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Whip Inflation, Fight Protectionism Now!


If the Governors of the Federal Reserve are to be believed, the greatest threat to the American economy today is inflation. But as with many economic slow-downs in the past, the greater culprit may indeed be protectionism – both in trade and immigration.

To combat inflation, the Fed really only has one option – to raise interest rates, increasing the “cost” of money and slowing spending. A rate hike would also strengthen the dollar and thereby make imports cheaper. It would also cool the economy and ease inflationary pressures like full employment and economic expansion. But is that really what we want?

It seems that if there were another option to fighting inflation, putting the brakes on the American economy would not be the preferable route. Luckily, there is something the government can do to fight inflation that won’t hurt the American economy – fight protectionism, not growth.

This week, the Bush Administration announced a trade kerfuffle with China. It seems that the Chinese government is paying businesses to export consumer electronics components to the United States, in a practice called price-dumping. Our response? Slap a tariff on them!

We did the same a year ago when the Chinese Government was found subsidizing the export of polyester pants to American markets.

Let me get this straight. The Chinese Government wants to spend its money in order to make things cheaper for the American consumer. And we’re opposed to that? Why? Rather than raising interest rates as a way to make the dollar stronger, let’s instead encourage the Chinese government to make consumer products cheaper here at home!

The same ill logic is at play around the globe. Using sugar, Brazil makes enough ethanol to make the country practically energy independent. However, because we want to protect the corn industry in Iowa, America has slapped a huge tariff on Brazilian ethanol. Even though the Brazilian-produced product is more environmentally-friendly than our own corn-based ethanol.

If we want to fight global warming and move away from fossil fuels, shouldn’t we stop protecting Iowa farm-owners and start thinking about the fastest and cheapest ways to combat global warming in a non-inflationary manner?

When it comes to another commodity – labor – our policies are just as inflationary. The labor market is essentially running at capacity. We can’t create workers the same way we can create widgets, however. But we can recruit help. Rather than address our country’s labor shortage by passing immigration reforms, making it easier for those who want to work to do so legally, Congress – the Congress led by Democrats – and the Bush Administration pursued an enforcement-first strategy. The year of wrangling on this issue – not mention the misguided enforcement attempts – has had a chilling effect on the hiring of undocumented workers.

As a result, places like In-and-Out, the fast food restaurant, have had to raise wages. Other businesses – from my Laemmle art house movie theater to the neighborhood taco stand – are screaming out that they are “Now Hiring!” If increasing wages push prices higher, no one’s standard of living improves. But the tax man gets a raise – from higher tax receipts. And higher taxes have the same effect: They stifle economic growth.

That’s why it is important to grow our base of labor. The only way to do that in less than a couple decades – about the amount of time left before a growing number of American works hit retirement and leave the workforce – is to accommodate those whose lives would improve by coming to work in even the lowest-paying jobs in our country.

Whether we’re talking about actual commodities like ethanol or soft-commodities like labor, government’s instinct to protect Americans will, by triggering inflation and higher interest rates, hurt us all in the end.

Share  Posted by Scott Olin Schmidt at 3:01 PM | Permalink

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