argued that the young, vibrant Mexican workforce was the answer. He said: “That generation is clamoring for jobs, for housing, and for schools [and] universities. So we have what the United States economy needs the most.”
DUBNER: So President Fox, assuming that you still see things this way, it sounds like the U.S. would be foolish to not entertain if not a merger, than at least a radically different immigration policy, yes?
FOX: Well, yeah. I think that was a great statement at that time. It is today the same. I think that today the world is moving towards blocks, towards alliances and partnerships from different nations. Look at the African Union at this point in time. They are replicating the process of the European Union, and they’re doing fantastic. Their plan is to have number one a shared, strong infrastructure program for all; this is highways, this is railroads, this is airports, that they’re going to share in the total of the continent, of the African continent. That’s what United States did at the beginning of the last century, and that’s what United States reinforced by getting together and partner through NAFTA…So coming back to your point, I think I still hold my statement in thinking that there is not one winner, Mexico, but there is two winners, which is Mexico and United States, and really it’s three, including Canada, and really it’s four, including what North America together can contribute to the world.
DUBNER: Okay, let me ask you this, if you want to strengthen that union not only between the U.S. and Mexico, but between the U.S., Mexico and Canada to make an even stronger North America, putting aside all the obvious barriers to a merger like tradition, like political institutions that want to maintain their own independence and so on; if you were thinking of this purely as a mechanism to help more people lead better lives, if that was the only goal, and it sounds like in your foundational work that is really your goal; if that’s your goal, why not one country, why not North America the nation? Think of the economies of scale, think of, I mean, just the vacation possibilities in one country, all the way from the south of Mexico, all the way to the Arctic Circle. Do you like that idea?
FOX: But that, excuse me, that can be done and accomplished without renouncing, without sacrificing our culture, our origin, because here in Mexico we like enchiladas, tacos…
DUBNER: We like enchiladas!
FOX: …we don’t like hamburgers and hotdogs. So there is a fundamental difference and that’s why we nations all over the world, each one has its own characteristics, and has its own personality, but yes we can have a union, a North American union, which will be much more than a trade partnership. A union goes much further than a trade partnership. That can be built…. For instance, we should have a customs union, because right now we see products that are coming from China into United States, and they come to Mexico taking advantage of the no-duty program that we have through NAFTA. And so that would be one advantage. If we could blend, mix, get together our financial systems, that would be again another engine to move our economies… I don’t see one nation. I see one union.
DUBNER: Let me read something you said at the time in 2001 again, April 2001. “I’ve been talking with President Bush, and fortunately he’s seeing it the same way. In the long term what we’re looking for is convergence of our two economies, convergence on the basic and fundamental variables of the economy, rates of interest, on income of people, convergence on salaries. Of course this is a 10 or 20-year program,” you said, “But when we reach that level, then we can just erase that border, open up that border for the free flow of products, merchandises, and capital as well as people.” Can you talk to me about how those talks progressed, and then what happened to turn that around?
FOX: How wise were those concepts? I don’t know who made them at the time? (laughs) But let me tell you, it’s working. Today’s reality is on the path that was set 10 years ago, because let me tell you some reasons. Number one, economic fundamentals of the economy have already converged. We have the same interest rate level, we have the same inflation level, we have other variables that have already converged…Mexico used to have interest rates of 180 percent a year, 12 percent a month. Today, Mexico’s interest rates are one-digit interest rates. But the key issue is the one you mentioned, salaries and wages. When NAFTA started, the difference in salaries and wages in the border between United States and Mexico was 10 to 1. You would make one dollar in Mexico when you were making 10 dollars in the United States. Today, that ratio is five to one. We yet have a time to go, maybe another 10 years, maybe 20 years, but then we’ll be on a one-to-one ratio. This is Canada, United States. You can see today that between Canada and United States there’s no problem in the borders because you make the same money working on the Canadian side than working on the U.S. side. That is coming in Mexico because of the reforms in oil that just happened on the constitution, because of Mexico becoming the number-one manufacturing cluster of automobiles in the world…So as you can see, yes this, this alliance, this agreement of North America is working pretty well. And as we can witness in Europe where they don’t have passports to move from one country to another one, from Spain to Britain, or from Britain to Germany, from Germany to France or from France to Poland, you don’t need a passport. You are a citizen of the European Union. That could and I forecast that it will happen among ourselves. But what I want to be very clear, I don’t see, I don’t think it can ever happen is that we become one nation with one culture, which that will kill both of us. Diversity is a very strong asset to people.
