Freakonomics Radio - 185. Should the U.S. Merge With Mexico?

Episode Date: November 6, 2014

Corporations around the world are consolidating like never before. If it’s good enough for companies, why not countries? Welcome to Amexico!

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. The polls have closed in Scotland, and the vote over independence went down to the wire closer than a lot of people imagined. And a plan to split California in six different states is one step closer to a vote this morning. Hundreds of thousands of people gathered in Barcelona to demand the right to vote on independence from Spain. Now, Catalonia is not alone in the battlefield for sovereignty.

Another Spanish region, the Basque Country, is also seeking a referendum on independence. In Iraq, the president of the country's autonomous Kurdish North has asked the regional parliament to prepare for a referendum on independence. But while countries are threatening to break apart, companies are moving in the opposite direction. 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. Dollar General has gone hostile in its bid to buy rival family dollar. America's two biggest cable companies announced a $45 billion merger. Three of the four largest German deals ever have happened in 2014. We've seen $61 billion worth of German companies buying U.S.

companies this year. But here we are again, and it's just another example of German companies buying U.S. companies this year. But here we are again, and it's just another example of an M&A frenzy. Is it really a frenzy? We've had three multi-billion dollar deals just in the last week. I see a lot of cross-border deals. Yeah, it's a frenzy. You know that voice, don't you? Yep, I'm Jim Cramer, and I'm 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. 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 Warner, recently sent us an email. 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. Now, last year, Jim, you said, quote, I think Mexico is a great buy. I believe you're 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? 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, I'd say, energized. And there's a country with tremendous natural resources that we've been able to exploit. I sure wish we'd do it.

And what if there were a stock offering for this merger, for this new conglomerate called a Mexico or maybe MexAmerica? 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've not been to Mexico. They don't realize the immediate premium this deal is going to go to.

I want in that deal. And I'm also going to buy in the aftermarket after it comes public. From WNYC, this is Freakonomics Radio, the podcast that explores the hidden side of everything. Here's your host, Stephen 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 1840s. 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.

If someone said to you, viewer, hey, I'm going to go buy houses in Mexico, you might think that you're a little crazy. Totally insane. Okay. Well, I did a real estate deal, yes. I have some property in Mexico. It's San Miguel de Ande. And San Miguel's got to be one of the nicest places I've ever been in. Kramer loves San Miguel so much that when he opened a Mexican restaurant in Brooklyn,

guess what he named it? We're here at Bar San Miguel, the latest Mexican restaurant to hit Carroll Gardens, Brooklyn, also known as the latest investment by Jim Kramer. Jim, thanks so much for having us here. Brittany, I'm glad you're here. I'm glad you're... Well, cheers. Cheers. So Jim Kramer is pretty much a Mexico fanboy, for having us here. Brittany, I'm glad you're here. I'm glad you're... Well, cheers. Cheers.

So Jim Cramer is pretty much a Mexico fanboy, which you'd already know if you watch him on CNBC. When you take a global view, all right, 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. Tonight, we're moving on to another country that's kicking butt in the World Cup. The great land of Mexico.

And the Mexican auto business, wow, it is on fire. Think Corona, Modelo, Pacifico, which is, by the way, my favorite. Holy cow, man, that guacamole is like, Oh, geez, I can't suspend guacamole. Exactly. 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 shape than almost every country on Earth. OK, you get the picture. That's why we went to Kramer with our proposal. Let's pretend for a minute that you, Jim Kramer, 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. Well, first, I'd start out with some bona fides. I own a lot of land in San Miguel Diende, which is in the center of the country, 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 experiences with Mexico are twofold. One, it's got the best health care system I've come across because it's not tied into worker employment. So that would be something that 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's 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 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. Geez, I think it's a great country. Talk for a minute about what a merger would do for the American immigration issue and how much of that issue is really Mexico? 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 I just think, I don't know, 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 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. 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. Morning, everybody. Hello. This is Vicente Fox from Mexico. 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. 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. 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 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 Martha was to the poor. And number three, yes, to build up a very strong relationship with North America. 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. I see that close to impossible. It's not the wish either of the United States and its wonderful people, nor is the desire of Mexicans in 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 short-sighted positions in relation to migration lately in the United States. 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. Mr. Speaker, the President of the United Mexican States. Honorable members of the U.S. Congress, the political change currently underway 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. Fox called on Congress to update its immigration policy. There is one crucial fact that we must not lose sight of. Migration flows respond to the 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.

