Should we worry about Mexican remittances?

by on June 16, 2004 at 2:41 am in Current Affairs, Economics | Permalink

Our trade deficit has reached a record high, and Mexicans are sending billions of dollars home to their poorer relatives. Is this a problem?

Most importantly, poverty in Mexico declines. Many recipients earn no more than a dollar or two a day. As for America, sending the funds does not damage the U.S. economy. For purposes of comparison, let’s say that Mexicans came to this country, worked to earn money, and then burned the dollar bills. Would this “trade deficit” hurt us? No. Wiring funds to Mexico has similar effects. If the dollars don’t come back, it is as if they have been burned. We have earned seigniorage by trading paper for goods. If the dollars do come back, someone is investing in the U.S. or buying exports.

The level of remittances does mean that we should be less worried about the trade deficit. Think of the remittance as redistributing wealth within Mexico, but without costing the United States real resources.

To some extent our trade deficit may reflect an inadequately low rate of saving. But wiring money abroad is not the central cause of low savings. First, migrant workers often contribute to our capital stock. Second, sending the money to Mexico is probably a substitute for spending it (most senders of remittances are themselves relatively poor, and thus have lower savings rates). So when these people “burn” their money by sending it abroad, they are lowering the real quantity of American resources devoted to consumption. Let’s not confuse sending money with sending real resources.

Read Econopundit for a more negative spin. Randall Parker inclines negatively on remittances as well. I often agree with Randall, but on this issue I am ready to send away…

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