DUBNER: I understand what you’re saying, but on the other hand, just to be the devil’s advocate…couldn’t you say, well one country contains many, many, much diversity. The U.S. is very diverse. Mexico is very diverse. Canada is very diverse. Just think of the advantages. Think of the gains from trade, and think of the economies of scale. I mean, come on, together you and us, we could, we could be a juggernaut. Think of our national football team. Wouldn’t that be nice?
FOX: No, come on. Come on, football is soccer. We play it with the feet, with the foot. You play it with a hand and call it football!
DUBNER: No, I’m talking about soccer. Think of our national soccer teams if we got together. Now, Canada would be no help, but between the U.S. and Mexico, next World Cup, we’d be something.
FOX: All what you’re saying… is happening. You have Mexican football players playing football in U.S. football teams. Mexican players are playing in Spain’s football teams. So that happens. But what I don’t see happening is that we become one nation…. You will never convince me of one nation. Especially, even when we have Texas was Mexico, New Mexico was Mexico, Arizona was Mexico, part of California was Mexico, and we lost it. But we’re getting it back pretty soon because you will see Hispanic governors in California, Hispanic governors in Texas pretty soon (laughs).
DUBNER: So yeah, we took half of Mexico in the Treaty of Guadalupe Hidalgo, wouldn’t it be nice to have that back, California, New Mexico and Texas? Wouldn’t it be nice to make that part of Mexico again in a merger?
FOX: I’m not so ambitious. I just want Mexico with opportunities for all, a Mexico that equals income with the United States, which is an envy, we really envy that. But we have to work hard to get that. We have to be smart, we have to go to school, we have to share opportunities with everybody here in Mexico. We’re doing that. We’re doing a great job.
[MUSIC: BitBasic, “Fiss Fingers” (from Farwah EP)]
DUBNER: Okay, so President Fox wants a more united North America, if not a proper merger. Jim Cramer sounds like he’d be happy if the U.S. and Mexico got hitched tomorrow. Coming up on Freakonomics Radio: what would an economist think of this idea, maybe a really prominent economist, like someone who used to work at the White House?
Austan GOOLSBEE: It’s worth contemplating as a counterfactual, but I think if you start thinking beyond the first stage, there are a whole bunch of costs associated with it. So it’s much more like the old mega Gulf-and-Western conglomerate amalgamations.
DUBNER: And to those of you who subscribe to Freakonomics Radio – thanks! We recently hit 5 million downloads a month, so you are in good company. And to those of you who don’t yet subscribe – via iTunes or whatever podcast app you use – what are you waiting for?
ANNOUNCER: From WNYC: This is FREAKONOMICS RADIO. Here’s your host, Stephen Dubner.
[MUSIC: Orchester Mariachi Sol, “La Salida” (from Fiesta Mexicana: Original Mariachi Music From Mexico)]
DUBNER: So you can’t go around proposing an idea like a merger between the U.S. and Mexico without consulting a big-time economist.
DUBNER: Austan Goolsbee.
GOOLSBEE: Hey, brother! How you doin?
DUBNER: Yep. That is…
GOOLSBEE: Austan Goolsbee. I’m a professor of economics at the University of Chicago Booth School of Business.
Stephen J. DUBNER: Mmhmm. You used to have a job at a little something-something called the White House too, yeah?
GOOLSBEE: Yeah, I used to be the Chairman of the Council of Economic Advisers in the White House. And that’s pretty much who I am.
DUBNER: I’m guessing you spent a lot of time, Austan, at the CEA, in addition trying to avoid another Great Depression, I’m guessing you spent a lot of time talking about how cool it would be if the U.S. could take over Mexico. Am I right? You and the president and…
GOOLSBEE: Well, you know, an old friend of mine who was on the CEA many years ago gave me the advice when I took the job, he said…a good CEA chair, like a good gardener, is 90 percent pulling weeds and 10 percent planting seeds. So we’re going to see if this is the weed category or in the seed category, Stephen.
DUBNER: To find out whether it’s weed or seed, I asked Goolsbee a basic question: given the strong trend in corporate consolidation, you have to assume that such mergers are in the economic interest of the companies getting tied up. Why, therefore, would it not be in the economic interest of two countries, like Mexico and the U.S.?
