Mind you, I'm V1 era player, back from the time when the only population number reported was the total population (POPs x4). So I tend to look at that figure as more than just flavour number that it seems to be in V2.
So for me, 650000x0.1 = 65000x4 = 260000 = roughly historical number of military casualities. I still shudder at those V1 wars which caused tens of millions to die from combat. Incidentally, the V1 ration was 100% on higher difficulty levels (4 people dead for every dead soldier).
I have had no problems dealing with Mexico in the game. During my first intervention in the Texan war of independence, they sued for white peace while still in possession of parts of Texas. I hadn't taken anything from them. If you want to attrition them away, then far more important thing to do than just kill their men is to destroy their economic capacity. Put them under total blockade and press right away for the rich states in Central Mexico. Ignore the peripherial badlands of the north and California.
But remember, a POP doesn't represent 4 adult males, which would be the working or fighting unit in the family in the 19th century. It represents the adult male and 3 dependents, but they wife (or wives), children, and/or invalids. And even though those disappear from the population due to the flat conversion from POP to actual population, they really shouldn't be included, I wouldn't think. That's my understanding of population anyways.
I didn't have problems beating Mexico, but I beat them in spite of attrition instead of using my population to my advantage. In the long run, you're right, killing the economy will drop their military power, but in the short run, should a series of battles causing hundreds of thousands of casualties not basically destroy any ability a 1840s Mexico has to build troops?
100% like it was at top difficulties of V1 is too much, for the reasons that have been stated already such as desertion and nonfatal wounds, but 10% just feels too low from a gameplay perspective. Regardless of how many pops are killed, Mexico should not be able to have the economy or the manpower in the 1840s to field an army that is replenished like so many Soviet divisions in WW2. Neither should just about anyone, but Mexico had a very small professional soldier group when the real MAW came about, and most of the troops were mobilized farmers. Even if things developed differently and they had gained enough stability to create professional soldiers, Mexico doesn't have the population or the economy by that point to support hundreds of thousands of troops. Neither did the USA; they barely capped 70,000 with all the volunteers, and the regulars weren't more than about 20,000 men, without many reservists to call up.
So, yeah, the argument about historical casualties aside, it doesn't make sense from a gameplay perspective. Had Mexico lost a 30,000 man army 3-4 times, they would have run out of willing and able soldiers. And most of these that I've found popping up are willing, since they are regulars and thus from soldier POPs.