Fed Chairman Alan Greenspan Issues A New Warning About Protectionism
Friday, December 02, 2005
|
|
|
|
SUSIE GHARIB: Federal Reserve Chairman Alan Greenspan stepped up his rhetoric on the U.S. budget deficit today, warning against a quote pernicious drift toward financial instability. As baby boomers retire, Greenspan says rising medical costs threaten to overwhelm the Federal budget. At his last G-7 meeting in London, Greenspan also spoke out about what he calls a disturbing drift toward protectionism. That`s been a concern of his since the mid-`80s, when he was a commentator for this program. Darren Gersh looks at how Greenspan`s views have evolved over the last two decades.
DARREN GERSH, NIGHTLY BUSINESS REPORT CORRESPONDENT: In the 1980s, Alan Greenspan was a well-respected economist with a deep concern about free markets, warning viewers of this program against what he saw as the evils of protectionism.
ALAN GREENSPAN, FEDERAL RESERVE CHAIRMAN: Protectionism, presumably the most politically attractive response, will only serve to lower our standards of living by shutting the door to foreign competition.
GERSH: Shortly before taking on the Fed chairmanship in 1987, Greenspan worried the Japanese would get tired of investing their trade surplus in American IOUs or worse, Congress would force the Japanese to dump their dollars.
GREENSPAN: If barriers to trade are being erected in the United States, foreigners would surely reason capital controls could not be far behind. Since such controls would dramatically lesson the value of externally held dollar securities, massive sales could easily drive the dollar`s exchange rate into a free fall.
GERSH: Fast forward 20 years and Alan Greenspan is an even more widely respected economist still worrying about protectionism.
GREENSPAN: Protectionism in all its guises, both domestic and international does not contribute to the welfare of American workers. At best, it is a short-term fix at a cost of lower standards of living for the nation as a whole.
GERSH: But much has changed over two decades. In 1986, the current account deficit, the broadest measure of America`s trade with the rest of the world, was just over 3 percent of GDP. This year, it is expected to come in at an unimaginable $750 billion, more than 6 percent of GDP. Fears about trade are perhaps not as strong as in the 1980s, but after falling through the booming `90s, pollsters say concern is rising again, though it`s wrong to label the American public`s concern about protecting jobs, simple protectionism.
ANDREW KOHUT, PRESIDENT, PEW RESEARCH CENTER: There are both protectionists and free trade. In other words, they want to see jobs protected and they`re concerned about the loss of the industrial base. But on the other hand, they also like the idea, the free flow of goods coming this way that benefits them when they`re consumers.
GERSH: Another change? China has replaced Japan as the focus of American trade anxiety. And the Chinese are also increasingly acting as our bankers, holding more than $700 billion in foreign reserves. Greenspan now argues the rise in the U.S. trade imbalance is a natural consequence of increased globalization. There`s more money around the world and investors around the world are more willing to put their money in a fast-growing American economy, keeping our interest rates low. Greenspan does not seem overly alarmed that foreigners now own half of the debt of the United States government.
GREENSPAN: That is part and parcel of the globalization process and I think the presumption that when it stops the whole world is going to collapse, I do not think is correct, unless we fall back on a degree of protectionism which has not existed in the world in the post-World War II period.
GERSH: Greenspan cautions Americans can`t keep borrowing massive amounts from abroad forever. Eventually we will have to rely more on our own savings. But he argues, the adjustment from a huge trade deficit can be gradual, providing protectionism does not restrict the market`s ability to adjust. Ted Truman was the Fed`s top international economist and an advisor to Greenspan.
TED TRUMAN, INSTITUTE FOR INTERNATIONAL ECONOMICS: The pattern in the past has been when people started talking about protectionism, it looked like it was likely the dollar would go down, right? That could set off at the current circumstances a large current account imbalance. That could set off or contribute to a run on the dollar and loss of confidence in U.S. policies.
GERSH: And that has been Alan Greenspan`s concern for 20 years. It`s also a problem he would not like to leave on his desk waiting for the next chairman. Darren Gersh, NIGHTLY BUSINESS REPORT, Washington.