GOOLSBEE: Okay, why did these corporate mergers take place? Basically you can think of two styles of reason. One is because we can merge these two things together and we can save costs, or we can merge these two things together and we can increase demand, which the cynics would say they’re trying to join up so that they can better collude, or there will be more concentration and they can raise prices. If not that, at the least, these two companies merge because they think they can get access to new customers or something like that. So if that’s the reasoning for a corporate merger, then apply that to a country merger and try to figure out what it is, so we’re going to try to save cost, how? I mean, the first thing to note is that median family income in Mexico, that is 50 percent of the country has income below $5,000 a year. So given the fiscal set up of the US, if you’re going to add 60 million people who make less than $5,000 a year, under our current system, you’re going to have massive transfer payments and subsidies from what are now the United States to the new states that are formerly of Mexico. And in a way you could have cost saving the same way if you merged two companies. But most of the people in the U.S are going to say, “Wait a minute, wait a minute, cost saving in this context means that everybody in the US is going to be paid less. Is that really what we’re looking for?”
DUBNER: Okay, well let’s just talk…Okay, so that low income. So U.S. GDP per capita is about $53,000. I don’t know if you like that metric or if you’re median family income more, but let me just put that one out there. $53,000. And Mexico is about a fifth of that, a little over $10,000. So one way to look at this is that in Mexico you’ve got a big, cheap labor force that is also younger than ours, and with elderly based entitlements swelling in this country, maybe it’s not such a terrible thing to inherit a young, cheap workforce. What’s wrong with that idea?
GOOLSBEE: Well, what would happen to the elderly in Mexico? Would they not qualify once they were part of the United States? Would the Social Security system—which, if you work your whole life and you earn relatively low income, you get a subsidy from the U.S. Social Security system—would that not apply to the people in Mexico? I mean, the root of the difficulties here is going to be, as I say, we’ve got a system set up in the U.S. which is at least moderately politically palatable, that people have kind of gotten used to the idea of here’s how much subsidy is going to take place, implicit subsidy let’s call it. And that subsidy takes multiple forms. Some is geographic. So if you take a poor state like Mississippi: Mississippi gets about 10 percent of its GDP back from the federal government, more than what it puts in every single year. So that’s a very large implicit subsidy to the poorer states. And a rich state like Connecticut, pays about 10 percent of its GDP more into the federal government than it gets out. Now just envision adding some states that are orders of magnitude poorer than Mississippi and you see what’s going to happen with this merger. Now, you would have some advantages like we’re gonna probably increase the amount of trade and there’d be a bigger potential market. But I kind of think that merging the U.S. and Mexico is if anything going in the opposite trend of what the rest of the world is figuring out. So if you look at Europe, you’ve got poor and rich countries locked in a monetary union, and everybody’s trying to devolve. The Scots are gonna vote to get out of there, the Flemish want to get out of there. Everybody’s trying to devolve down to a let’s call it a defensible unit, what’s a sustainable economic unit. And the sentiment for these big, mega mergers…I guess I would describe this as there was a time in the seventies when in corporate America all the rage was for building these giant conglomerates. And most of those conglomerates basically flopped. And by the eighties and nineties, nobody wanted to do conglomerates anymore. Merging the U.S. and Mexico, two humongous population countries whose economies are hugely different, strikes me as being in the tradition of the forming a major conglomerate that combines a whole bunch of businesses that have nothing to do with each other.
DUBNER: So Austan, you’re saying that if I’d come to you 25, 30 years ago with this idea, you might have loved it.
GOOLSBEE: (Laughs). If I was the same guy saying, you know, “plastics, that’s where you need to get into, plastics.” And the thing is, there’s one school of thought that says, “Well, the U.S. has an immigration problem, an illegal immigration problem, won’t this solve that problem?” But you know, for that it kind of reminds me of my dad is a very big guy and he’s not very flexible. So one year the doctor told him you should really go do yoga to get more flexible. So my dad goes over to the yoga and he tells the guy, he says, “You know, I can’t stretch very well, I think this is gonna hurt.” And the yoga instructor said, “No, it’s not going to hurt, there is no pain in yoga.” And my dad said, “Well, that’s great.” So they begin, my dad says, “Oh, this definitely hurts,” and the instructor says, “No, it doesn’t, there is no pain in yoga.” You know, and this solves the immigration problem only by redefining it as not being an immigration problem. The basic problem of here are 120 million people whose average income is one-fifth, or one-sixth what the other 300 million people’s income is, you know, that’s going to be an issue. If you look at examples of country mergers like East Germany-West Germany, there was more than a trillion dollars of subsidy from the West Germany to the East Germany when they joined up. Now, the reason they did it, there was a big political and national clamor. They wanted to do it. But it was very expensive for the West German half. And, there’s massive labor mobility, where East Germans look around and say, “Well, jeez, I can’t find a job over here, I’m going to go move over there.” And that would certainly happen if you merged the U.S. and Mexico. You know at the time of German unification, there are about 10 million people working in East Germany. And today, there’s about 5 million people working in what used to be East Germany. So you would envision something like that would happen. And in a way that’s a more pure economic system. That’s what should happen, but I do think that would generate a lot of conflict and a lot of pushback from the U.S. side.
