Bras, Steel and Bush

By: John Mauldin | Sat, Nov 22, 2003
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Whenever I venture from my "assigned" space of economics and investing, and roam into the realm of politics, I am sure to offend more than a few readers. But today, I see the world of economics and politics meshing, as the threat of an international trade war is becoming more and more real. From Senators proposing insane 30% tariffs on the Chinese, (our new whipping boy, probably to the relief of Japan) to boneheaded steel tariffs, we put the economy of the world at risk. And the reasons are more political than economic, so I weigh in. I am sure I will be able to offend most everyone at some point, but I hope I will give us all a few things to think about as we get ready to celebrate Thanksgiving. For the readers who can't stand political heat, you've been warned.

The Bra Wars

When I was a tad younger (this was the late 60's), it was considered de rigueur for well meaning males to attend a gathering or two where women ceremoniously burned their bras to show their rejection of the male hierarchy. As young college guys, we never quite understood the symbolism, but most of my more boorish friends were all in favor of the removal of bras, cause celebre or not.

And now, we find the Bush Administration once again starting a fight over women's lingerie. Scandalously, it seems we need to protect the jobs of brassiere factories in the US from the Chinese imports. Never mind that, as far as I can research, there are no workers toiling away in the US making brassieres. There are maybe 20,000 jobs which might- maybe- possibly would be affected.

As long time readers know, the thing which most concerns me is the potential for a trade war. It would wreck what fragile recovery is beginning to emerge in the world economy. Nothing could be more disastrous and lead to the actual destruction of more jobs and loss of real wealth, as the markets would simply deflate in the US and abroad.

To that end, I write a less than tongue in cheek letter to Karl Rove. For my foreign readers, Karl is the political architect of Bush's election first as governor here in Texas and then president. He is one very, very smart man, perhaps the best political tactician of my generation, and a genuinely nice guy.

Fingers point to him as the architect of the steel tariffs and now the selective tariffs on certain textile items, including women's undergarments. The reasoning is that since the tariffs make no macro-economic or business sense, they must be political in nature. There is a certain rhythm to the allegation. But on to my "letter."

(I have had a few interesting conversations with Karl, not always in agreement but always in good spirits. Long time readers know that I was involved in Texas politics during the last two decades, and was once on the Executive Committee of the Texas Republican Party. So this letter is stylized as a conversation between two GOP partisans talking policy. If we were together, I would say it the same way, with maybe a little more Texas color.)

Dear Karl,

It's been awhile since we last talked. Since you have had your political duties transferred to the White House from Austin, we don't bump into each other any more. It goes without saying that you did a wonderful job of running the President's campaign, and I am sure you will do as well in 2004. You are one of the main reasons I am confident that GW will be re-elected. The other guys just don't have anyone to match you.

And as you rightly pointed out (whenever anyone would listen) almost two decades ago to small groups of Republicans in Texas - at a time when we could hold our conventions in a telephone booth - Texas (and the rest of America) was slowly changing. The tide of history of the conservative cause was with us. Back then there were no statewide Republicans in office in Texas. Today there are no Democrats. Nationwide, Republicans now control a majority of the state governorships (28 of 50) and have control of the majority of states legislatures.

Just as surely as the Republicans shot themselves in the foot in 1964 by nominating a far right wing conservative to run against a sitting president from Texas (LBJ), it seems the Democrats are going to oblige and nominate a far left wing liberal (shades of McGovern!) to run against another Texan serving as president. The economy seems to be coming along to help. Iraq will be better in 12 months than it is today. While the race will be close, I am sure you can handle it.

I remember sitting in your office back in Austin (actually, I think we had our feet up on the desk, but that may just be my memory getting old), talking about party and state politics. I was pushing for some policy or the other. You made the always excellent observation that if you did not get elected, you could not change the policy. Hence, your drive has always been to get your guys elected. The lesson of Goldwater is clear. Moving too far in any direction does not win the hearts of a majority of voters. And you got some very good conservatives elected in Texas and around the nation, no questions about that.

Which brings me to my point: Why in the name of Sam Houston are you pushing these crazy trade policies? I mean, from here in the cheap seats, it seems like you are risking the whole farm for a little feel-good for some political constituencies that by my count (and you taught us how to count votes) we don't need.

First, let's look at the steel tariffs. Never mind that it doesn't sit well with GW's free trade beliefs - it is just bad business. We have lost more jobs because of the steel tariffs than the few we have saved. This has been a blatant tax on consumers, who have paid for the tariffs in the form of higher costs for cars and other items made of steel. It has tarnished our reputation as the leading nation promoting free trade. All around, it has been the most embarrassing policy of the administration, and one for which I have no explanations to those who write me from around the world asking about why Bush supports tariffs and is against free trade?

Now admittedly, those readers from around the world do not vote in Pennsylvania, and it would be nice to have that state in the GOP column. (There's that count the vote thing again.)