But five days after that speech, President Fox's agenda was backburnered. 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. It happened. Priorities changed. Immigration reform and a closer integration of the two countries were set aside. We all understand the threat that September 11 imposed on the people and the nation of the United States. And of course, fear became a 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. 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, quote, that generation is clamoring for jobs, for housing and for schools and universities. So we have what the United States economy needs the most. 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, then at least a radically different immigration policy, yes? 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 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 and thinking that there is not one winner, Mexico, but there is two winners, which is Mexico and United States, and release three, including Canada, and release four, including what North America together can contribute to the world. 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 from all the way to the south of Mexico, all the way to the Arctic Circle. Do you like that idea? 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. We like enchiladas. We don't like hamburgers and hot dogs. 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 will be, again, another engine to move our economies. I don't see one nation. I see one union. 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 are 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? How wise were those concepts? I don't know who made them at that time. 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% a year, 12% 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 $1 in Mexico when you were making $10 in the United States. Today, the ratio is 5 to 1. 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-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 in the world. So as you can see, yes, 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. 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 be a juggernaut. Think of our national football team. Wouldn't that be nice? No, come on. Come on. Football is soccer. We play it with the feet, with the foot. No, that's a... You play it with the hand and you call it football. 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 US and Mexico, next World Cup, we'd be something.

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. It will never convince me of one nation, especially even when we had Texas was Mexico. New Mexico was Mexico. Arizona was Mexico. Part of California was Mexico. And we lost it.

We were getting it back pretty soon because you would see Hispanic governors in California, Hispanic governors in Texas pretty soon. 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? I'm not so ambitious. I just want a Mexico with opportunities to 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. 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 somebody who used to work at the White House? 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. And to those of you who subscribe to Freakonomics Radio, thanks. We recently hit five 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? Thank you. without consulting a big-time economist. Austin Goolsbee. Hey, brother. How you doing? Yep. That is... Austin Goolsbee. I'm a professor of economics at the University of Chicago Booth School of Business.

Mm-hmm. You used to have a job at a little something-something called the White House, too, yeah? Yeah. I used to be the chairman of the Council of Economic Advisors in the White House, and that's pretty much who I am. I'm guessing you spent a lot of time, Austin, at the CEA. And in addition to 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? 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, the good CEA chair, like a good gardener, is 90% pulling weeds and 10% planting seeds.

So we're going to see if this is in the weed category or the seed category, Stephen. 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.? Okay, why do 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'll be more concentration and they can raise prices. If not that, at the least, these two companies merge because they think they could 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 costs? How? I mean, the first thing to note is that median family income in Mexico, that is 50% of the country, has income 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 merge 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? Mm-hmm. Well, OK, let's just talk. is going to be paid less. Is that really what we're looking for? Well, okay, 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 your median family income more, but let me just put that one out there, $53,000. In Mexico, it's 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? 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% 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% 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 going to probably increase the amount of trade, and there'd be a bigger potential market. But I kind of think 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 going to 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 what I'd describe this as, there was a time in the 70s when in corporate America, all the rage was for building these giant conglomerates. And most of those conglomerates basically flopped. And by the 80s and 90s, 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 forming a major conglomerate that combines a whole

bunch of businesses that have nothing to do with each other. So, Austin, you're saying if I'd come to you 25, 30 years ago with this idea, you might have loved it. If I was the same guy saying, you know, plastics, that's where you need to get into plastics. You know, and the thing is, there's one school of thought that says, well, you know, 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 going to 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, 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, geez, I can't find a job over here.