DUBNER: If I can’t interest you in Mexico, what about Canada?
GOOLSBEE: (Laughs) You’re envisioning, these are like the biggest nightmares of all of these countries is like, “the U.S. is trying to take us over!” And there’s an old joke about Canada. What is the difference between a Canadian and American? The Canadian cares. You know, in Canada their question is what do the people in the U.S. think about Canada, and the answer is the people in the U.S. aren’t thinking about Canada, you know, that’s just not our thing.
[MUSIC: Spencer Garn, “Funky Zapatos”]
DUBNER: You may remember that former President Fox of Mexico was in favor of strengthening the union between Canada and the U.S. and Mexico. But you know who really likes Canada, almost as much as he really likes Mexico? Jim Cramer:
CRAMER: The Canadian dollar is very low, the Canadian people, I think very nationalistic, as they should be, because they’ve got a great country as they should be in Mexico. But I just think the idea of an E.U. – of an E.U. with no borders, one currency – would be dramatic. It would be exciting… We’d get the best cars from Mexico. We have an incredible partner to the North that very much wants to put a lot of people to work – pipeline jobs are fantastic. And we’re not embracing Canada. And I gotta tell you, let’s just face it: our President should be in Mexico at least six times a year, because the Mexican economy is our economy in so many different ways, we are so together. I would love to see a continent of one….
DUBNER: Austan Goolsbee, as you might have guessed by now, does not agree:
GOOLSBEE: You’ve got the same issues….With closer incomes there would be a lot less of the redistribution problems. We didn’t even get into the, if you merged with Mexico you’ve to make some decisions about basic infrastructure. Okay, so are we going to go reprint all the signs in English and Spanish in both countries? You know, the water system in the U.S. is far better, cleaner water than what is in Mexico, so are we going to have a massive infrastructure investment program just in Mexico? And you’re going to get the same thing with Canada. Not to mention the cost of reprinting every kid’s school map and globe and all of that.
DUBNER: I have to say, you really sound a little bit like a Debbie Downer today, Austan. I was expecting a little bit more optimism from you. Cuz, you know, you’re a…
GOOLSBEE: Look, I’d like to go visit, and I’m all for immigration and increased economic ties between these countries.
DUBNER: But you’re making it sound like “oh, oh my god we have to repaint the signs.” We can’t do…
GOOLSBEE: I took it from the highest levels down to the lowest.
DUBNER: You did, you went low. But look at it this way, we have already taken over half of Mexico once when we took on California, New Mexico and so on, right? We won that in a war in and we got that. So you know, we had to repaint some signs then too. If the point is that…
GOOLSBEE: Yeah, there weren’t…Look at that time there wasn’t a whole…My people are from over there, you know, in Texas. They fought their own war, they were a separate country and then they merged into the U.S. But A) there were a whole lot fewer people then; it was a very low population density. And the federal government’s roles in the economy at that time was so small, it’s certainly easier to conceive of, you know, buying Alaska from the Russians and getting the Louisiana Purchase from the French, fight a war and take over some of Mexico, we’re going to stick all those things together and call it a country. Now, pretty much every inch of ground is accounted for by somebody and if you want to take it, you’ve got to figure out how to merge these things into the existing systems. Now, we’ve seen from the Germany side it can be done, but it is expensive. And we’ve seen from the breakup side like the Czech Republic and Slovakia, if you want to break up the country, you can do it. You can sit down and say, “Okay, look you keep the armory and we’re going to keep the government movie theater, and you know, here’s how you change the signs.” If you want to do it, if there’s political will to do it, you can. But if there is not political will to unify, or what’s the opposite of unify, de-unify, countries, boy then it really is complicated, and it’s a tough thing to do.
