Increased Political Risk

A comparison of the interventionist Hoover regime to the Bush-Obama regime does not engender confidence, a topic I hope to expand upon in a future post. That said, two major areas where government action imposed massive economic costs in the 1930s but not today was the effort to maintain wages at a high level—in total defiance of the laws of supply and demand and with massive unemployment being the result—and the Smoot-Hawley Tariff.

As of yet, there is no sign of a similar effort to maintain wages, although we did see Barry Diller raise the argument. Perhaps this could gain momentum, especially with a Democrat Congress and Democrat President, but I expect intervention to come in another form, such as increased wealth transfers.

What I did worry about and do expect are anti-trade policies. Last week, we read that Timothy Geithner and the Obama administration consider China a currency manipulator. Last night on Bloomberg, Peter Morici gave this interview regarding China and its currency policy.

I don't fully agree with his economics (the part about the U.S. printing to buy Treasuries is factually correct though not at all desireable), but what struck me was the tone and also the political viability of this argument. Americans will only become more angry as unemployment climbs close to or into the double digits. The Democrat Congress already put pressure on Bush to officially declare China a currency manipulator, Obama used protectionist rhetoric during the campaign, and now his administration has unofficially called China a currency manipulator. Perhaps as early as this summer, the GOP will be hammering Obama and the Democrats on the economy and they could be in a position to retake the House in 2010. Framing the GOP as the defenders of free trade and Chinese Communists (not communists) who steal American jobs would be a good issue for Democrats to deflect attention from the unmitigated failure of all their economic policies and placate their base of union voters and angry anti-war voters, who will be dissatisfied with Obama's foreign policy.

Events are progressing along a path that leads to confrontation with China.

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