I'm going to go move over there. And that would certainly happen if you merge the U.S. and Mexico. You know, at the time of German unification, there were 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. If I can't interest you in Mexico, what about Canada? You're envisioning these are like the biggest nightmares of all of these countries. It's like the U.S. is trying to take

us over. And, you know, there's an old joke about Canada. You know, what is the difference between a Canadian and American? The Canadian cares, you know, that it's 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. 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. The Canadian dollar is very low.

The Canadian people, I think, are 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 EU, of an EU with no borders, one currency, would be dramatic. It would be exciting. We 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 got to 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. Austin Goolsbee, as you might have guessed by now, does not agree. You 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 merge with Mexico, you got 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, you know, with Canada, not to mention the cost of reprinting every kid's school map and globe and all of that. I have to say, you really sound a little bit like a Debbie Downer today, Austin. I was expecting a little bit more optimism from you. Look, I want you to go visit, and I'm all for immigration and increased economic ties between these countries. But you're making it sound like, oh, we have to, oh my God, we have to repaint the signs. We can't do it. I took us from the highest levels down to the lowest. You went low. But look at it this way. We have already taken over half of Mexico once when we took on California and New Mexico and so on, right?

We won that in a war and we got that. So, you know, we had to repaint some signs then too. If the point is that, you know. 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, you know, it was a very low population density, and the federal government's roles in these roles in the economy at that time was so small, it's certainly easier to conceive of buying Alaska from the Russians and getting the Louisiana

purchase from the French and 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 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 here's how we'll 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 or what's the opposite of unified, deunify countries, boy, then it really is complicated and and and it's a tough thing to do. OK, I'd like you to just blue sky for a minute about potential upsides for the U.S. You've already shown there's 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 unnationalizing, denationalizing, whatever you want to call it, their oil. Their agricultural output is pretty good considering that they're not us. In other words, that 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?

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 kinds of investments. 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 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'd be a bunch of different jobs that would likely be filled by people who 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. I agree. 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.

Okay, one last question. I'm sure you know Deron Acemoglu and his work, yes? Yeah, very well. Right. 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 two historical examples of mergers of sorts with very different outcomes. 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, 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 sort of the political equilibrium through the antebellum period, the misery 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 were to merge, which part would dominate? You know, it's one cannot say with certainty. But, you know, I think given that, you know, U.S. institutions are themselves shaky at times, you know, could go either way, I guess. So given what you, Austin, know about modern American political institutions, which is 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. Yeah. Boy, if that's the strongest institution the world has got, God help us. But look, I would count some economic slash 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 that 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, is that this merger kind of would 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 locked 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's been in recession for seven years. And part of that is they've messed some things up. But part of that is 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's 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 their 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 Derone says after the Civil War, the North 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 rationale, 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. down and said, hey, what we're going to do is, you know, we're going to just name each Mexican province is going to be a state and you each get a senator and you're going to come down to the Capitol 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 do this. 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. 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. Oh, I was going to say, look, I'll be down there for vacation whenever you want. You know, they got a lot of nice beaches and all kinds of stuff. Well, there's that, too. There's that, too. all kinds of stuff over there. Well, there's that too. There's that too. Yeah.

All right. Goolsbee, thank you very much. That was great. It's always fun thinking through some of your guys' craziest ideas. I was deeply offended by Austin 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 Mexi-Canady American Coke. The Royal Canadian Mounted Police, we get them. Hey, podcast listeners, on the next Freakonomics Radio, we start with a big question about fertility. That is, why do people have children?

I think this is probably an open question for debate. And then a smaller question. What happens to fertility after a tragic loss of life? For instance, the 2004 Indian Ocean tsunami. Women who had lost a child in the tsunami were about 10 percentage points more likely to have another birth after the tsunami than women whose children had survived. Mortality and fertility. That's next time on Freakonomics Radio. Freakonomics Radio is produced by WNYC and Dubner Productions. Our staff includes David Herman, Greg Rosalski, Greta Cohn, Caroline English,

Susie Lechtenberg, and Chris Bannon, with help from Joel Werner. If you want more Freakonomics Radio, you can subscribe to our podcast on iTunes or go to Freakonomics.com, where you'll find lots of radio, a blog, the books, and more.