DUBNER: Okay…I’d like you to just blue sky for a minute about potential upsides for the U.S. You’ve already shown that there are a lot of potential downsides for the U.S. and potential upsides for Mexico. But let’s just think about this, we have a lot of oil now, but Mexico has a lot of oil too, and they’ve had it for a long time. And they’re un-nationalizing, denationalizing, whatever you want to call it, their oil. Their agricultural output is pretty good considering that they’re not us. In other words they don’t have our resources, and capabilities and technology, and so on. You know, Mexico, on the negative side, Mexico is a highway for drugs into the U.S. Mexico likes to say that they produce very few of the drugs that get to the U.S., but they get exploited along the way from South America. South America has big markets that are growing, that we perhaps could have a lot more access to, relationship to if we were Mexico. Can you blue sky and tell me if any of those potential upsides appeal to you?
GOOLSBEE: Yeah, all of those are upsides. I think those are all correct, and some of those would probably be pretty large. You know, if you say, “the U.S. has got very advanced technology that can help with resources, mining, oil, exploration, et cetera, and Mexico does have a great deal of natural resource wealth,” so both sides in that case would benefit from having the best technology applied to the resources they have, and then you say, “Well, why isn’t the best technology applied now?” It’s probably because countries are nervous about getting nationalized; they don’t want to make these kind of investments. You know, if you go to Venezuela, they’re not doing a whole bunch of advanced oil exploration precisely because they’re nervous about that. I think if they were one country that’d be worth a fair amount. Normal gains from trade, for whatever trade benefits came from NAFTA, they would be far greater if there were no tariffs of any kind on any product, we could trade things between each other. And there are upsides to the labor mobility that I was describing would be unpopular. But, you know, it would allow for the people of Mexico far more opportunities to go to places where the pay is much higher than where they are now. And in those places there would be a bunch of different jobs that would likely be filled by people who would have lower skill than what they have in the U.S. All of those are positives, from an economic perspective. All I’m saying is those positives have got to be weighed off against pretty substantial transition costs and pretty substantial political sustainability costs, that I just…I don’t know.
DUBNER: I hear you.
GOOLSBEE: It’s worth contemplating as a counterfactual, but I think if you start thinking beyond the first stage, there are a whole bunch of costs associated with it. So it’s much more like the old mega Gulf-and-Western conglomerate amalgamations.
[MUSIC: Soundstacks, “Reminiscing”]
DUBNER: Okay, one last question. I’m sure you know Daron Acemoglu and his work, yes?
GOOLSBEE: Yeah, very well.
DUBNER: Okay, so the idea that nations succeed or fail largely on the strength of their political institutions, not their natural resources, etc. So when we put this question to him about a Mexico-U.S. merger, he brought up historical examples of mergers of sorts with very different outcomes.
ACEMOGLU: There are examples in history where when you have two different parts of a single country have evolved differently institutionally, sometimes the extractive part dominates and poisons the inclusive part. Sometimes the inclusive part dominates and ultimately takes over the extractive part. So the example I would give for the former, you know, it’s not the most sharp example, but let me stick to it, is Italy, where the south of Italy has, you know, to a large extent made the north of Italy politically more inefficient… And then, you know, the example that you would give for the latter is the United States, where after a period of the extractive part, the South, dominating the political equilibrium through the Antebellum period, the Missouri Compromise period, ultimately, after the Civil War, gradually sort of the northern institutions more and more became dominant in the South, but with some sort of peculiar details and differences. But you know, when Mexico and the United States to merge, which part would dominate, you know, one cannot say with certainty. But you know, I think given that U.S. institutions are themselves shaky at times, you know, it could go either way I guess.
DUBNER: So given what you, Austan, know about modern American political institutions, which is quite a lot, and the institutions of modern Mexico, which I assume you know a fair amount about, how do you think this merger, this impossible merger that won’t happen, but if it were to happen, how do you think that would work out — one set of political institutions coming up against another, and intermingling, which would succeed? Are U.S. political institutions necessarily much stronger than Mexican? I assume they are, although you’ve been in one so you would know better than I.
