November 24, 2003
by Irwin Stelzer
The economy itself continues to grow, although not at the breakneck 7.2 percent pace that has been reported for the third quarter (that figure will be revised upward on Tuesday to something like 8 percent). The housing market is a principal driver. In October, housing starts rose 2.9 percent from the previous month’s level. Construction was started on more new homes than in any month since January of 1986.
And the index of leading economic indicators rose by 0.4 percent, twice the rise predicted by economists. This index predicts—imperfectly, needless to say—the course of the economy in the next six months. One thing seems certain: the housing sector will do its bit to keep the economy moving along. Inventories of unsold homes are low, as are mortgage interest rates, which last week dropped from 6.03 percent to 5.83 percent on 30-year mortgages. The improving jobs market should increase both consumer confidence and wage income. Applications for building permits, a good indicator of future building activity, rose in October by 5.2 percent.
Enter the politicians. Eager to respond to charges that George W. Bush has presided over the first decline in jobs since Herbert Hoover was resident in the White House, the president’s team seems determined to adopt policies that have in the past stunted economic growth.
Start with trade. In the face of continuing trade deficits, the dollar has headed down. No surprise there. But the rapidity and extent of its fall, putting the euro at a record high against the dollar, rattled the White House. In fact, politicians there didn’t need much new rattling. With elections less than a year away, the president’s men feel they must do something to show that they care about the plight of the unemployed. Particularly disturbing to the White House was a study released last week by the American Electronics Association. The AEA found that some 750,000 high-tech jobs, 12 percent of total employment in the sector, have disappeared in the last two years. This loss of jobs that pay 84 percent above the average private-sector wage leaves the administration open to the charge that the jobs being created in the current recovery are merely providing work for low-paid hamburger-flippers in MacDonald’s, or shelf-stackers in Wal-Mart.
And how better for Bush to demonstrate his concern about the manufacturing jobs that seem to be moving to China, and the high-tech jobs that are being lured to India, than by a dramatic reversion to the sort of protectionism that has historically thrown the world into recession? So we have the unedifying spectacle of China being threatened with the reimposition of quotas unless it agrees to restrain the increase in its exports of knit fabrics, cotton dressing gowns, and bras to 7.5 percent over the next year.
The good news for American consumers is that these products are such a tiny portion—perhaps 5 percent—of China’s clothing exports to America that the proposed quotas won’t do much to restrain total clothing imports, which increased by 175 percent in the first six months of this year. The bad news is that even though very few goods are affected, other requests for protection are certain to follow. Furniture makers are at the head of the queue.
The Chinese count on their textile industry to provide employment for millions of workers descending on their cities. But so far their response has been mild: they cancelled a buying mission to the United States. The net result will be that fewer made-in-China bras will find their way to Wal-Mart. But the Chinese products are unlikely to be replaced by made-in-the-U.S.A goods. More likely, other Asian countries will fill some of the gap, and Honduras and the Dominican Republic will supply more of the about 300 million bras sold every year in the United States, leaving American workers with nothing to show for what Federal Reserve Board chairman Alan Greenspan last week called “creeping protectionism.”
The Fed chairman told a Washington audience that he is reasonably confident that international markets are flexible enough to produce “a benign resolution of the U.S. current account imbalance.” Translation: don’t worry about the trade deficit; it will shrink as the decline in the dollar will makes American goods cheaper overseas, and imports more expensive in America. But cave in to protectionist pressures, and you “significantly erode the flexibility of the global economy.”
Greenspan is engaged in a very delicate balancing act. He has pledged to hold short-term interest rates at their current low levels because the presence of excess capacity in the manufacturing sector and a large supply of jobless workers makes it unlikely that even current robust growth rates will trigger inflation. Besides, the Fed prefers to avoid interest-rate increases in the run-up to a presidential election.
But the Fed chairman is not being helped by the president’s stated view that the hole in the federal budget “is just numbers.” As if the federal deficit were not already large enough, Bush is preparing to sign an energy bill that doles out some $30 billion in subsidies to farmers and assorted special interests over the next ten years. He is also pressing Congress to pass a bill that would subsidize seniors’ purchases of prescription drugs, at an estimated cost to the government of $400 billion over ten years—and that estimate, say most experts, is wildly on the low side.
There you have it. An economy growing steadily stronger, in part due to some intelligent tax cutting by the president. But it isn’t growing fast enough to satisfy the president’s re-election team, so they are pushing protectionist and fiscal policies that just might counteract all of the good work they have done in their calmer moments.This article appeared in London’s Sunday Times on November 23, 2003.
Irwin Stelzer is a Senior Fellow and Director of Economic Policy Studies for the Hudson Institute. He is also the U.S. economist and political columnist for The Sunday Times (London) and The Courier Mail (Australia), a columnist for The New York Post, and an honorary fellow of the Centre for Socio-Legal Studies for Wolfson College at Oxford University. He is the founder and former president of National Economic Research Associates and a consultant to several U.S. and United Kingdom industries on a variety of commercial and policy issues. He has a doctorate in economics from Cornell University and has taught at institutions such as Cornell, the University of Connecticut, New York University, and Nuffield College, Oxford.
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