It’s the Economy, Stupid

With all the current talk about looming economic recession I am reminded of the Clinton campaign’s 1992 catch phrase. That election turned on the economy and it looks as though this one could too. As it did that year the talk comes with an ugly undercurrent of protectionist sentiment. Ross Perot’s famous warning to expect a giant sucking sound as jobs went south with NAFTA resonated with a lot of Americans. This time around the support is broader and I think more dangerous. Candidates from both major parties are questioning the benefits of free trade. Even Hillary Clinton has suggested a moratorium on the agreements. It’s time to recall a little history. Like a lot of Americans my parents suffered heavily during the Great Depression and I well remember hearing stories about it as a child. President Herbert Hoover is hardly remembered for anything else but history books barely mention what actually caused it. Some scholars point to the protectionist Smoot-Hawley act of 1930 and retaliation by other countries as the trigger. Some point to other factors but there is no question that international trade ground to a halt, people were thrown out of work all over the world, and that decade will be forever known for its breadlines. Germans suffered even more than most because ruinous inflation had already all but wiped out their middle class. Adolph Hitler found a ready audience for his fascist promises. Franklin Roosevelt responded with the 1934 Reciprocal Trade Agreements Act and America led the world down a path of steadily advancing trade liberalization that has continued right up until today. My parents would never have dreamed of the explosion in global prosperity that came with it. Nor would they have dreamt of a world where the prospect of another major war is as remote as it is today. The three issues are connected. Let’s take Europe for example. We are accustomed to thinking of our own economy as the world’s largest. It will come as a shock to some that it isn’t. The aggregate GDP of the European Union last year is estimated at a staggering $14.44 trillion. Ours was about $13.86 trillion, higher on a per capita basis but a bit smaller overall. Think about Europe’s past. The people of that continent were at war with each other with only brief periods of respite from the days of Julius Caesar right up to 1945. The grinding poverty they experienced was responsible for all but a fraction of the immigration that built America into the most powerful nation in the world. Then after WWII they began to integrate their economies for the first time. By the end of the cold war the wealth disparity may have been the signal factor in the collapse of the Soviet Union. Any outbreak of armed hostilities among member nations today would be as unthinkable as a border war between Texas and Oklahoma. Think about what makes our own economy so strong. It’s no coincidence that the several states are prohibited by the constitution from interfering with interstate commerce. We are a free trade zone by definition. Oregon cannot impose punitive tariffs on wine imported from California. Michigan cannot impose safety requirements on a BMW manufactured in Alabama if it exempts Buicks assembled in Detroit. The resulting flow of goods and services across state boundaries has been an economic boost interrupted only by the Civil War. It isn’t just interstate trade either. The single sector of our economy that has shielded us thus far from the current threat of recession has been exports. It’s not been much in the news but they’ve been growing at a healthy clip, especially to NAFTA countries, giant sucking sound not withstanding.