In his April 2 testimony before the Congressional Joint Economic
Committee, Federal Reserve Chairman Ben Bernanke said that "it now
appears likely that real gross domestic product will not grow much,
if at all, over the first half of 2008 and could even contract
slightly." Adding to this guarded assessment of the
U.S. economy, he cautioned that a recession is "a technical term"
determined by the Business Cycle Dating Committee of the National
Bureau of Economic Research (NBER), which has not yet declared a
Indeed, 2008 began with intense speculation and predictions that
the U.S. economy either is in or would slip into a deep recession.
Worse, the ongoing economic pessimism has been further fueled by
the exaggeratedly negative news and rhetoric that is typical in an
In a time of economic uncertainty, responsible policymakers
should be realistic rather than pessimistic about the future.
Especially in this presidential election year, the challenge to
Washington is not to get trapped in attempts at quick fixes of
short-term problems at the risk of eroding the economic freedom
that has been the backbone of America's prosperity. Congress must
take a long-term view focused on strengthening economic
fundamentals. Pessimism is not an excuse for burdensome regulation
What Is the State of the U.S.
America's $13 trillion economy is certainly going through
challenging times. After expanding for "the sixth consecutive year
in 2007," economic activities recently have slowed
due to major corrections in housing and financial markets. This is
not pleasant, but it should be properly viewed as a normal and
reasonable correction in the aftermath of an unprecedented economic
In other words, the U.S. economy is going through the slowing
part of a business cycle. This cycle is a key characteristic of our
free-market system--the economic ebb and flow that defines dynamic
entrepreneurship--as the growth rate fluctuates above and below its
long-term trend. The cycle includes periods of relatively rapid
growth of output and periods of relative stagnation or decline.
True, an economic slowdown is not something anyone would welcome,
but no country has yet perfected the art of perpetually high
economic growth. Right now, the economy seems to be regrouping
rather than advancing.
The generally accepted authority for determining when U.S.
recessions begin and end is the Business Cycle Dating Committee of
the NBER, a nonprofit group based in Cambridge, Massachusetts, that
has 600 academic economists. Interestingly, periods of recession seem to
be getting shorter and more moderate in modern economic times.
According to the NBER, which has not described the current economic
situation as a recession, recessions have become shorter and less
frequent. Since 1945, recessions have averaged just 10 months. The
last two recessions were among the shortest and mildest on record;
both the 1990-1991 and the 2001 recessions lasted just eight
Throughout modern economic history, the multifaceted and dynamic
U.S. economy has been on a path of continual change and adaptation
owing to endogenous as well as exogenous factors, but trending
always toward a higher and better state. Economist Joseph
Schumpeter, the father of business cycles theory and "creative
destruction," once elaborated, "It is by no means farfetched or
paradoxical to say that 'progress' unstabilizes the economic world,
or that it is by virtue of its mechanism a cyclical
Still, no matter how "creative" the process is, the current
slowdown is unpleasant and destabilizing for some economic
activities. At the same time, however, the current slowdown is
helping the market mechanism work to revalue inflated assets in the
housing and financial markets on the basis of real economic
Pessimism Driving Protectionism: A
Perilous Recipe for Our Economy
A key driver of our economic prosperity is a high level of
flexibility and resilience founded on economic freedom. This has
been continuously protected by keeping levels of regulation and
government intervention low while emphasizing great transparency
and strongly protected property rights.
Yet the truth is that economic freedom, like other freedoms, is
always vulnerable. History tells us that this is never more so than
when politicians are running for office and espouse populist
rhetoric, playing to people's fears and calling for more government
interventions that promise a quick fix to whatever is deemed faulty
in a complex economy.
In 2008, voters deserve an honest debate about economic policies
such as free trade, not populist bromides. True, most voters are
somewhat uneasy about the current economic slowdown. However, it
may be a gross mistake to assume that they are comforted by
alarmism and calls for more government action. According to a poll
by Democracy Corps, more than 55 percent of 1,017 respondents
agreed that "government makes it harder for people to get ahead in
life." The same study reveals that 54 percent of
respondents perceived government as a "hindrance to economic
growth." Congress should not misjudge that, due to
the current anxieties over economic slowdown, Americans would
automatically support congressional actions for more direct
More important, Congress should not use economic pessimism as an
excuse for more protectionism. Some politicians argue that the
benefits of today's free trade system go unfairly and primarily to
low-wage countries, which take jobs away from Americans. Such
arguments are not supported by the facts. President Ronald Reagan
once eloquently reminded Americans of this truth:
A creative, competitive America is the answer to a changing
world, not trade wars that would close doors, create greater
barriers, and destroy millions of jobs. We should always remember:
Protectionism is destructionism.
America's economy, over the past few decades, has proved that
openness coupled with flexibility makes the economic pie much
bigger and that the benefits can be widely shared. Over the past 10
years, open trade has boosted job growth by more than 13 percent
and has helped to raise U.S. GDP by nearly 40 percent.
As Charts 1 and 2 demonstrate, trade has been the backbone of
the U.S. economy, contributing almost 30 percent of GDP in 2007.
The benefits go not only to workers and entrepreneurs in export
industries, but also to consumers of imports. Free trade has
delivered a greater choice of goods for people in all 50
states--everything from food and furniture to computers and
cars--at lower prices. America is now the top exporter of services,
consistently recording service trade surpluses since 1970. U.S.
service industries account for more than 75 percent of U.S.
private-sector GDP, creating 80.2 percent of U.S. private-sector
employment. Reflecting America's strength and
flexibility, the service trade surplus has increased exponentially
in recent decades and reached more than $100 billion in 2007, as
Chart 2 indicates.
Unfortunately, this powerful force of dynamic economic expansion
has been under growingly exaggerated doubts, suspected as being the
root cause of every economic ill in recent years. But, according to
a recent study conducted by the President's Council of Economic
Advisers, no more than 3 percent of all job disruptions may stem
from international trade, while 97 percent of job displacement is
due to other factors such as productivity increases, new
technologies, and innovation.
Despite the fact that international trade, reinforced by the
free trade agreements that have been implemented since 2001, has
been one of the biggest drivers of economic growth,
Congress has all but shut down the trade agenda in recent months.
But protectionist approaches or isolationism have been tried
throughout history and have failed to create new and better jobs of
the future. Protectionism might shelter old and outdated jobs, but
it will not provide effective protection for those negatively
affected by the business cycle or gains in productivity, or for
those few whose jobs are lost to trade.
Without overreacting to the current economic slowdown, putting
forward a long-term policy plan that strengthens economic
fundamentals would calm fears among entrepreneurs and restore
confidence. The temptation to fuel economic pessimism during an
election year should be resisted, and the false virtues of
protectionism should be rebuffed. As the economy goes through the
downside of the current business cycle, Congress should remember
that protectionism never protects. It is economic freedom that will
promote new jobs and greater prosperity.
Anthony B. Kim is a Policy
Analyst in the Center for International Trade and Economics at The
NBER defines a recession as "a significant decline in economic
activity spread across the economy, lasting more than a few
months," and usually visible in measures such as gross domestic
product, employment, incomes, and industrial production. For more
information, see The NBER's Recession Dating Procedure, at