GOOLSBEE: Yeah, boy if that’s the strongest institution that the world has got, then God help us. But look, I would count some economic/political institutions as being important, too, here. The first being the Fed, the currency, the central bank. Mexico has had many international problems with the Peso, debt crises, et cetera, that the U.S. has not had. So, for sure, I believe the market would largely interpret, the central bank would remain the Fed. And so that would be a dramatic improvement for Mexico, the equivalent of firms, banks, what have you, in Mexico being able to borrow, they would get much lower interest rates because they would be coming under the umbrella of kind of the U.S. economic institutions. But that’s a double-edged sword; this is exactly what I’m saying that this merger would kind of go against, like what happened in the Eurozone, because countries like Greece, and even Italy, Spain, Portugal, that previously faced high interest rates, when they get in under the Euro, they’re kind of under the umbrella of the Germans, so they too are able to have much lower interest rates than what they had before. But, the devil’s bargain is that they lock themselves in a currency union and the central bank, essentially, operated ignoring what the problems are going on in Greece. And Mexico would for sure have this problem. It’s kind of the problem, a problem in Puerto Rico. So Puerto Rico has been in recession for seven years. And part of that is they’ve messed some things up. But part of that is that they don’t have monetary policy that’s geared toward Puerto Rico in the slightest way. No one at the Fed says you know, what maybe we should be looser than we thought, because Puerto Rico has been in recession for seven years. So that’s an institution that would serve Mexico well in the immediate term, but in the long term, I think that uniting in the currency would be a difficult spot because the economies are so different. On political institutions, I think the only problem here, is we have only a moderately shared history. You know it’s kind of an interesting case that Daron says after the Civil War the North’s institutions take over the South…Historically it has been episodes of war or major national events and crises that everybody goes through together have proved to be nation-forging, historical events. And that political, I don’t know if you call it rational, but the fact that the people consider themselves part of one country and want to stay together is not exactly an institution, but is super, super important in my world in determining what this is. And if you look in Italy… I forget what the Italian phrase is, but the uniting of all the separate little kingdoms and fiefdoms of Italy into one country was largely imposed from the top. And I think that that kind of disorganization that people weren’t really actively wanting to do that, is part and parcel to why the institutions ended up sort of messed up. So how you did it with the U.S. and Mexico would make a huge difference. If you just went down and said, “Hey, what we’re going to do is we’re gonna to just name each Mexican province, this is gonna be a state, and you each get a senator, and you’re going to come down to the capital and here we go,” I don’t think that would have the positive impact…even though that’s the U.S. institution taking over. Let’s say you did it in that extreme form. I kind of think you’d still have the nagging problem that you’d have all the people in Mexico going, “Wait a minute, I don’t want to, why do I have to listen to these bozos in the Senate anyway? Is that really better than what we had?” And if people don’t want to be together I think it’s really hard to keep them together.
DUBNER: You know, for someone who is so dead set against this idea, I think you’re coming around a little bit. And furthermore, I would say that if this were to happen, you’d be the guy that we’d want to send to start working this out on the political institution level at least.
GOOLSBEE: Oh, I thought you were going to say, oh, I’ll be down there for vacation whenever you want! They’ve got a lot of nice beaches and stuff like that over there too.
DUBNER: Well there’s that too. There’s that too. Alright, Goolsbee, thank you very much, that was great.
GOOLSBEE: It’s always fun thinking through some of your guys’ craziest ideas.
[MUSIC: Siquisiri, “La Guanabana” (from Son Jarocho De Tlacotalpan – Traditional Music from Mexico)]
DUBNER: I was deeply offended by Austan Goolsbee’s closing remark. This isn’t even close to one of our craziest ideas. After talking to Goolsbee, and President Fox, and Jim Cramer, I’m not sure it’s crazy at all. You know who else might not think it’s crazy? The Council on Foreign Relations. The Council has an Independent Task Force on North America. It’s led by former CIA director and Army general David Petraeus and Robert Zoellick, former head of the World Bank. They just issued a report called “North America: Time for a New Focus.” “Here is our vision” they write, “three democracies” – see, they like Canada too – “with a total population of almost half a billion people; energy self-sufficiency and even energy exports; integrated infrastructure that fosters interconnected and highly competitive agriculture, resource development, manufacturing, services, and technology industries; a shared, skilled labor force that prospers through investment in human capital; a common natural bounty of air, water, lands, biodiversity, and wildlife and migratory species; close security cooperation on regional threats of all kinds; and, over time, closer cooperation as North Americans on economic, political, security, and environmental topics when dealing with the rest of the world, perhaps focusing first on challenges in our own hemisphere.” All right: it’s not quite a merger they’re proposing but still – they get the picture. Do you? Can’t you imagine the bounty of a U.S.-Mexico-Canada union? Not only would U.S. soccer get a lot better, with help from Mexico, but think about what Canadian hockey would do for the U.S. hockey team in the Olympics. We’d have all the maple syrup, and avocados, that any American could possibly want. Mexican Coca-Cola, prized for its real cane sugar, would now be American Coke, or at least Mexicanadiamerican Coke. The Royal Canadian Mounted Police – we’d get them! And poutine!
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