Sunday, March 28, 1999

Economy sails amid dangers

Protectionism, politics could still trip it up

The Cincinnati Enquirer

        Unless it gets impaled by steel or slips on a banana peel, the U.S. economy looks as if it will sail through 1999, The Cincinnati Enquirer's Board of Economists says.

Widening trade deficit
        Over lunch recently, six members of the board wondered at the strength of the nation's economy and — to earn their lunch — discussed what factors could throw the economy off track:

        • Protectionism: Trade disputes over steel and bananas could escalate into something worse. The United States conducts $150 billion in trade annually with Western Europe. “We're going to jeopardize $150 billion over what, bananas? They're not even grown here,” Miami University's Jim Brock said.

        • Overcapacity: “You can't keep building buildings and building factories unless the demand growth is going to be behind it. You run the risk of surplus capacity,” Cinergy's Richard Stevie said.

        • Other economies: The problems in Asia fell into South America and are leaning toward Mexico, and it's not over yet. “It's taken the roundabout route to get here, but it's still on its way,” Mr. Stevie said.

        • Politics. The federal budget surplus is creating a frenzy. “The Republicans have joined the Democrats and it's "How fast can you write tax laws for your constituents and the money people?'” Federated Department Stores' Brian Richard said. That only threatens to get worse if the government begins giving trade protection to specific industries, he said.

  The Enquirer's Board of Economists combines people from the public sector, the private sector and academia. The board meets quarterly. Members:
  • Melanie Blackwell, professor of economics at Xavier University.
  • James Brock, Bill R. Moeckel professor of economics at Miami University.
  • David Hehman, executive vice president and chief financial officer at the Federal Home Loan Bank of Cincinnati (unable to attend).
  • Brian Richard, operational vice president and economist, Federated Department Stores Inc.
  • Richard Stevie, general manager of market analysis, Cinergy Corp.
  • Alex Tshiunza, staff economist with the Ohio-Kentucky-Indiana Regional Council of Governments.
  • George Vredeveld, director of the Center for Economic Education at the University of Cincinnati.
        But right now, those are only threats. The economy continues to grow faster than economists expect, with the rise of the stock market (despite last week's tumble) the most prominent symbol of that strength.

        Low inflation “is probably the most important thing that is still driving this expansion today and making the market as optimistic as it is about the future,” Mr. Richard said.

        The combination of low inflation, rising wages and strong demand for labor means that the consumer keeps spending, he said. Of 1998's 3.9 percent growth in gross domestic product, 3.7 points of that was due to consumer spending.

        The stock market has helped feed that. Mr. Brock noted how he sees groundskeepers at Miami checking stock prices in the newspaper. The University of Cincinnati's George Vredeveld said: “What it indicates is that they are looking at the stock page because they're aware it has an impact on their wealth position. And they react rationally, and they spend expected income from that wealth.”

        When the market dropped last summer, Federated Department Stores “saw a definite slowdown in some of the higher-end businesses, but it just evaporated by the time you got to Christmas,” Mr. Richard said.

        Xavier University's Melanie Blackwell said at least some of the market's rise is due to demographics — more people have more money to set aside. “You've got a lot of money out there that's looking for some place to be invested, and I don't think that you're seeing people want to invest in your more traditional CDs, low-paying investments,” she said.

        The U.S. economy has become the envy of the world, and Americans are aware of it. Mr. Vredeveld said Americans shouldn't forget how it got that way. “I feel the economy we have today compared to the one we had in the mid-'70s is so much more flexible, so much more responsive, so much more efficient,” he said, and a big part of that came because the government regulated less, not more.

The banana battle
        “It became that way because we submitted this economy to the discipline of the world competitive markets,” he said. “Japan didn't do it, Europe didn't do it. Clinton's hanging in there, and he's bucking his party, and he stills wants to support, by and large, free-trade policies. And if we continue to do that, we'll have a great shot.”

        The U.S. trade deficit was once viewed as a sign of the weakness of American industries. Today, with the deficit at record levels, it's a reflection of the gulf in economic health between the United States and other nations. The U.S. economy offers a strong market for imports. Asia, with its troubles, can't afford to buy much from the United States, and its goods — down in price because of currency devaluations — are more attractive here.

        The currency devaluations in Asia “made imports extraordinarily cheaper, made the dollar much more stronger,” Mr. Brock said. “If you're trying to sell over there, forget it. If you're buying inputs (for production) and materials over there, your costs just dropped 30, 40 percent.”

        The board, however, sees politics working its way back into trade policy. Mr. Richards said, “The United States has always been the shining light, in terms of the benefits of open world trade and being willing to take a little bit on the chin in terms of reciprocity in order to pursue that goal because it was the best thing for the world and the United States.”

        The escalating fight over trade in steel, meat and bananas — with Cincinnati-based Chiquita Brands International, controlled by financier Carl Lindner, at the core of the battle — is clouding the picture.

        “We're not into the banana thing because bananas are of strategic interest to the United States, or because they're a particularly potent symbol of our cultural heritage,” Mr. Brock said. “We're in it because a certain Cincinnatian shoveled truckloads of money to people in Washington for reasons other than just good government.”

        Said Mr. Vredeveld: “If you think it's about bananas, you realize how silly it is. Europe doesn't grow bananas, and the United States doesn't grow bananas.”

Real fears of job loss
        Alex Tshiunza, of the Ohio-Kentucky-Indiana Regional Council of Governments, pointed out that right now, the United States is practically the only economy strong enough to be an importer of steel. Close that door, and other nations — already in poor health — might get worse, and that ultimately isn't good for the United States.

        Behind the protectionism debate, however, is real fear by some Americans of losing their jobs and their ways of life. “We've never come to grips with how do we compensate the losers in a way that we're all better off,” Mr. Brock said.

        Ms. Blackwell agreed. “It's always been one of our downfalls: How do we deal with structural changes?” she said. “It's going to be a long time before you can get our government to realize that perhaps that's one of their responsibilities.”

        A broad plan to help people who lose their jobs to shifts in trade and the economy might go a long way to blocking the push for protectionism, Mr. Brock said.

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