Supply-side economics should not mean bailouts or protectionism

From a recent speech by the executive vice-president and chief economist of Bank of America at the Commonwealth Club of California. Supply-side economic policy should not be taken as synonymous with government bailout programs for weak companies and industries.

In a recent survey (which I helped conduct) active government bailout policies were identified in more than 20 industrial nations. The reasons for not permitting business organizations to close their doors are heavily political because of jobs and votes at stake.

The urgent need for stronger supply-side economic policies here has coincided with some instances of major business failures or near failures. The companies and industries in trouble typically have structural rather than cyclical problems, so no quick or easy turnaround can be expected. Accordingly, political pressures from local constituencies for financial assistance and protectionism are certain to mount. The new administration will have to make some bullet-biting decisions in this area in its first year in office.

In my judgment, the key issues should be (1) the extent to which government itself is responsible for a crisis in a business or industry and (2) the minimum US market share which must be retained by US producers for national security reasons or to minimize US vulnerability from excessive dependence upon foreign producers.

I still do not believe that the US is about to embark on a strong protectionist economic policy, but all concerned can no longer consider US free trade policies as safely automatic. Protectionism per sem is inflationary and must not be permitted to dominate US foreign economic policy in the future.

I've long held that America must rearm economically to reduce economic and political risks in tomorrow's unstable world. We must strive diligently to become the low-cost, quality producer of the key goods and services needed across our land and the world. When we cannot do so, we must forge agreements with others on such a diversified and decentralized basis as to minimize the danger from abroad of disruption to our economy. Just plain realism forces me to lend my support to vigorous US supply-side economic policies for the years ahead to avoid too many more bailout proposal s and to check more incipient protectionism.