Bush actions skewered stock market
By David R. Breuhan / Special to The Detroit News
Rarely has a president made the same mistake twice. But the Bush administration has managed to hurt the stock market, once on its own and a second time with the help of the Republican-led Congress. It may explain why George W. Bush has a needlessly more difficult re-election battle.
The stock market is often considered an indicator of future economic activity. If the stock market rises, investors believe that corporate earnings will increase. If it stagnates or decreases, it indicates that investors believe future earnings will be lower.
Following the September 11 attacks, the markets slowly but surely improved. From a bottom of 8,235 on Sept. 21, 2001, the Dow Jones industrial average eventually reached a peak of 10,635 on March 19, 2002. It surpassed where the market had been on Sept. 11.
But then the Bush administration made moves that hurt the economy. It allowed 30 percent increases in steel tariffs to take effect. It created a plan to increase farm subsidies 80 percent over 10 years. And it slapped a 27 percent tariff increase on the lumber industry, which raised prices and was bound to hurt consumers.
The stock market responded by falling. It resulted in a miserable year for the markets and share holders in 2002.
The Dow Jones average did not recross 10,635 until after Dec. 4, 2003, when the steel tariffs were fully repealed.
The lesson seems clear: Bush’s tax cuts would have helped the economy more if they had not been temporarily negated by the trade tax increases. The Bush administration may not have needed to lobby for a second round of tax cuts if it had not raised tariffs and agricultural subsidies.
Since Feb. 11, when the Dow Jones peaked at 10,737, the markets have declined again. There are many contributing factors. Investors are sensing inflation. The lower dollar, high fuel and commodity prices and an uncertain security situation in key areas like Iraq are making investors worried and hurting earnings.
But analysts are overlooking how much poor trade relations with our neighbors and a recently imposed tariff on selected American exports from the European Community may be hurting the economy.
European nations have imposed $4.2 billion in tariffs against selected U.S. companies because of an income export tax break that the American government gives to its companies. They can do so because the World Trade Organization has ruled this tax break is illegal.
This trade retaliation hurts the selected American companies and makes investors nervous about whether the economy and jobs will continue to grow. It may partially explain why Michigan and some other states continue to have problems making a dent in their relatively high unemployment rates.
There is a direct relationship between the stock market’s peaks and American trade policy. The Bush administration and Federal Reserve have gone out of their way to try to stimulate the economy. But if trading lanes were allowed to function efficiently, many of these measures might be unnecessary.
After all, a lack of trade barriers and lower tariffs give consumers more choices, foster competition, helps reduce prices and allows people to use the savings to create jobs or invest. It’s a net winner for the economy.
Congress needs to rapidly remove the illegal export tax break. Further delay may continue to hurt the stock market and economy, just as the steel tariff increase did.
David R. Breuhan is a portfolio manager at the investment firm of Gregory J. Schwartz & Co. in Bloomfield Hills and is an assistant adjunct professor at Walsh College in Troy. Send letters to The News at 615 W. Lafayette, Detroit, MI 48226, (313) 222-6417 or letters@detnews.com
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