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October 1971
liberalized free trade policy. Average
Japanese tariff quotas on imports this
year are about 11 percent, only 3 per–
cent above the U.
S.
rate. Japan was also
in the process of removing dozens of
quotas, while allowing American busi–
nessmen more investment opportunüies
in Japanese companies.
In the last eight years, Japan has re–
moved 71 import quotas, the Common
Market has removed 11, but the U.
S.
has
added
60 quotas. Quotas cover 17
percent of American imports, and only
12 percent of Japanese.
Japan has been protectionist, and
admits it. But the nation was moving in
the right direction when the U.
S.
socked Japan's exports with the 10% im–
port "tax." Like Europe, Japan cannot
effectively retaliate at this time, since
she depends too much on tbe U.
S.
for
raw materials in Alaska and the Pacific
Coast, and relies on America to buy
increasing billions worth of her
products.
But the Japanese may be able to
establish markets for their goods in
Europe and developing Asia, and can
"mine" their raw materials from Asia
and Australia. Then Japan's position
for retaliation, or "trade war," will
be
much improved.
On top of these economic develop–
ments, the strain between the U.
S.
and
Japan on foreign policy produces a pos–
sible scenario of increasing anti-Ameri–
canism, "Asia for the Asians" and
removal of the U.
S.
nuclear umbrella in
favor of Japan's own nuclear arsenal.
Bear in mind that the nuclear non–
proliferation treaty, affecting Japan, is
not yet ratified, and Japan's nuclear
capability is well documented.
These developments may all trace
their origin back to the sick U.
S.
dol–
lar. Meanwhile, what is the outlook for
the sagging U. S. economy ?
Future of the U. S. Economy
Dollar devaluation abroad aod the
wage-price freeze put America at the
economic crossroads. Other nations have
devalued, put their houses in order, and
prospered, while still others have deval–
ued, only to devalue again and again as
the reflection of a chronically sick
economy.
( Continued on next page)
The Economics of
the"Dollar Crisis"
O
N
AUGUST 15, President Nixon
acted boldly to solve not just
one
economic crisis, but
three
con–
current crises. The three had pre–
viously occurred separately, and had
been treated separately, but by 1971
they formed one huge combined crisis
- the worst U.
S.
economic condition
since the Great Depression.
"The time has come for a New
Economic Policy," the President said.
" lts targets are unemployment, infla–
tion, and international speculation."
Never before had all tbree beeo so
serious at the
same
time (although
each had been worse separately) .
The two-headed " inflationary reces–
sion,"
oc
"stagflation" was joined by
international
crisis, iocluding balance
of payments deficits, speculation and
loss of faitb in the dollar.
Here is a quick rundown of con–
ditions in the tbree broad economic
arenas which led to the President's
August 15 announcements.
l. The Business Front
By mid-1971, unemployment had
hovered arouod 6 percent for eight
long months, defying the predictioo
of economists and government
spokesmen that it
should
come
down, according to past precedents.
By August 1971, this represented
5,300,000 unemployed Americans,
double the number of jobless at the
beginning of 1970.
Unemployment was also severe in
Great Britain and Canada, reaching
30-year highs in both countries, as
well as in America. The
percentage
of unemployment in all 3 countries
had not been topped for
ten
years.
Industrial production
in
America
was dedining at a 10 percent annual
cate in July, just when the U.
S.
should
have been coming out of a
recession. The Dow Jones Industrial
Average had skidded 100 points in 3
months. Business investrnent was
still declining, a trend unchanged for
two full years. The cate of savings by
consumers was highest in recent
history.
For sorne seemingly unexplainable
reason, the American economy ( and
many European economies with it)
appeared unable to recover at, or
near, the expected rate.
To speed up the recovery in busi–
ness, the President asked Congress to
increase the investment tax credit of
businesses (the amount of money
they can immediately take from their
income tax:es when iovesting in new
equipment), remove the excise tax:
( about $200 per car) on automo–
biles, erect a 10% trade barrier
against more competitive foreign
goods, subsidize American exports
( although this was not announced in
President Nixon's speech), and put
more money in tbe coosumer's hand
witb larger income tax: benefits to
begin January 1, 1972.
11. The lnflation Front
The rise in prices also "should
have" stopped or slowed long ago,
according to economic theory and
past experience. But, since America
never experienced simultaneous crises
so severely, there was actually no
precedent for predicting results.
Therefore, at mid-1971, prices were
in the midst of a new upswing, after
slowing down in early 1971.
Between March and June, the cost–
of-living (as measured by the Con–
sumer Price Index) increased
at
a 6
percent annual cate again (this 6
percent cate prevailed during 1969
and 1970, but had slowed to 2y
2
per–
cent during the first three months of
1971).
Meanwhile, Britain's inflation was
even worse, continuing ata 10% an–
nual pace. Most other European
nations and Canada had smaller cates
of price increase, from 2 to 4 per–
cent annually, but those increases
were still nettlesome
to
both busi–
nessman and consumer.
Fueling this renewed inflation
were recent wage contracts of a 42%
increase (over 3Yz years) for railway
workers and a 30% (over 3 years)
iocrease for steel workers. These
be–
carne the pattern for the many other
smaller industry wage settlemeots.
According
to
"cost push" inflation
theories, these wage increases tend to
"push" the inflation cate up to the
rate of wage increases (this amount
is about 1 percent a month) . Increased