CLINTON & GREENSPAN: IS THE PARTY OVER?
Just when we thought Fed Chairman Alan Greenspan was in a perfect political position to reassure U.S. creditors that our bonds are as good as gold, President Clinton has ended his year-long golden silence on Fed policy ~ practically instructing the Fed to inflate! Who knows how it happened? A week ago, the President and the White House were giving every indication that they would defer to Greenspan's judgement on whether or not he had to raise short-term rates to squelch inflationary pressures. At 4:25 p.m. yesterday, we learned on the wires that Clinton now believes "it would be a mistake" for the Federal Reserve to tighten its monetary policy, since "there is no inflation trend in this economy." This was no off-hand remark. Financial reporters had been invited to hear the President fire a shot at the Fed. A week ago, when asked by Robert Novak at a press lunch what he thought about monetary policy, the President had nothing but praise for Greenspan, the Fed and Fed independence. Laura Tyson, the President's chief economic advisor, has been marvelous, simply stating that the Fed has to do what the Fed has to do. Now this.
The President argued that with core inflation down at "quite a low level," energy prices declining, 6.4% unemployment and little wage pressure, "there's no indication that we're facing a return of inflation" since "nearly every American would say we need more jobs and higher incomes." He said that "until a combination of employment and economic activity produces some real threat of inflation, it would be inappropriate for us to choke off an economy that has already had a false start or two" over the last few years. Nor did the President seem receptive, according to the Dow Jones reporter, to the recent suggestion of Fed Vice Chairman David Mullins that it might be appropriate for the Fed to move from a policy regarded as accommodating to a neutral stance.
If next week's meeting of the Federal Open Market Committee was extremely important — given the sagging bond market and the steady, upward creep in the price of gold — the President's remarks have now made it a crucial meeting. It could produce a huge rally in the financial markets, if Greenspan and his fellow governors find a diplomatic way to assert themselves. Or, we could see the long bond marching back above 7%, with the broad stock market going into a sickening slide. It's not enough that the FOMC agree to give Greenspan authority to fiddle with fed funds sometime in January, if the President says it would be okay. All the governors have to stand up and be counted, each bearing some of the burden now on Greenspan, voting an immediate increase in the fed funds rate, preferably with a unanimous vote. It would be up to Greenspan to explain that this is not meant in defiance of the President's preference, but in accordance with the President's wishes that interest rates not climb in a way that shuts down economic growth.
Appropriately, this will be the last FOMC meeting of its most senior governor, Wayne Angell, who for almost nine years has been taking the lead in restoring the credibility of the bond market. We can be absolutely sure Angell will be trying to rally his colleagues behind Greenspan in a display of Fed independence from political pressure. We don't have the slightest idea of who or what got to the President to turn him around, but this has to be dealt with immediately. If not, we will be back to the bad old days of Bush and Brady. The timing couldn't be better, or worse, as it will all be decided in the seven days of Christmas.
A PITIFUL GATT
Leaders of the international trade establishment are falling all over themselves in self-congratulation as the wrapping is finally being put on the Uruguay round GATT agreement. We find that the deal has a worn, haggard and lifeless look, though, coming after seven years of halting negotiations among more than 100 sovereign nations. The frenzied haggling to complete the round has had much more to do with political horse-trading than with any political commitment to free trade. While politicians and trade bureaucrats may take smug self-satisfaction in the outcome, this agreement falls woefully short of its hoped-for potential to drop trade barriers, create jobs and raise living standards worldwide.
The United States, the world's largest export market and post-war standard-bearer of the free-trade-benefits-all consensus, must bear a large measure of blame for the disappointing results. After its hard-fought victory on NAFTA last month, the Clinton administration appears to have lost the political will to follow through with an equally bold stance for a world trade agreement. In late November, senior administration officials suddenly found unacceptable a section of the agreement drafted two years ago that would have placed some modest limitations on anti-dumping actions. They demanded new text that actually expands the scope for dumping complaints. This last-minute alteration of anti-dumping rules included in the so-called Dunkel draft compelled the administration to accept a substantial easing of the EC's earlier commitment to slash agricultural export subsidies. It also opened the door to other concessions that will preserve the status quo rather than expand trade.
The anti-dumping regime imposed by the U.S. in the context of a "free-trade" agreement reads like an Orwellian fantasy. Under the guise of preventing "unfairly" priced imports, for example, the rules will allow countervailing duties to be assessed against foreign producers that fail to recover start-up costs within six months. New products and factories typically take several years to break even. Pricing products to recover costs so rapidly means pricing them out of the market. Thus, the new GATT essentially bars entrepreneurial start-up ventures from global export markets. The Dunkel draft would have excluded dumping complaints against price differences of less than 2% between home market and export prices. The Clinton text allows penalties against "dumping" margins of as little as 0.5%. The administration also eliminated review procedures that were called for in earlier drafts, with the new language preventing GATT dispute resolution panels from reconsidering facts at issue in a dumping case, allowing determination only of whether a government's decision falls within the "range of actions" consistent with GATT.
The biggest kicker of all in the new GATT dumping rules is included at U.S. behest: Labor unions, for the first time, will have standing to file dumping complaints. In the midst of the inexorable global movement toward economic openness and dynamism, the world trading system now institutionalizes the influence of advocates of declining, inefficient industries against the interests of emerging, new, productive ones. This can only be a political sop by Clinton to the AFL-CIO after the nastiness of the NAFTA fight. No wonder Lane Kirkland was smiling after his meeting with the President at the White House last week.
The political necessity of the administration to torpedo the Dunkel draft's anti-dumping provisions created a commonality of interests among the major industrial countries to water down the agreement. Buying off the EC meant eroding the agricultural subsidy restrictions. One of the last political trades that sealed the deal came Tuesday. It satisfied Canada that the GATT rules would not penalize subsidies provided at the sub-national level (by states and provinces). All this dealing among the industrial powers, of course, excluded developing nations — whom this round was supposed to benefit most of all — from a seat at the table. They were left with a fait accompli that they could hardly refuse, even though most of the "compromises" will create narrower access to markets in the developed world than would have otherwise been the case.
Is part of a loaf better than none? Perhaps, but we suspect this may be the last agreement negotiated under the auspices of GATT. Multilateralism served a useful purpose in establishing strong global economic links in the second half of the 20th century. The process now seems outmoded and unwieldy with the 21st century aborning. The bilateral approach to trade liberalization, we think, is the wave of the future, with far greater potential to open markets and create the conditions for global prosperity.