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Fast Track Will Not Help Economic Recovery, National Unity
EPI President's Letter to Congressional Leaders


By Jeff Faux
Economic Policy Institute
September 26, 2001

The Honorable J. Dennis Hastert
Speaker, United States House of Representatives
232 U.S. Capitol Building
Washington, DC 20515

The Honorable Richard Gephardt
Democratic Leader
United States House of Representatives
204 U.S. Capitol Building
Washington DC 20515

The Honorable Thomas A. Daschle
Majority Leader
United States Senate
221 U.S. Capitol Building
Washington, DC 20510

The Honorable Trent Lott
Republican Leader
United States Senate
230 U.S. Capitol Building
Washington, DC 20510

Dear Sirs:
As you know, the nonprofit Economic Policy Institute has long
been involved in research and policy analysis on the issues of
trade and globalization -- including providing testimony and
advice when solicited by members of Congress. I am taking the
unusual step of writing this letter out of concern that the
current crisis is being used as an excuse to pressure Congress
to give the president the authority to put international trade
and investment agreements on a Congressional "fast track."
Such an effort to promote a controversial and politically
divisive agenda is clearly inappropriate at a time when
national unity is essential.

This effort is also inappropriate on economic policy grounds.
Rather than agreeing to a fast track, the Congress should put
trade policy on hold while it examines the impact of previous
agreements in light of the growing threat posed by the trade
deficit to our nation's economic stability, and the failure of
our current international economic strategies to produce
promised improvements in the lives of the world's poor.

The United States has entered into several hundred trade
agreements over the past two decades. The U.S. Trade
Representative tells us that two of them, NAFTA and the
Uruguay Round, have created a benefit of $1,300 to $2,000 for
the average American family. But a look at the source of such
numbers shows that they do not represent the actual experience
of these treaties but rather estimates based on forecasting
models of what the effects might be. As a soon-to-be-released
EPI study of these models shows, they are abstract exercises
based on unrealistic assumptions (the absence of unemployment,
for example). Indeed, these were the same models that
predicted that NAFTA would bring about a U.S. trade surplus
with Mexico. Seven years later, we are running a trade deficit
of some $35 billion, which translates into a loss of about
367,000 jobs on our side of the border.

Certainly, before Congress gives away its responsibility to
amend such agreements, it should make a thorough analysis of
how past agreements meet the claims that were made for them.
Virtually all of these agreements were promoted as a way to
reduce the U.S. trade deficit. Instead, the gap between
imports and exports has expanded. Driven by that widening gap,
the U.S. international balance of payments deficit last year
reached $450 billion, roughly 4.5 percent of our gross
domestic product (GDP). In order to finance these annual
deficits, Americans have had to borrow from abroad. Last year
the U.S. foreign debt -- the difference between foreign claims
on U.S. assets and American claims on foreign assets --
reached 20 percent of our GDP. On its current trajectory, U.S.
foreign debt will double to 40 percent in five years. To put
this in perspective, debt is 50 percent of the GDP of
Argentina's imploding economy.

Because the U.S. dollar is so widely accepted around the
world, pundits have dismissed the danger of a crisis of
confidence. Certainly the United States is not Argentina. But
common sense tells us that we cannot forever borrow and sell
our assets in order to buy from the rest of the world more
than we sell. At some point the interest burden will become
too high, and foreign investors will be unwilling or unable to
keep financing our rising debt, causing the dollar to plummet
and interest rates to rise sharply. The United States will
then be forced into a trade surplus as incomes fall far enough
to reduce imports and wages fall far enough to make U.S. goods
competitive. Economist Wynne Godley of the Levy Institute
estimates that bringing the trade deficit into balance by 2006
would require doubling the U.S. unemployment rate to about 9
percent.

So far, we have avoided such a crisis, largely because the
red-hot economy of the 1990s induced foreign investors to buy
our overpriced securities. In a sense, the U.S. economy has
been like a corporation whose booming domestic division has
obscured the losses from the firm's foreign operations. From
1992 to 2000, 23 million jobs were created in the U.S.
domestic sector, while 4 million were lost in international
trade. It is clear that the domestic boom -- powered in the
last half of the 1990s by a speculative stock market bubble --
was unsustainable and will no longer justify official
disregard of our foreign financial imbalances.

