FTAs to the rescue in boosting American jobs?

Business Times - 07 Dec 2010

FTAs to the rescue in boosting American jobs?


THE bad economic news hit Washington at the end of a very depressing week dominated by bipartisan bickering over whether to extend tax cuts and unemployment benefits and how to cut the swelling federal deficit - not to mention the never-ending flow of WikiLeaks.

The report released last Friday indicating that the unemployment rate jumped last month from 9.6 per cent to 9.8 per cent - the highest unemployment number this year - and that the economy created only 39,000 jobs in November, compared to 172,000 in October, did come as a shocker to officials and lawmakers in Washington.

The jobs report made it clear that most of the sectors of the economy (with the exception of temporary help and healthcare) were not hiring. And some sectors were even cutting jobs.

Even more shocking to economists, many of whom had predicted better results earlier in the week, were the disappointing job numbers coming from retailing and financial services - two sectors which seemed to be doing well for a while.

The ugly numbers seemed to accentuate the view that the American economy is experiencing a jobless recovery. If one looks at the GDP numbers, it is obvious that the Great Recession has ended and that the economy is growing (although the expected rate of growth of less than 3 per cent next year is not impressive).

But for many Americans, who haven't been able to find a job and who could be facing a cut of their unemployment benefits, it still feels like a recession, especially at a time when they are preparing for the Christmas holidays.

The depressing jobs report came out just as the outgoing Congress was convening for a short lame-duck session during which lawmakers will have to decide whether to extend the tax cuts that were passed during the administration of ex-president George W Bush and which are scheduled to expire before the end of this year.

Congress will also have to agree on whether to extend a set of jobless benefits that are also scheduled to run out very soon.

So it was not surprising that the high unemployment rate ended up serving as a political football for the two parties on Capitol Hill. Republicans led by John Boehner, the House Speaker-designate, were arguing that the private sector has not been creating new jobs because of the uncertainty over the extension of tax cuts. The current legislative stalemate over the issue has to do with the insistence by the Democrats that the tax rate is extended only to those making less than US$250,000 a year.

Republicans want to extend the tax cuts to everyone and threaten not to extend the jobless benefits if the Democrats oppose extending the tax cuts to those making more than US$250,000.

There is a general consensus in Washington and in Wall Street that a failure to extend the tax cuts could bring the economic recovery to a full stop. At the same time, thousands of jobless Americans will not be able to pay their rent and buy food if Congress doesn't extend unemployment benefits.

At the same time, with unemployment remaining high and with a deadlocked legislative process, the Federal Reserve - that has been under attack by Republicans and conservatives over its decision to pump new money into the economy, the so-called quantitative easing (QE2) - seems to be in a better position now to defend its policies.

Indeed, with the White House and Congress unable to agree on new fiscal policies to energise the economy, the Fed's monetary moves seem to be the only game in town as far as trying to accelerate the weak economic recovery - although it's not clear if QE2 is going to work.

In a way, the November unemployment report may have come as a shock to many observers because it seemed inconsistent with other more positive data, including signs of increasing consumer spending and rising manufacturing activity.

In particular, purchases of cars have jumped and there were even some indications that the housing market was coming back to life, thanks to the low mortgage rates sustained with the help of the Fed policies.

But it is becoming clear that the weak economic growth will not be able to create the conditions for a new wave of jobs until sometime in 2012. In fact, no one is confident that the economy will return to the 'normal' unemployment rate of about 5 per cent before the end of the decade.

Indeed, the main concern in Washington is that the high unemployment rate reflects deep structural problems confronting the American economy.

These structural factors include rising competition from China and other emerging markets as well as advances in information technology that have made it possible for companies to become more productive - manufacturing more products and providing more services with fewer workers at home and by relying on a cheaper labour force abroad.

From that perspective, the announcement last Friday that American negotiators have concluded a much anticipated free-trade agreement (FTA) with South Korea came as a piece of good economic news. In addition to eliminating most tariffs on American exports to South Korea (America's seventh-largest partner), the new trade accord is expected to create thousands of new and well-paying US jobs.

'The agreement we're announcing today includes several important improvements and achieves what I believe trade deals must do. It's a win-win for both countries,' President Barack Obama told reporters in Washington after returning from his trip to Afghanistan last Saturday.

The accord will be submitted for a vote to a newly elected Congress early next year where a coalition of pro-business Republicans and a number of pro-free-trade Democrats are expected to provide the Obama administration with the majority it needs for approval.

Indeed, one of the main beneficiaries of the growing Republican power in Capitol Hill is going to be the energised effort by the Obama administration to promote the US global trade agenda as part of a strategy to accelerate economic growth and create new jobs.

Copyright © 2010 Singapore Press Holdings Ltd. All rights reserved.


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