Anatomy of a Recovery

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In light of all this, it's not surprising that many people are in favor of legislation to restrict "free" trade. But I believe that President Reagan is right on this one; protectionism is not the answer. We'd only be treating a symptom, not the real problem, if we went the route of protectionism, which would surely lead to retaliation from our foreign competitors. We might do well to remember that the trade wars of the 1930s had more than a little to do with the economic stagnation of the Great Depression. The creation of trade barriers could also weaken the financial status of heavily indebted Third World nations, which rely on exports to pay off their loans. Then too, inexpensive foreign imports have forced American manufacturers to keep their prices competitive, helping us to keep a lid on the inflation rate. Tariffs or quotas would very likely boost prices for American consumers and cost thousands of jobs in other countries, thereby decreasing the demand for American exports.

The real problem is that we need to reduce the federal budget deficit, which caused the overvalued dollar and the resulting trade imbalance to begin with. But this may not be as painless as it might seem. Taking some of the wind out of our overvalued currency would cause other currencies to rise in value relative to ours. This could aggravate U.S. inflation by boosting import prices. Furthermore, there's yet another catch that may prevent us from significantly reducing the budget deficit . . . it's still financing our recovery. It seems we've borrowed ourselves into a corner.

The severity of the farm crisis stems partly from the reduced overseas sales of farm products caused by our overvalued dollar. These reduced foreign sales also caused crop prices in the Unit ed States to fall. Lower prices for farm goods decreased farmers' net incomes and left farmers with larger amounts of debt unable to make their payments. The decline in market prices also intensified the drop in farmland values caused by high interest rates. Essentially, high real interest rates have dealt farmers a double blow by causing a decline in the price of farm products and lowering the value of farmland. As more and more farmers found themselves on the brink of bankruptcy, many of them asked Washington for some help. The response was basically that there wouldn't be much help and that farmers were foolish for running up so much debt that they could no longer pay it off. (A saying comes to mind here, something about a pot calling a kettle black.)

In early 1985 many rural banks were obviously in trouble, and the farm crisis was fast becoming a major problem. Washington decided to take action. Congress forwarded an emergency bill to provide financially pressed farmers with low interest loans, which President Reagan promptly vetoed. The trouble with this emergency legislation was that it would have increased the deficit, the same deficit that created the problem to begin with. The Federal Reserve Board temporarily eased credit requirements for agricultural banks-a move that helped many farmers. Some states set up special programs, such as "Operation All-Out" in Wisconsin, to help farmers with debt problems. Whether or not these measures will sustain farmers until crop prices rise again remains to be seen.

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