The problem of remittances

From CNNMoney:

I send money home to Mexico to support my family

by Patrick Gillespie | March 20, 2017: 12:16 PM ET

Dalia Maldonado is considered a life saver by her family and friends in Mexico.

She paid for her father Francisco’s knee surgeries. She pitched in $400 for her friend Esmeralda’s leukemia treatment. And she regularly helps pay for food and bills for her parents and relatives.

But Maldonado is not with them in Sonora, Mexico. She sends about $250 home every month from Menifee, California, where she works in real estate, earning about $35,000 a year. Her parents have a combined income of $20,000 in Mexico.

The cash Maldonado sends home is called a remittance, which has become Mexico’s biggest source of foreign revenue.

Last year, Mexico received $27 billion in remittances — a record high and far more than what the country got from its oil exports, $18.7 billion, according to Mexico’s central bank. The vast majority of remittances sent to Mexico come from the U.S. and they support millions of low-income families in Mexico.

President Trump could make it harder for Maldonado and millions of other Mexicans in the U.S. to send money home.

During his campaign, he threatened to tax remittances to pay for the wall. In January, after being elected, he hinted at it again.

There’s more a the link, including the statement that Miss Maldonado holds dual citizenship, with both the United States and Mexico.

There is an economic concept called the velocity of money, which is, simply put:

the frequency at which one unit of currency is used to purchase domestically- produced goods and services within a given time period. In other words, it is the number of times one dollar is spent to buy goods and services per unit of time. If the velocity of money is increasing, then more transactions are occurring between individuals in an economy.

A further Fed document notes that the velocity of money has fallen, pretty dramatically, to the lowest point since the 1950s. From FRED:

In general, the velocity of money starts to increase after a recession is over, when confidence is restored. However, since 2007, the velocity of money in the U.S. has been decreasing, which means consumers and firms are still holding onto cash instead of spending it. This behavior, which also reflects a decrease in inflation, suggests that confidence in the recovery is still low. When confidence is restored, we should expect to see a rebound in the velocity of money.

Perhaps this is explained by something we have noted previously, that the American people don’t really believe all of the good economic statistics put forward by the government. And part of it is explained by the Fed’s own actions, to increase the money supply through “quantitative easing.”

But, as the CNNMoney article noted, in 2016 Mexican immigrants in the United States removed $27 billion from the United States economy, and added that money to Mexico’s. Every dollar Miss Maldonado sent to her family in Mexico became a dollar which ground to a halt as far as the velocity of money is concerned within the United States. Those remittances sent south of the border to “support millions of low-income families in Mexico” might make those families slightly better off, but by removing them from the United States, they have made American citizens that much poorer.

The $250 per month Miss Maldonado sends to Mexico is $3,000 a year that she has been paid by (mostly) Americans that is not being spent in the United States to help other Americans, to help the American economy. It’s worse than buying imported products, because at least those imported goods have some value in the United States; remittances are the sending of US dollars abroad for no return at all.

Mr Gillespie’s CNNMoney original notes that if President Trump succeeds in getting a tax on remittances passed, many people who send them will do so the old fashioned way: simply take cash across the border when they visit their families.  It is perfectly legal to transport cash across the border, though if you carry more than $10,000, you must file a form with Customs and Border Enforcement. Mexico also requires the declaration of cash at customs.  But there will be many people who simply can’t head back to Mexico to take cash to relatives, for reasons such as distance, expense or the inability to get time off of work, so such a tax would net more than zero.  Any remittance tax at all would help the American economy.