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john birchall

Letter from an Economist

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Letter from an Economist – 1st March 2004.

‘The fine line along which Kerry must tread’

With Senator John Kerry now building a considerable lead in the race to take on George W Bush next November it is perhaps advisable that we look at some of the main economic problems he faces.

It is never easy to list priorities but I do feel that he will face an opponent who is surrounded by those who wish to promote the school known as ‘protectionism’. The Bush team are using an old target as the reason for making protectionist noises and that is employment protection. As in many EU countries it seems probable that job protection will be central to the US election and that Kerry will face pressures from within his own party to be hard on free trade. If so, then I for one believe that he too will be making a serious mistake.

I fully agree with the essential doctrines of free trade and that an economy such as the US would be the poorer if it turned its back on world markets. Furthermore, if the US started such a campaign others would follow and a downward spiral would be set in motion. Yet it is not good economics to pretend that any policy and that includes free trade is good for everyone all of the time. Surely, we are all aware that in any economic decision we are dealing with trade-offs’ and these involve both winners and losers. The pace at which globalisation is growing means that we have to re-visit some of our beliefs regarding free trade and it is this that Senator Kerry is wrestling with. I hope he does not go down the easy option route.

Let’s think what it is he faces. Put in simple US terms and such sentiments could soon return to the UK workers are fearing for their jobs as Chinese factories undercut traditional production centres and India becomes the focal point for increasing proportions of the call centre and technology businesses. These are genuine fears and addressing them is not protectionism. No, for me being aware of what is happening beyond your own geographical boundaries is realistic politics and part of a sensible attitude towards free trade.

If the Republicans continue to get their way with domestic economy before the election then if he wins in November Kerry might face a Congress with too many members looking for a short-term fix and thinking that protectionism is the answer to all of their problems. I am therefore pleased to note that last week Kerry spoke of his sadness at the loss of jobs to imports but was careful to make no concrete policy suggestions as to how he would address this problem. The text of his speech seemed to accept that he will need to be seen to do something but that in reality it will be a slowing down procedure and not a formal this has to stop reaction. He did not see outsourcing as a scourge of our time but he did feel that both private enterprise and their public sector equivalent will have to inform his Administration before simply closing a factory or service outlet and transferring everything to a low cost country. He also accepted that offshore tax loopholes will need to be looked at and that such a move will undoubtedly bring charges of ‘interventionist’ from his political opponents. He even went as far as saying that his representatives in future trade discussions would be more aggressive in enforcing already agreed policies. To balance this ‘hard talk’ and it is an election year he also pointed to the need to keep the environment right at the top of any trade discussions. Doubtless one of Al Gore’s vote winners will not be forgotten.

So Senator Kerry seems to be talking economic sense and with a distinct appearance of being a ‘safe pair of hands’ but will he actually tackle the big issues and sadly can he afford to? The US economy is at least four million jobs below its optimum and imports plus outsourcing do not account for most of this figure. No, it might just be that some old fashioned Franklin Roosevelt thinking might have to enter the Kerry’s thinking – a gamble which was good to Clinton in 1992 but quickly dumped once Gindrich took control of ‘the hill’ in 1994. A recent Republican-led bill that ended long term unemployment benefits will do little for the living standards of what are a growing number of long-term unemployed in the US. As all politicians know the nearer you get to an election the more the electorate focuses on what they want in their pockets. Bush knows this hence his speech last week contained many references to tax breaks and high spending Democratic regimes. He also used the ‘war’ card and probably kept his fingers crossed that Iraq does not implode between now and polling day.

If we return to what Kerry might say and promise to do we begin to include some interesting areas of policy. It remains a mystery to most that the largest and richest economy in the world still does not have universal health care. Surely, the provision of such a fundamental corner stone of most other free trade economies would assist the US in appearing to actually make free markets work for all its citizens! By not doing so the isolationist charge must gather credence.

For free trade to be most effective and politically acceptable it has to be seen to promote strong domestic cohesion. So, will Kerry support job creation programmes and other social interventionist actions? It is his choice but he might like to ponder on one interesting fact of recent economic history. It is that the two most growth orientated Presidents were Roosevelt and Truman and they actually promoted the development of free trade. Whilst the two most protectionist Presidents in recent times have been Ronald Reagan and yes you have guessed George W Bush.

We will need to look very closely at the small print in Senator Kerry’s speeches as the campaign unfolds. It might yet be a truly ‘watershed election’ and I for one hope so.

John Birchall

www.johnbirchall-economist.net

Edited by john birchall

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