Loose Change

by Noam Scheiber | December 22, 2003

One of the truly poetic subplots of the recent flap over U.S. steel tariffs was the skill with which the Europeans played politics. In early November, shortly after the World Trade Organization (WTO) deemed the Bush administration's 20-month-old tariffs illegal, the European Union threatened to retaliate with tariffs of its own--on products that just happened to be key exports of crucial electoral states like Wisconsin and Florida. The proposed sanctions were designed to affect "products that are sensitive to important U.S. constituencies," an EU spokesperson told The Christian Science Monitor, with what must have been the world's biggest grin on her face. "They are very vocal sectors that would make their case to the administration."Why was this so poetic? Because it was the White House that had kicked off the political game back when the president first imposed the tariffs last March. Even then, it wasn't hard to see that the chief beneficiaries of the decision, which came after heavy lobbying by the steel industry, would be steelworkers in swing states like Pennsylvania, Ohio, and West Virginia. The tariffs also happened to be suspiciously timed to expire in March of 2005, just after President Bush would be sworn in for a hoped-for second term. As it turns out, the tariffs were imposed at the suggestion of chief White House political adviser Karl Rove over the objections of just about every member of the Bush economic team. (It was only when Rove realized that European retaliation would be more politically costly than junking the tariffs that the administration reversed course.) Of course, no administration has ever banished political considerations from economic policy-making. Former Clinton economic officials, for example, complain about being overruled on air-conditioner regulations, which environmentalists demanded even though the increase in cost far outweighed the increase in efficiency. But the extent to which this president has exploited economic policy as a tool for his own reelection is nearly unprecedented. The tariffs were only the first step in the Bushies' unique experiment with electoral-map economics. Two months later came a porcine agricultural bill, which, Bush declared, would "promote farmer independence and preserve the farm way of life for generations." But farm life wasn't the only thing the bill was crafted to preserve. The measure graciously divvied up $20 billion per year among voters concentrated in key Midwestern states like Iowa and Minnesota, and key Southern states like Georgia and Arkansas. Then, this spring, Treasury Secretary John Snow set to work on a curious new exchange-rate policy, one that just happened to provide a boon to the slumping manufacturing sector. Apparently abandoning an eight-year consensus on the nation's strong-dollar policy (or else several centuries of consensus on the meaning of the word "strong"), Snow announced that his definition of a "strong" dollar was "something people are willing to hold" and that is "a good medium of exchange." The dollar promptly nose-dived. Today it remains at historical lows against the euro and a three-year low against the yen, making U.S. goods remarkably cheap abroad. Coincidentally, American manufacturers recently reported their highest quarterly production increase in 20 years. Finally, just last month, as the WTO was winding its way toward the steel- tariff ruling, the president made a further mockery of the free-trade principles he touted on the campaign trail. Using an obscure provision of the bill that ratified China's ascension to the WTO, the president imposed strict quotas on imports of Chinese bras, bathrobes, and various knit products. It's possible that the president was genuinely moved by the plight of garment-sewers in South Carolina, who've seen their ranks diminished from 170,000 in the 1980s to fewer than 10,000 today. But, if that were the case, you'd probably have expected him to extend the quota beyond January 1, 2005, which is when WTO rules force the United States to eliminate all textile barriers. Amazingly, he declined. Instead, it looks like the White House was looking ahead to next fall's election, when its Democratic opponent could be an outspoken trade skeptic like Dick Gephardt. In the history of presidential politics, only Richard Nixon rivals George W. Bush's level of cynicism about the economy. Nixon used just about every economic trick in the book to ensure his 1972 reelection: Throughout 1971, he made good on the generous social spending he'd promised in that year's State of the Union address. Late that year, he took the dollar off the gold standard so the Fed could increase the money supply without restraint. By early 1972, Nixon was reportedly even ordering his Cabinet to spend money, which helped turn a $3 billion surplus into a $23 billion deficit in less than two years. The consequences were hard to miss once Nixon lifted wage and price controls in 1974: Inflation spiraled, and interest rates rocketed into the double digits. Before long, the United States was on the edge of one of the deepest recessions since the 1930s. But even Nixon's irresponsibility pales in comparison with Bush's. What makes W. qualitatively worse is the larger fiscal dynamic at work. That is, to ensure his own reelection, Nixon needed to focus on only one objective: buying off swing voters. But, thanks to the rise of the conservative movement, Bush actually has two objectives: He must buy off swing voters but also appease his conservative base--often the people most incensed by the policies used to accomplish goal number one. How does Bush square that apparent circle? With lavish, long-term tax cuts that disproportionately benefit the wealthy. Politically, the effect is positive: Swing-state voters are happy because they have their manufacturing jobs and their farm subsidies. Conservatives are happy because they have their tax cuts. The problem is that, economically, each tactic reinforces the negative effects of the other: Monkeying around with the dollar the way Snow has drives up long-term interest rates; so do the massive long-term deficits caused by the administration's upper-income tax cuts. Meanwhile, tariffs and quotas drive up prices for consumers, which, among other things, leads to inflation and ultimately higher interest rates as well. Keep heading in that direction and don't be surprised if, not long after 2005, Bush's strong recovery turns anemic. Of course, he could always trot out John Snow to redefine the word "strong" again.

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