Playing Politics with Protectionism

Lord William Rees-Mogg - Tue 15 Apr, 2008

The Democratic nomination battle has seen the leading candidates talk up protectionism

The intensity of the Democratic nomination battle has seen the leading candidates talk up protectionism says Fleet Street Letter contributor, William Rees-Mogg...

Hillary Clinton is fighting a mean campaign. In American terms 'mean' denotes a quality which is indeed ungenerous and unsympathetic, but also formidable and impressive. If one had to choose an advocate in one of those American trials which can lead to a lifetime sentence, one would want to pick a lawyer who had some degree of meanness somewhere in his or her soul - not so mean as to repel the jury, but mean enough to put fear into expert witnesses under cross examination. Pretty well everyone in the Democratic Party is afraid of Senator Clinton, not least her husband. If she does win the nomination, it will be her mean quality, her total motivation and total ruthlessness, which will have won it for her.

The US presidential race is increasingly coming to depend on the state of the economy; both the development of the credit crunch and of the blue collar unemployment in the 'rust-belt' states are strong factors. Both of these issues play to Senator Clinton's strengths. In the primaries, she has only been able to win those big States where there is a significant blue collar vote, and manufacturing industry is laying people off. She has largely captured the blue collar vote which went to President Reagan in 1980 and again in 1984.

To start with, she has the advantage with the poor whites of running against a black candidate. Until quite recently no American Party could afford to nominate a black candidate because of the racial prejudice of the white electorate. That racial prejudice still exists, but pollsters, taking exit polls in primary elections, found a racial prejudice which runs at around 15% of the white community. One can do the sums, though they are not altogether reliable. In key standards, the white population is likely to be around 50% of the electorate, with minorities accounting for the other half; African-Americans and Hispanics are the largest minorities and may amount to about 20% each. If a black candidate brings most of the black voters to the polls, he can make up for the loss of a proportion of the white vote. However, he will still need every vote he can get, particularly in the manufacturing states.

This competition has forced both Hillary Clinton and Barack Obama to criticise American free trade policies, and particularly the North Atlantic Free Trade Area (NAFTA). Neither Senator Clinton nor Senator Obama seems by nature to be a protectionist. Bill Clinton's administration believed in freedom and indeed supported the creation of NAFTA. Hillary Clinton may want white, blue collar votes, but she is well aware of the damage done to American trade in the 1930s by protectionism which was in fact introduced by a Republican administration in the early 1930s, under President Hoover, against the will of Hoover's Secretary of the Treasury, Andrew Mellon. Nevertheless, Senator Clinton has to get out her core vote in the primaries, and a part of the core vote wants to have its job protected, and fears that they may be moved offshore or merely down to Mexico. Senator Obama is probably an equally reluctant protectionist. He has already been embarrassed by an aide who told the Canadians not to worry about his protectionist speeches because they were only meant for domestic electoral consumption and would not have any effect in the event of his actually becoming President. The aide had to resign, but I suspect that both Senators would be reluctant to introduce new protectionist measures unless they were forced to do so by a major recession.

The threat of a recession does not come from the problems of manufacturing, but from Wall Street, structured finance and the $11trn owed in the US mortgage market. The Federal Reserve has financed the takeover of Bear Stearns by JP Morgan. That is unlikely to be the end of the panic, but it is a sign of the scale of the panic. Bear Stearns has been sold for $10 a share, a knockdown price. That in itself will cause more panic, since Bear Stearns was the fifth largest US investment bank. The only comfort is that Bear Stearns did not have - and does not have - a big tail of retail customers who would have to be looked after politically, financially and indeed emotionally.

Nevertheless, the normal lending market has shut down, in New York, in London and in most other centres. Perfectly reputable and solvent banks have cancelled mortgage deals at as little as half an hour's notice. The movement away from risk has not been a prudent response to a change in market conditions, in which banks still lend, but want better security and better rates on their money. This is a slamming on of the brakes of vast trucks on the financial motorway followed by entirely predictable skids into the central barrier and across the road. In the early years of the 1929-33 Crash, America did try to defend the home market. Who can tell whether that would happen again, if the 2007-8 panic is not brought under control?

Regards,
William Rees-Mogg
For the Daily Reckoning