27 Feb 2004 Words Matter

Tuesday’s Consumer Confidence numbers reported an unexpected erosion of confidence in the economy.  During February as the Democratic candidates marched through each state in their presidential quest their criticism of the economy grew louder and more focused.  As jobs or the inability of the current economy to create substantial job growth seems to resonate so well with some voters, politicians’ criticisms of the economy and the current administration have grown louder and, on occasion, outlandish.  Political experts suggest that negative campaigning is not only effective, but may be the only way to win modern elections.  But, there is a cost – the words are carried far and wide and more people than ever seem to accept them at face value.  

In response to the latest campaign talk, yesterday’s Wall Street Journal asked the question “Is Free Trade Immoral?”  As the race for the White House heats up both John Edwards and John Kerry have placed themselves on the slippery slope of trade protectionism calling trade a moral issue.  While they ultimately face pointed tough questions about how they would justify such a position and what trade and tax laws they would change to improve policy, Mr. Kerry is in a more precarious position; he voted for NAFTA and supported President Bill Clinton who signed it into law.

The Journal goes on the point out that mixing morality and economics is a risky business.  As Adam Smith wrote, “rather than relying on the benevolence of the baker to provide us our bread, we trust to his self-interest; the transaction benefits both parties.”  Business exists to make a profit.  Managers hire to improve their profits, not out of ‘benevolence’ or morality.

Simply put, our economy and the world economy would be severely damaged if the talk of and trend toward protectionism continues.  Indeed, the Great Depression was exacerbated and prolonged by protectionism measures taken by Washington and echoed around the world.  By pandering to the fears of the working Americans, presidential hopefuls have taken the low road and seem willing to risk the economic recovery to reach their objectives.

Free trade raises standards of living in all countries where it is allowed to thrive.  This fact is undeniable.  People in less developed countries are given the opportunity to work themselves out of poverty.  As they do so they become better customers for the businesses in more developed economies.

A painful reality is that theU.S.is losing thousands of manufacturing jobs to lower wage countries.  But it is a cycle that has been going on for decades.  The current response should not be one of preventing business managers from running their businesses in the most profitable manner they see fit.  The better response would be to improve and facilitate education and training for displaced workers, making them more attractive to existing employers.

Mr. Greenspan suggested in his testimony before Congress, that by supplying more skilled workers to businesses, the wage premiums such workers could command over their less skilled counterparts would fall.  Furthermore, as the supply of lower-skilled workers fell, the wages they could command would rise.

If government policy makers really want to improve job creation, they should be about lowering the cost of doing business and hiring in this country.  They could lower taxes to encourage capital and worker investment, especially small-business investment, reduce the burden of regulations, encourage creative solutions to environmental and energy issues through tax incentives, and reform the legal system to eliminate ridiculously high jury awards for damages.

Trade restrictions may become a major economic issue for investors going forward.  The fervor with which the two front-running Democratic candidates have embraced them, the previous international damage done by President Bush’s steel tariffs (mostly repealed now), and a growing number of agricultural bans between trading partners seriously threatens to undermine the fledgling global recovery.  The mere talk of it here has foreign governments upset and thinking of similar actions to protect themselves.  These issues deserve close attention as they will undoubtedly impact future investment decisions.

Recent readings on the actual rather than the perceived health of the economy have been quite good.  The government’s preliminary report of fourth quarter growth of Gross Domestic Product for theU.S.economy showed surprising strength.  Business spending was a much larger contributor to the economy’s growth, providing balance to the consumer’s efforts.  Economists project that this year’s growth could reach the fastest since 1984.  To the extent the economy’s current performance is not overshadowed by future threats to that growth, stock markets should perform quite well this year.