Resist the Democrats on economic freedom

January 15, 2007|By George A. Pieler and Jens F. Laurson

The newly Democratic Congress is spouting neo-populism, and that means change, and new concerns for the global economy. Commentators have warned that the Democrats might revive nativist-protectionist forces in the U.S. body politic.

Free trade may not have "left the building," as one observer recently asserted, but its lease may become a lot more expensive. There have been stirrings of discontent over foreign investment, hostility toward cutting agricultural subsidies to advance the Doha round of trade talks, and tax penalties on U.S. companies operating overseas. The 110th Congress seems at least marginally more hostile to economic freedom on these fronts.

Washington is turning away from a pro-growth inclination on other fronts too. The Democratic Congress is less keen on tax cuts and, on balance, less resistant to tax increases. Most Democrats and Republicans have spending agendas far too ambitious to justify much optimism for short-term fiscal restraint. Add to that a panoply of campaign pledges that would put more friction into the U.S. economy.

Even if the new Congress brings only marginal change, it matters. When even harsh critics (such as France) count on the U.S. to be the principal engine of global economic growth, marginal changes can cause a lot of trouble, especially if enough of them head in the wrong direction.

In this case, that direction seems to be Europe: not for a winter holiday but with a shift toward elevating government power to "do things" for people ahead of the market's power to facilitate people doing things for themselves. This is a centuries-old debate, and both Europe and the United States have an uneasy mix of state control and market deference. The European mix generally gives more primacy to the state. That works in times of economic stability and reflects Europe's distinct social values, but in recent years it has produced less growth, higher unemployment and less wealth with which to fund Europe's robust welfare state.

That's why any U.S.-Europe economic convergence that leans in the direction of Europe is not a good idea now. The question is how far the United States can go in the direction of today's Europe without putting the global economy at risk.

No one can say for sure, and indeed the Financial Times takes a sanguine view in its year-end editorial, concluding that "a sharp slowdown in the U.S. would probably need some additional triggering event" of a shocking nature (terror, oil price spike), and that "with some luck and judgment, 2007 should be another good year for the world economy."

Luck we can't control, but judgment is surely needed. One way to hedge against the mildly protectionist tendencies of the new Congress is to leverage countervailing political forces. In this case, that means minority Republicans and the Bush White House, which did only a fair job to begin with: small bilateral trade deals, temporary tax cuts and no fiscal restraint whatsoever.

A good start would be the thoughtful use of the veto pen. Here, President Bush could learn a lesson from the late Gerald R. Ford, who earned his stripes in promoting freer trade, relaxing wage and price controls, and restraining federal spending despite never quite becoming a paragon of economic virtue.

With working bipartisan majorities and a well-calibrated use of his veto power, Mr. Bush can steer the new Congress away from knee-jerk protectionist reflexes without squandering his very limited political capital. The Financial Times may not worry about marginal changes in U.S. economic policy, but if anything, the supply-side revolution has taught us that everything important happens "at the margin." Heading off even a marginal risk of entering a global recession should be near the very top of Mr. Bush's agenda.

George A. Pieler is a senior fellow with the Institute for Policy Innovation and was economic adviser to Sen. Bob Dole. His e-mail is gpieler@cox.net. Jens F. Laurson is editor in chief of the International Affairs Forum. His e-mail is jlaurson@ia-forum.org.

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