An economist's reflections in a time of prosperity

Christian Century, August 11, 1999 by Robin Klay

FOR THOSE WHO remember the days of recession, high unemployment and high inflation in the 1970s, the state of the American economy in 1999 is remarkable. We are enjoying the longest peacetime recovery in U.S. history, a record low unemployment rate (4.3 percent in May), and few signs of inflation, despite rapid expansion of output and jobs. The strength of the U.S. economy is largely the result of unusually strong spending by consumers. Increased levels of personal wealth (in the form of rising values of financial capital and housing) have made households more comfortable about borrowing to finance spending. Furthermore, demographic changes have augmented the number of younger households, which borrow against future earnings as they begin to establish families and careers, as well as the share of retired households, which spend beyond their current incomes by gradually reducing savings and selling assets.

Despite all this good news, some have expressed concern about the possible hidden costs of our macroeconomic success. And some wonder if the U.S. has prospered at the expense of other countries. Did the Asian countries, perhaps, suffer a financial recession over the last few years as "payment" for the U.S. economy's continued expansion?

Nothing could be further from the truth. Precisely because demand in the U.S. continued to be strong, export sales from Asia fell less than might have been expected, giving those countries an opportunity to begin to recover from recession. The long U.S. economic expansion of the 1990s has done more than lower domestic unemployment rates (which was especially valuable during a time of welfare reform, because it enabled large numbers of recipients to move off welfare into jobs). Expansion has also provided the needed spending stimulus to prevent Asian and Russian economic crises from drawing the whole world into a recession.

Other critics focus on job losses in particular industries, such as steel, and call for protectionism. Job losses by less-skilled workers, income disparities by race and gender, and the deterioration of our central cities do present real challenges. But the answer is not trade protection. Protectionism usually surfaces when economies are suffering from recessionary levels of unemployment, and governments seek to protect workers from job losses due to foreign imports. It is surprising to see bitter trade skirmishes between the U.S. and the European Union (over items such as bananas and hormone-fed beef) at a time of economic growth.

If the U.S. economy were suffering large job losses due to foreign import competition, raising barriers to trade would still not be the answer. One of the long-lasting lessons of the Great Depression is that raising trade barriers to save jobs easily cascades into a cycle of retaliation, which in the end decreases trade, income and jobs. Furthermore, studies repeatedly show that the cost to a nation of saving a job in an industry facing strong import competition is several times the typical wage in that industry. For example, a recent study of Europe put the average cost per job saved there by protectionism at a cool $215,000, for a total cost of $43 billion in one year (from the Economist, May 22). Obviously, there are cheaper ways to help workers while keeping markets open and competitive.

Given the present condition of the U.S. economy, which is creating many more jobs than are lost due to changing technology and international competition, protectionist voices should be relatively weak. But economists have long noted that the beneficiaries of free trade--citizens who enjoy more variety, greater quality and lower prices of goods--are poorly organized politically to have their voices heard over those of the well-funded spokespeople for the sectors and industries experiencing job losses. Even more muffled in the power corridors are the voices of many Third World people who stand to suffer when markets for their exports are not strong and expanding.

Recent history shows that whenever the leading economic powers are not actively engaged in further efforts to reduce trade barriers, backsliding is inevitable. The achievements of post-World War II GATT tariff rounds, which successfully ratcheted down tariff barriers among all the major trading nations, have been regularly threatened by perverse innovations in protectionism. "Voluntary export controls" and, more recently, "antidumping procedures" have been introduced whenever there was a lull in negotiations.

President Clinton's administration deserves some credit for the passage of legislation creating the North American Free Trade Area in 1994. This is the first free-trade arrangement ever to include both developed nations and a developing country. However, since then Clinton has been ineffective in persuading Congress to grant him "fast track" negotiating authority either for a new international round of free trade negotiations, through the World Trade Organization (permanent successor to GATT), or for gradual expansion of NAFTA to embrace most of Latin America. This failure is almost certainly the result, in part, of a second term during which the president and Congress were distracted with impeachment proceedings and other wranglings.