Global economics hogs US election campaign

Business Times - 06 May 2008

Global economics hogs US election campaign

Clinton, Obama now portray themselves as protectionists and China bashers


THE recognition that American businesses had cut fewer jobs (20,000) than expected (about 90,000) in April and the perception that the US central bank seemed to be containing the threat of a financial meltdown may have helped boost the sense of mild optimism among investors in recent days.

Indeed, there seems to be a feeling in the financial community that things are starting to get better and that, perhaps, the financial crisis is coming to an end.

That sentiment has been reflected in the somewhat bullish mood in the stock markets and in growing expectations on Wall Street that the value of the various financial products will start climbing up soon.

At the same time, officials in the Bush Administration and Republican lawmakers are hoping, wishing and praying that the US$117 billion in federal tax rebates that the government has started mailing last week to Americans - they are part of the economic stimulus plan that had been embraced by Congress and the White House - will make it more likely that the current economic slowdown will be relatively short and mild.

It is not clear whether this rising enthusiasm among some investors and politicians is based on reality or on wishful thinking. What is obvious, however, is that this sense of optimism about the economy is not shared by consumers and workers on Main Street.

That is probably not surprising if one considers the effects that the mortgage market crisis, the credit crunch and the rising energy and commodity prices are having on homeowners and other consumers who reside in the 'broader economy' - where one experiences a rise in the number of foreclosures, falling home prices, and tighter lending standards - and are not part of the 'investment community'.

Hence, the Labor Department report issued last week also pointed out that Americans appear to be working fewer hours, and for less pay, and that the percentage of employees who involuntarily turned to part-time work is continuing to rise.

And in one area where the 'broader economy' meets the 'investment community' - consumer spending that brings about more earnings for businesses and profits for investors - there are no indications that Americans are going on another huge shopping spree any time soon.

If anything, it won't be an exaggeration to suggest that most Americans are now in a very sour mood about the American economy and the future of the country. Indeed, according to the latest Wall Street Journal/NBC News poll, President George W Bush reached new lows in his eighth and final year, with only 21 per cent of American approving of his handling of the weakened economy. An unprecedented 73 per cent of them expressed the belief the country is on the 'wrong track'; only 15 per cent say it is going in the right direction.

Moreover, President Bush while talking about the economy on the White House lawn last week refrained from describing the current economic conditions as a 'recession' - that is exactly the way 81 per cent of Americans describe it, according to the same Journal/NBC News poll. And while Mr Bush blamed 'inaction' by the Democratic-controlled Congress for the economic problems, most Americans say that the White House is responsible for the high gas prices they are paying at the pump and for the rising costs of bread and rice at the grocery store.

Interestingly enough, a plurality of Americans are feeling that the problems the American economy is facing - and in particular, the energy prices and other global economic issues - constitute now the main threat to their interest and welfare as a nation, while the issue of Iraq seems to be less prominent among their concerns.

According to opinion polls by Daniel Yankelovich, and published by Foreign Affairs magazine, the number of Americans who named the economy as the top foreign policy challenge rose from 3 per cent to 11 per cent. Seven out of 10 respondents said they worried 'a lot' about the rising energy costs, a 16-point increase from last year.

There has also been an increase from 31 per cent to 40 per cent in the number of Americans who are worried about the US debt to foreign economies. And a large majority of Americans, 84 per cent, are worried about the way things are going for the US in world affairs.

This growing sense of economic insecurity among Americans that is responsible for the current nasty public mood is also responsible for the growing support for protectionism. The American voters expect their presidents and lawmakers to 'do something' to bring about economic relief.

But the politicians who recognise that many of the economic problems have to do with structural changes in the American and global economy - for example, rising energy demand in China and India - respond to the public pressure by searching for political scapegoats like the oil companies and foreign trade competitors.

And the same politicians also look for short-term measures that will create the perception that they are indeed 'doing something' to help the struggling consumer/voter.

These politicians were in action last week: both presumptive Republican presidential candidate John McCain and one of the two leading Democratic candidates, Hillary Clinton, called for called for a summer-long suspension of the federal gasoline tax.

But most economists, as well as the other Democratic candidate, Barack Obama, argue that this 'gas-tax holiday' would have very limited effect on gas prices, which are in short supply in the summer, which in turn puts pressure on prices; that most of the benefits of a temporary tax moratorium would probably go to oil companies rather than consumers; and that if anything, the government should increase the tax on gas, which will put pressure on the consumers to buy more fuel-saving cars, and help reduce energy consumption.

Mr Obama's supporters have accused Mrs Clinton and Mr McCain of irresponsibly 'pandering' to the American voters by proposing the 'gas-tax holiday', but Mr Obama has joined Mrs Clinton in doing the same kind of pandering, when the two joined forces in supporting a Senate Bill that is supposed to offset China's alleged 'currency manipulation'.

The legislation proposed by Democrat Senator Debbie Stabenow and Senator Jim Bunning - a Republican would define currency manipulation as a subsidy under US trade laws - and Commerce Department wants to impose countervailing duties on many Chinese products.

This move is just another example of the way Mrs Clinton and Mr Obama, who in the past had backed a centrist free-trade agenda and economic engagement with China, have attempted to re-invent themselves as economic protectionists and China bashers who seem to blame global trade competition, especially from China, for America's current economic woes.

The two Democrats have also promised to revisit the North America Free Trade Agreement and have backed the efforts to torpedo a bilateral trade agreement with Colombia. They apparently hope that their anti-free trade rhetoric will help them win support among blue-collar workers in states where the manufacturing sectors are in decline.

Since many of the problems facing the American economy - including the weakening manufacturing sector, the growing energy prices, and the falling value of the US dollar - reflect long-term structural changes, expect that even if the current recession proves to be short and mild, the next US president is going to face more protectionist pressures from Congress and the general public.

It is very likely that there will new restrictions on foreign imports and investments, whoever wins the election.

Copyright © 2007 Singapore Press Holdings Ltd. All rights reserved.

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