Structuring a Democracy Jude Wanniski January 7, 2000

Memo To: SSU Students
From: Jude Wanniski
Re: Structuring a Democracy

Welcome back to SSU and the first lesson of the new century. We still are on the political side of the political economy, remember, with a few weeks left to go in this semester. This week we will cover a topic new to SSU, one I decided upon in the last few weeks as I thought of the way the U.S. presidential elections are shaping up. The heart of the lesson is a piece I wrote for Mexico's most important financial daily, El Economista. It was published on April 12, 1994, at a time when Mexico was in the midst of a presidential election that began with the assassination of the ruling party's candidate and a bloody peasant uprising in the southernmost and poorest Mexican state of Chiapas. Mexico's economy was booming at the time, but the boom was concentrated around Mexico City and in the northern states along the U.S. border. At the same time, in the campaign, there was discussion and debate among the parties on the need for fundamental political reforms, to break the iron grip of the Establishment and its control of the PRI, the ruling party.

In reading the essay, remind yourself that Mexico is a relatively impoverished nation compared to its North American neighbors and that the reason may have something to do with its political structure. The stereotype when I was a young man was explicit: Mexicans were lazy, preferring long siestas to the work ethic. That stereotype remains embedded in our culture, but because it is politically incorrect, it is implicit. In 1989, my company and I undertook a major study of the Mexican political economy, financed by Mexico's private sector. It took two years and was published in both English and Spanish as Mexico 2000. It enabled me to understand the history of the country and its political and economic structure in a way few other Americans have experienced. It also enabled me to see that a number of relatively small changes to the political structure would dramatically increase the political structure of the nation -- in a way that would bring dramatic gains to the living standards of ordinary Mexicans. The ideas Mexico 2000 generated were having positive effects. But when the government changed hands in December 1994, the new administration almost immediately devalued the currency and ended the economic boom. In the years since, the income gap between the United States and Mexico has grown wider yet. I've become even more persuaded that the kinds of political reforms suggested here will have to be undertaken if there is to be a steady convergence of real wages and living standards between Mexico and the rest of North America. In our next two or three lessons before the semester ends, we will discuss some of the concepts as they apply to Europe and U.S. 2000 presidential elections. Questions from the class as always are most appreciated.

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Published: April 12, 1994
El Economista, Mexico City[TRANSLATION]

MEXICO REFORMS
by Jude Wanniski

The most important problem facing Mexico today is the inadequacy of its political system in serving the myriad needs of the Mexican people. From a U.S. perspective, it even occurs to me that the business and political leaders of your country should consider a grand political reorganization, not merely the kind of incremental reforms that are being debated.

The reason is that Mexico's existing political mechanism evolved during its experiment with socialism, which requires a concentration of power at the elite center. Democratic capitalism functions best when political power is diffuse, widely shared by ordinary people. Luis Donaldo Colosio had embraced this view of political decentralization, as does Ernesto Zedillo and the candidates of the other major parties. This essay may help further the discussion by taking it to a broad, philosophical plain.

More than a century ago, Karl Marx correctly saw that for capitalism to thrive, political power must be dispersed through active universal suffrage. What he saw as the flaw of capitalism was that successful businessmen -- those at the top -- would always tend to use their political power to discourage competition from those at the bottom. Only a democracy that puts political power in the hands of the many can act as a check on that tendency.

Mexico is now experiencing terrible social distress because the economic reforms of the Salinas Administration have taxed the existing political structure to the breaking point -- like a growing boy who is splitting through an old suit of clothes.

"Salinastroika," as I came to call it in 1989, has been a great boon to Mexico, benefitting the nation in general by reviving an economy that had stagnated under a burden of taxes, inflation, and public enterprises that squandered national resources. But the benefits thus far have been largely concentrated in the industrial and financial centers -- in Mexico City and Monterrey.

The answer is not to tax the centers more heavily in order to redistribute wealth to the less developed states -- Chiapas, for example. The answer lies in reorganizing the national political structure so that states, like Chiapas, will have the ability to increase their own economic welfare instead of relying on the good will of those at the center.

Giving up political power at the center sounds difficult to those who now have it, but it should rather be seen as an investment that will expand the power of all Mexicans -- in the same way a father gives up power over his growing sons. The people of Chiapas do not wish to drag down the people of Mexico City and Monterrey. They just do not want to be left behind.

At a meeting in Mexico City last November, for example, I recommended to some of Mexico's leading businessmen that Mexico import one of the most successful of the institutions of the United States -- the practice of issuing state and municipal bonds that have been approved in elections by the people whose taxes must ultimately guarantee the bonds.

In the past several decades, Mexico's national ruling class has maintained the allegiance of the people by gathering in resources at the center and, with a rough sort of justice, distributing those resources through the socialist mechanisms of the PRI.

President Salinas has taken this a step further, by distributing capital assembled at the center to public works projects given priority by the local citizenry. This at least draws on the intelligence of the people of the grass roots in discovering which uses of national capital will provide a reasonable return on investment.

In the United States, because political power is diffuse, the power to tax is diffuse as well. This enables even the smallest political subdivisions to draw upon public resources when all those affected democratically agree to shoulder the increased tax burden should the public investment fail.

There has been no better demonstration of the wisdom of ordinary people when democratically assembled than the public bond issues of the federal system in the United States. Over the last two hundred years, literally several hundred thousand bond issues have been floated by states, counties, cities, and towns as well as districts representing schools, airports, sewer and water systems. Rarely have such bonds failed, so careful are taxpayers and property owners in assessing the investments before they vote.

