In the case of Japan, monetary policy can end the deflation that has characterized the economy since the late 1990s, but can do little to infuse  2  BIS central bankers’ speeches  long-run expansion unless it is accompanied by fiscal policy that implements structural change. But the biggest problem the U.S. confronts is homegrown: political failure in Washington to act on the key issues holding the recovery hostage. Fiscal and regulatory uncertainty is a powerful deterrent to business investment. Going back to the earliest days of the current recovery, my business contacts have regularly complained of the fog of uncertainty emanating from Washington. They have consistently cited fiscal and regulatory uncertainty as major impediments to capital investment and expanding payrolls. Uncertainty comes in many forms. In some cases it is major legislation such as the health care reform or financial regulation as in the Dodd Frank [Wall Street Reform and Consumer Protection] Act. Fiscal issues have regularly constrained the recovery – the debt ceiling debacle in summer 2011, the last-minute resolution of the fiscal cliff in December 2012, the brute force sequester of 2013 and so on. Most vexing is not knowing how businesses will be taxed or how the federal government will shape future spending. This makes budgeting and planning capital outlays and payrolls into the future an uncertain process.
Mexico has revamped labor laws, the education system and its telecommunications system, financial and energy sectors – including a plan to open up its oil and gas sector to private investment. The timing is good. The implementation of these new laws will coincide with a strengthening U.S. economic recovery. You know far more about these structural reforms than I do. I cannot pretend to speak with any authority on the detailed economic implications of these reforms, but I do want to offer some perspective from Texas. Last year’s passage of the historic energy reform should, if carefully and deliberately implemented, increase oil and gas production and reverse the nineyear trend of declining output that is currently depressing Mexico exports, industrial production and GDP and adversely impacting government revenues. The Eagle Ford shale oil boom in south central Texas exemplifies the regulatory differences between our two regions that the reform aspires to relinquish. The gap is very telling. As activity has accelerated dramatically north of the border, there is no corresponding drilling or production in northern Mexico despite the contiguous geology. And it’s not because Eagle Ford required the deep pockets of the huge energy corporations. Rather, it is largely independent operators who have developed the vast majority of Eagle Ford projects. The result: sharply rising oil production in the Eagle Ford, from nothing four years ago to more than 1.3 million barrels per day currently. The shale oil boom in Texas has had far-reaching effects on the state.