The current indifference toward the rising trade deficit seems
inexplicable, particularly considering the bipartisan panic a
few years ago when the fiscal deficit of the federal
government reached the same share of GDP. Similarly, we have
engendered a national debate over projections that the Social
Security Trust Fund might have to start borrowing money in
2038. Yet, on our current path, the trade deficit will touch
off a serious economic crisis long before the Social Security
Trust Fund needs a modest tax increase to cover its
obligations.

The root cause of the problem is not that we trade with other
countries. Fast-track supporters are correct that freer trade
can bring benefits in the form of cheaper goods. But those
benefits can only be sustained when trade remains in rough
balance. Rather, the root cause is our economy's
extraordinarily high propensity to import. As the report of
the U.S. Trade Deficit Review Commission noted last year, "For
an equal increase in national income in the United States and
foreign countries, the United States increases its purchase of
imports proportionally more than foreigners increase their
exports." With the trade gap structured to grow faster than
our income, it is no surprise that trade agreements have had
the perverse effect of widening the trade deficit and thus
increasing the debt.

We cannot escape the accumulated consequences of having
consumed more than we've produced. But we can stop making it
worse. Moreover, given that there is some evidence that the
terrorist network has the sophistication to coordinate stock
market speculation with large-scale violence against financial
targets, the last thing we need is for U.S. currency to become
weaker and subject to market attacks.

A "strategic pause" in our relentless pursuit of trade
expansion would give us time to develop policies to make the
structure of the U.S. economy consistent with freer and more
open trade.

We also need a pause to reexamine the global economy in which
trade policy is enacted. The Uruguay Round and the North
American Free Trade Agreement were not just about lowering
barriers to trade. In each case, the U.S. conditioned access
to the U.S. market for poor countries on their agreeing to
restructure their economic policies along radical
laissez-faire lines. Reinforced by State Department and USAID
policies, as well as pressure from the IMF and the World Bank,
countries have been privatizing government, deregulating
agriculture, and opening up vulnerable Third World economies
to volatile capital flows.

The economic result of these policies is disappointing.
Although there have been exceptions, comparing the last 20
years under globalization with the previous 20, world growth
has slowed, poverty has risen, and inequality has grown.
Despite efforts by supporters of unregulated trade to paint a
rosy picture, the facts are stark. As another forthcoming EPI
report will show, poverty remains widespread and is growing in
Eastern Europe, Central Asia, sub-Saharan Africa, and Latin
America. In 1980, 400 million people -- the poorest 10 percent
of the world -- lived on an average of 72 cents a day or less;
the same number had only 79 cents a day or less to live on in
1990, and just 78 cents a day or less in 1999. And those
numbers are even bleaker when inflation is factored in.
The gap between rich and poor has grown dramatically, which is
troubling news not only from a humanitarian viewpoint but also
because of its potential for global destabilization. In 1980
median income in the richest 10 percent of countries was 77
times greater than in the poorest 10 percent; by 1999 that
income gap had grown to 122 times. The evidence is clear that
liberalized trade and capital flows have led to more, not
less, poverty and inequality in many parts of the world.
Promoters of a forced march to free markets dismiss these
trends as "transition" problems. In the long run, they say,
everyone will ultimately benefit. Perhaps. But even in
advanced countries the capitalist process of "creative
destruction" generates insecurity and pain. In Third World
countries it rips up communities, families and implicit social
contracts that in many cases have been in force for a thousand
years. And it creates a swamp of hopelessness that breeds the
bin Ladens of the world.

Iran is a case in point. The militant Islamic regime was a
reaction to the Western values of the U.S.-backed Shah, a
model economic reformer. His attempt to impose an
American-style agribusiness displaced masses of small farmers
and their families who turned to the ayatollahs -- not because
of some theological conversion, but because they had been set
adrift in an open, deregulated economy in which they could not
compete.

This is not an argument for protection or isolation. But the
world has changed, perhaps forever. It is now generally
acknowledged that we need to rethink our national security
policies, our budget priorities, our judicial processes and
our foreign policy. Similarly, before rushing through an
agenda that was problematic even before September 11, we need
a thorough review of the way in which our policies may be
contributing to the dangerous destabilization of Third World
societies, and the future destabilization of the United States.

I might suggest that you consider that the Joint Economic
Committee undertake this responsibility.
As in the past, our institute will be happy to assist the
Congress in deliberating these issues.

Sincerely,

Jeff Faux
President
Jeff Faux is a president of the Economic Policy Institute.

 

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