The Japanese are threatening to raise tariffs against a whole host of American items, thus hurting jobs and exports. Norway is going to run up tariffs 30% on a whole host of products. The line is forming and getting longer. Of course, these are across the board, so the effect will be spread among a lot of small vote counts.

Europe: Call and Raise

But those dastardly French and German guys have learned a lesson in democracy that we taught them a little too well. There are a lot of states that GW either won or lost by a very small margin. It seems the Europeans are going to target their increased tariffs on items that are manufactured in these close swing vote states.

You want to play politics with trade? It seems the Europeans are going to answer: "call and raise." From looking over the list, it seems we have a lot more to lose than just a few electoral votes from Pennsylvania.

President Bush gave one of his most eloquent speeches in London this week. (Is Peggy Noonan moon-lighting once again in the White House? Some of those phrases had the powerful resonance of a Reagan speech.)

He talked about our heritage of John Locke and Adam Smith. "We believe in open societies ordered by moral conviction." They "turn their hearts and labor to building better lives..... By extending the reach of free trade, we foster prosperity and the habits of liberty."

Powerful stuff, and he delivered it well. A far cry from the early stump speeches I remember he gave when he ran for governor less than a decade ago. It brought the house down.

And then, almost on the same day, we had the sorry spectacle of the administration slapping tariffs on Chinese made bras. We go from "fostering prosperity and the habits of liberty" to nit-picking over who is making our ladies support garments. Is there some reason we are concerned about the source of the Victoria's Secret Miracle Bra?

And for that matter, whose jobs are we protecting? Textile jobs went from New England in the early parts of last century to the southeastern states and then to Central America and Mexico. Is it now American trade policy to protect Honduran jobs? I know there are a lot of illegal aliens from Honduras, but they don't get to vote in New Mexico or Iowa (maybe in California, but that's another story).

This is clearly a slap at China. If we were worried about the last remaining textile jobs, we would be putting on broad tariffs and not just on the Chinese. It is bad enough that there are a few congressmen and senators from the Southeast who want to see large selective tariffs on China. They can almost be excused for their idiocy because the need to pander to some voters in their states, although it is sad to see free trader Bob Dole's wife resort to such petty politics.

But why in the name of Stephen F. Austin are you letting GW get involved in such lunacy? I know you are the master of politics, and I would never presume to teach you anything about counting votes. You have forgotten more than the rest of us will ever know. Actually, you have probably not forgotten anything. You just know a lot more.

But let me offer a few thoughts on a subject in which I spend a few minutes of contemplation from time to time. Let's talk international economics.

First, you know, I know and everyone else knows that our international trade deficit is a problem and that the dollar is over-valued. That is why we talk a strong dollar policy but allow the dollar to drop. The major Federal Reserve study on this topic suggest the dollar will drop at least 20% and will probably overshoot. A 20-30% drop in the dollar has happened many times and is not an economic life-threatening event. That is, as long as it happens over time and the adjustments come slowly.

If it were to happen within too short a time frame, it would precipitate a serious reversal in the stock market (think the Crash of 1987 and then Secretary of the Treasury Baker's plan to push the dollar lower). And given our precarious current account balance, this could be a problem. Stephen Roach notes that "overseas portfolio inflows into dollar-based assets totalled only $4.2 billion in September 2003 -- far short of the $64 billion average inflows in the first eight months of the year and the $46 billion monthly bogey required to finance the US current account deficit at its prevailing rate."

A trade war, or even trade skirmishes, with our major trading partners would make investors all over the world very, very nervous. Maybe not today or tomorrow, but if this escalates, it could create serious problems next summer, right before the election. Not good timing.

Today, the leading economic indicators for world growth are pointing up and looking better than they have in a long time. Thanks in no small part to the Bush tax cuts, the US economy is moving ahead, and finally - finally! - jobs are beginning to slowly develop. It looks like we have postponed the hard work of working through the massive build-up in consumer and business debt to a later date.

But we are not out of the woods. The US stock markets are at historically high valuations. It would not take much to spook them. The boost we got from the second quarter mortgage refinancing binge is almost over, and that source of consumer boost looks a little weak right now. Going back to Stephen Roach:

"Moreover, with budget deficits on the rise and little hope of an offsetting surge in private saving, the daily foreign financing requirement could climb to $3 billion by the end of 2004. Such an increase in the offshore dollar overhang only reinforces expectations of a further currency correction. Eventually, there comes a point when foreign investors need to be compensated for taking such currency risk. That compensation invariably shows up in the form of higher real interest rates."

Karl, we do NOT need higher rates if we want to see the economy continue to expand. Now, Sir Alan is keeping his pledge to hold rates down, and we all expect him to do so through the election (apres moi, le deluge?), but even the Fed cannot fight the forces of a major international flight from the dollar.

Right now, it appears that central banks around the world have agreed to "play nice." They are holding our dollars, to the tune of about $1 trillion. But Karl, that is not even the amount of currencies that trade every day. Each and every day, the demand for dollars (and yen and euros and pounds and pesos) smoothes the wheels of commerce.

