Trans Infastr Key to Competitiveness

A2 Resilient

No resiliency – its try or die now

Roughly three years since the onset of the financial crisis, the U.S. economy increasingly looks vulnerable to falling back into recession. The United States is flirting with "stall speed," an anemic rate of growth that, if it persists, can lead to collapses in spending, consumer confidence, credit, and other crucial engines of growth. Call it a "double dip" or the Great Recession, Round II: Whatever the term, we're talking about a negative feedback loop that would be devilishly hard to break. If Barack Obama wants a realistic shot at a second term, he'll need to act quickly and decisively to prevent this scenario. Near double-digit unemployment is the root of the problem. Without job creation there's a lack of consumer spending, which represents 40 percent of domestic GDP. To date, the U.S. government has responded creatively and massively to the near collapse of the financial system, using a litany of measures, from the bank bailout to stimulus spending to low interest rates. Together, these policies prevented a reprise of the Great Depression. But they also created fiscal and political dilemmas that limit the usefulness of traditional monetary and fiscal tools that policymakers can turn to in a pinch. With interest rates near zero percent already, the Federal Reserve has few bullets left in its holster to boost growth or fend off another slump. This lack of available good options was patently on display in August when Fed Chairman Ben Bernanke spoke with a tinge of resignation about new "quantitative easing" interventions in the mortgage and bond markets -- a highly technical suggestion that, until the recent crisis, amounted to heresy among Fed policymakers. It certainly hasn't helped that the U.S. federal deficit has reached heights that make additional stimulus spending, of the kind that helped kindle the mini-recovery of early 2010, politically impossible.

No resiliency – now is different

Gary Clyde Hufbauer et al (Reginald Jones Senior Fellow at the Peterson Institute for International Economics in 1998, Previously he was the Marcus Wallenberg Professor of International Financial Diplomacy at Georgetown University, and served in the U.S. Treasury Department from 1974 to1980), Jacob Funk Kirkegaard (Fellow at the Peterson Institute for International Economics), Woan Foong Wong (research analyst at the Peterson Institute) and Jared Woollacott March 2010 “US Protectionist Impulses in the Wake of the Great Recession” http://www.iie.com/publications/papers/hufbauer201003.pdf

The U.S. unemployment rate more than doubled between the onset of the Great Recession in December 2007 and December 2009, and is now hovering just below 10 percent (figure 1). 1 Considering that this discouraging figure likely understates broader deterioration in the U.S. labor market, 2 the absence of sustained Congressional pressure for large‐scale protectionist measures, beyond “Buy American” provisions and several smaller companions (all examined in this report), is in some ways surprising. 3 At least part of the explanation for the restrained political response is the simultaneous large improvement in the U.S. trade balance during 2008 and early 2009. Figure 1 illustrates how the total U.S. deficit in goods and services trade was nearly cut in half during this period, creating a political obstacle to kneejerk protectionism. As we will elaborate in section IV, during recessions an improving external balance (from imports falling faster than exports) often acts an “automatic international economic stabilizer,” which temporarily fulfills an equivalent economic function to a Keynesian government stimulus package. The “external sector” of the U.S. economy during the early quarters of the Great Recession provided an “automatic offset” to sliding U.S. economic activity. This probably caused policymakers to think twice about succumbing to short‐term protectionist instincts However, figure 1 also shows how the improvement in the U.S. trade balance has been only temporary and indeed began to reverse as the U.S. economy exited the Great Recession during the second half of 2009. Crucial for the political threat of protectionism, economic forecasts indicate that the U.S. unemployment rate will probably remain at very high levels over the medium term, despite President Obama’s emphasis on “jobs, jobs, jobs” in his State of the Union Address delivered on January 27 th , 2010. 4 A time lag of at least 12 to 18 months probably separates the point at which the U.S. trade balance showed maximum improvement (spring 2009) and the expected drop in measured unemployment well below 10 percent (fall 2010). Absent the “feel good” factor of an improving trade balance, but facing continuing high unemployment levels, protectionist sentiment in the U.S. Congress may increase in the coming months, especially as the November 2010 midterm election draws near. This is particularly so, as current economic forecasts suggest a more robust U.S. economic recovery in the coming years, relative to other industrial trading partners (table 1). A large and growing deficit in the U.S. external balances will likely persist for some time, while the external balances of other major trading partners could hold steady or even improve. If the United States thus returns to its “pre‐crisis role as the world’s importer/consumer of last resort,” protectionist impulses in the U.S. Congress are destined to escalate. 5 Fresh U.S. protectionist initiatives, at a time when the U.S. economy is growing at a decent pace, will likely invite in‐kind retaliation by America’s trading partners, despite the relatively muted reaction to the original “Buy American” provisions in early 2009 and other protectionist measures implemented since then. No longer facing a newly‐elected U.S. president, who entered office with considerable global appeal in the midst of an unprecedented economic crisis, foreign leaders are unlikely to give the U.S. an easy pass on future new instances of U.S. protectionism

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