US economic policy advanced on two legislative fronts last week, the less significant of the two being enactment of a tough corporate-fraud law. More important to economic health-and therefore financial and energy markets-is agreement on renewal of trade-promotion authority for the president.
The legislative crackdown on corporate fraud is necessary and welcome. Markets can't work if investors can't believe financial reports. Company executives who mislead stockholders for personal gain sell out free-market capitalism. They deserve criminal punishment. They'll get it now that Congress has passed and President George W. Bush has signed the corporate-fraud law, whatever its imperfections. And the accounting industry will get the regulatory oversight it regrettably but evidently needs.
Other concern
Misbehavior by executives and accountants cannot have been the only concern of investors inclined lately to dump company shares, however. As was pointed out here last week, recent economic conditions-which have been remarkably buoyant-should have eased the panic to some extent (OGJ, July 29, 2002, p. 17). The markets, which always look forward, must be worried about something else. They indeed have a good reason to worry about future economic dynamism: deliberate setbacks to global trade by the US. The record is alarming.
In the past decade, the US has frequently subordinated trade to expediency by imposing economic sanctions on countries with whose governments it has chronic quarrels. And this year, with an important congressional election looming, the Bush administration and Congress have been unapologetically protectionist.
In May, Bush signed a farm bill that includes an astonishing $190 billion in federal payments to farmers over 10 years. The move spoiled US efforts to coax European governments away from their traditional protectionism in agriculture.
In March, Bush approved new steel tariffs as high as 30% to help himself and fellow Republicans in Ohio, West Virginia, and Pennsylvania. Since then, Japan and the European Union have been threatening to impose retaliatory quotas. That they haven't yet acted reflects warranted concern that the cycle will escalate into an all-out trade war.
Now a House-Senate conference committee is reconciling energy legislation containing two major protectionist mistakes. One of them would subsidize with price supports a proposed pipeline for North Slope natural gas transiting Alaska and preempt a competing, all-Canadian route. The other would mandate that gasoline contain specified amounts of agriculturally produced ethanol, which is heavily subsidized and protected against foreign competition.
For a government supposedly on the vanguard of free-trade advocacy, this behavior won't be seen elsewhere as persuasive. Some especially peeved governments, in moments of relaxed diplomacy, might even call it hypocritical. The question for equity markets, not to mention future economic health, is more fundamental: Is the US committed to free trade or not?
The answer, of course, is yes-except in an election year, when consistency of commitment applies only to political outcomes. Over time, the US will favor free trade and act accordingly more often than not. It will do so because its citizens overwhelmingly prefer prosperity to pointless sacrifice. They generally understand that prosperity results from economic vigor. And they are developing a healthy appreciation for the contribution trade makes to that national priority.
Yet lapses happen-mostly in election years. In view of this year's whoppers, any official act taken in support of trade is especially encouraging. Two such acts have appeared recently.
Encouraging acts
One of them is the Bush administration's notice to the conference committee reconciling energy legislation that it opposes federal favor- itism for the gas pipeline across Alaska. The other is agreement to restore the president's trade-promotion authority, which expired in 1994 and has needed congressional renewal ever since. The measure enables the president to present Congress trade agreements negotiated with other governments for acceptance or rejection, without change.
Neither measure alone represents a giant step forward on global trade. Each of them, however, indicates that trade remains a US concern. That should give some assurance to the country's understandably dubious equity markets and trading partners.
Greater comfort comes from the arrival of August. Congress is in recess for the month. There probably won't be enough time left between when it reconvenes and the election in November for political desperation to do any more damage.