What keeps this going is the belief that the world is going to grow and that consumer demand in the US and throughout the world is going to increase. Anything which threatens that should be studiously avoided. US tariffs and a trade war threaten world growth more than any other single thing - far more than terrorism.

GW was eloquently right. Free societies "turn their hearts and labor to building better lives..... By extending the reach of free trade, we foster prosperity and the habits of liberty."

All over the world, lives are better because America has been a bastion and promoter of free trade. To critics, NAFTA was supposed to be a terrible thing for the US. Yes, we lost a few jobs here and there. But instead of a crisis, it has created massive amounts of net new jobs. Former President Clinton got it right. In that regard, he was bold and showed true leadership. It is embarrassing to now have a Republican president threatening tariffs over bras. Especially one who we both know in his heart believes in free trade, and is now an eloquent advocate for a greater and freer world flow of goods.

Karl, let me do something reckless and count the votes the way I think it is stacking up. Right now, every poll which puts GW up against a specific Democrat shows GW winning by reasonable margins. But you and I know that national polls mean little. It only counts when you break it down on the electoral college basis.

By that count, you are looking good. And if the Democratic establishment doesn't do something soon, you are going to get to face an unabashed liberal in Howard Dean, who is the darling of the majority of his party, but he is far from the mainstream in the US. He will get trounced in the general election in all those fly-over swing states where we only lost by small fractions. It won't be 1984, but GW should do quite well.

Yes, I know one of the rules of politics is to get elected. I know that one of the Democrat's big attacks next year will be about manufacturing jobs going overseas. But that has been going on for 80 years. There is nothing new about that. It happened just as much during Clinton's term. There is nothing we can do to stop that, short of a trade war, which would throw us into a Depression faster than you could say Smoot-Hawley.

Here's the counter to that attack: Let's create a better climate for some new jobs and see what the free market can do.

When you and I were thinking about which college we wanted to attend, we might have gone to the Census Bureau's category of jobs. We could peruse that list, thinking about what type of job we wanted and what school would be the best one to teach us that trade or profession.

Here's a fact. Over 25% of the jobs that US citizens have today were not on that list of job categories. The American free market entrepreneurial spirit created jobs that no one even dreamed of in 1967(except for a few sci-fi types who watched Star Trek). Internet? Cell phones? Personal computers? The Information Age? Bio-tech?

If you want to counter the isolationist and protectionist Howard Dean, let GW do it the way he does best - as an eloquent proponent of free trade. Promote a Technology Innovation Initiative. Re-train all those workers who make bras to compete in the Information Age, or better yet, the Nano-tech or Bio-tech Age. What about serious work on fusion or fuel cell conversion? Whatever happened to the idea of expanding Free Enterprise zones?

What about a 0% capital gains tax for companies that create new technologies and drugs, for ventures that develop brand new ways of doing things that spark whole new industries?

Someone at the White House is writing some great speeches. Let them loose on creating a new and powerful vision of America that makes us proud not just of our soldiers but of our businessmen and inventors. Have GW get us to stop wringing our hands about losing jobs to the Chinese and Indians and start competing for the creation of brand new worlds. Let GW talk about a new "Morning in America," but make it his personal vision.

That's a positive message that Dean will have difficulty in countering, except to his core group. Middle America longs for another Reagan. You know this: positive beats negative in America. Reagan made us feel good about ourselves, after decades of Viet Nam, inflation and Iran.

You are being given a gift in a Howard Dean candidacy. We both know that there are other candidates who could give our guy a real run for the money. The good news, from a GOP point of view, is that they are not likely to win the Democrat nomination.

It is your election to lose. And the one real way to lose it is to tank the stock market and thus the economy. And a trade war is just about the one sure way to do that.

It's time to declare victory on the steel front and go home. Pack up the bag and head for the exits, as gracefully as possible. You cannot argue that we are just following the WTO rules on textiles and then flout them on steel. Let the Bra War die a decent death this next year, as the time expires.

And then let GW follow his free trade instincts. You can win with that. You do not have to risk wrecking the economy of the free world to do it. Maybe we can get the other guys to blink. Maybe it all works out. But is it worth the risk? I think not.

Regan taught us that bad policy does not make good politics. And tariffs are very, very bad policy and even worse politics.

Karl, I appreciate you thinking about this and next time the huevos rancheros are on me!

Your friend,


It is time to close. I have to get back to my book. I made good progress this week, and am going to take the weekend off for a few nights in a log cabin with my bride in Salado, Texas, contemplating the future and thinking about the last chapter. The next, revised, latest plan says I will be through by Thanksgiving. You cannot imagine how ready I am to be finished.

Just to answer a question no, I do not think Karl readers my weekly letter, but maybe someone will walk down the hall and hand it to him. We can only hope.

God has graced our lives to give us so much of the things which are truly important. The love of family and friends, freedom to create our own destiny and to top it off, smoked turkey. It hardly gets any better.

Your grateful the book is almost done analyst,


John Mauldin

Author: John Mauldin

John Mauldin

John Mauldin

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