Democracy works so splendidly when voters can focus on a single issue because the electorate is like a giant computer, linking together the power of the small computers at the heart of the human brain. Individual voters may not be able to compete with the wisdom of the elite at the center, but when massed together in an integrated circuit, ordinary people can outperform any small number of experts on a single yes/no political decision.

The electoral reforms being discussed by leaders of the three main political parties in Mexico attempt to insure honest elections at the presidential and gubernatorial levels. The reforms are naturally resisted by local political operatives who see their way of life challenged by these reforms. From their perspective, Mexico City is taking away political power from the rest of the country in the name of political reform -- increasing power at the center.

The only way to neutralize their opposition is for the three national political parties to agree that some of the taxing power at the center should devolve to the perimeters -- along with the power to capitalize public resources through bond finance. In the United States, income from interest on state and local bonds are tax exempt, which is an efficient way of attracting capital from the wealth at the center to those locales deficient in capital. The system is perfectly suited to Mexico, which is already structured loosely along federal lines.

With this kind of power shift to the states comes responsibility. When people have an opportunity to acquire wealth, they develop a greater respect for property rights. As a result, communities that have honest elections do better than communities that do not. Instead of the national government attempting to police the voting booths, the people do it themselves out of self interest.

The current structure of government in Mexico is perfectly suited to the kind of corporate socialism that has served the people for better or worse. It is organized along the lines of a giant conglomerate called Mexico, Inc., with a chief executive officer who reports to a board of directors, who serves six years and, with the general approval of the board, is permitted to name his own successor.

The formula is superior to monarchy, which transmits power from one generation to another through blood and kinship. In the corporate method, anyone born in Mexico can theoretically grow up to be president. In some of the best days of the Roman Empire, emperors followed the practice of adopting sons deemed worthy of power. Over time, the system broke down through slippage in the selection process -- less able leaders chose less able successors.

The most efficient system is that which gives the whole people the power to select their leaders from the widest possible talent pool. The great religions of the world teach us that saviors can be found born in a stable or abandoned in the bulrushes. In establishing a new political system, the concept might again draw upon the experience of the United States.

It has only been in the last forty years that the American president has been chosen from candidates themselves chosen by the people at large. Prior to the 1950s, there were few primary elections. Democratic and Republican party leaders chose candidates through the convention process, which concentrated power in the hands of the party elite. In a new, decentralized political system, there would have to be some method that would give electoral weight to the considerations of those furthest from the center.

Yet another democratic concept that has served the United States well is that of the electoral college, which is suited to Mexico's federal system. Its important ingredient is the winner-take-all aspect of state-by-state balloting. This maximizes the importance of small states, whose numbers would otherwise be swamped by the several megastates like California and New York.

It also forces the dominance of two political parties, as it is almost impossible for a major third party to survive a winner-take-all system. A two-party system is technically superior in advancing the national interest because it forces a clear choice in the agendas of the two parties. Multi-party systems introduce confusion in the electorate, leaving critical issues facing a nation unresolved.

If Mexico were to adopt a winner-take-all federal system, one of the three major parties would fade to minor status -- equivalent to the Libertarian or Socialist parties in the U.S. The other two would likely organize around the fundamental principles that have faced all people in all times -- one being the party of security, the other the party of opportunity.

In the smallest political unit, the family, the tension usually lies between the mother's role of security, wishing to limit risk, and the father's role of expanding opportunities through greater risk. The modern nation state may seem exceedingly complex next to the family unit, but in simplest terms, it operates best when it is organized the same way, as an aggregation of millions of family units.

If Mexico wished to carry these concepts to the state of the art, it might consider another democratic mechanism that is not now available to the people of the United States, but can be found in Switzerland. That is a national initiative and referendum process, which carries the concept of democracy to its logical conclusion.

In Switzerland each year, the most important issues facing the people are decided by the people in national referenda. Instead of assigning the most important policy questions to national legislatures, which can be considered "committees" of the whole people, the national electorate itself grapples with these five, six, or seven topics.

This mechanism makes Switzerland the most democratic country in the world. It should not be surprising that it is also the most prosperous, with the highest per capita income in the world. It is also a peaceful country, despite the fact that it accommodates four official languages of four distinct ethnic groups.

If Mexico had such a mechanism, it could put questions that now are impossible for it to address to the whole people. Should Pemex be privatized? If the people are asked this question in a public opinion poll, the answer comes back in the negative. In a national referendum on the subject, with voters having to educate themselves on the pros and cons, the results could be quite different. It could also lead to a question on whether citizens who own property should also own the mineral rights to that property -- restoring the law as it existed prior to the revolution.

The same is true of fundamental questions of monetary and fiscal policy, of social policies, and the environment. Instead of national political leaders having to guess at where the people wish to go, they can on the most important questions simply ask them. The ruling class at first glance will always be suspicious of this kind of expansive, active democracy -- believing it would diminish the importance of the elite. Instead, it would put a higher premium on the other elites of society, in business and finance, in the arts and sciences.

The global trend is in the direction of more, not less democracy, as communications become instantaneous, and as competition between nations requires the most efficient decision-making at the level of public policy. Instead of waiting for it to happen elsewhere, Mexico should now consider getting ahead of the curve, of taking this opportunity which history has presented it and discussing the frontiers of democratic possibilities. Instead of incremental reform, it should think of a constitutional convention and a grand reorganization that would put it first in the world at the edge of the new century.