Economic Outlook Political expediency likely to temper Bush's free-trade instincts

The markets and business communities cheered US President George W. Bush staying in the White House for another four years.

Bush would work for more tax cuts, or at least keep the cuts he put in his first term. It really favours investors, with 15 per cent cut in tax on share dividends and another 15 per cent cut in tax on capital revenues.

Bush may also privatise social security, eagerly eyed by the market as a potential activity sector. But this may not be exactly the case.

What will the economic agenda of Bush be in his second term?

In principle, he is expected to push ahead with most of the policies he championed in his first term, though he might be hemmed in more than he would like. A very large budget deficit of more than $400 billion (Dh1.468 billion), equal to over 4 per cent of GDP, might prevent further rounds of large tax cuts.

But Bush will work hard to make the current tax cuts permanent, and some are due to expire in a few years. He will also pursue other tax-lowering initiatives, including tax-favoured healthcare savings accounts.

More dramatically, but less realistically, he may also seek to overhaul the entire tax code by introducing a long-cherished conservative goal: a flat tax. If it happens, a flat tax would almost certainly result in an overall reduction in the national tax take.

Any further tax reductions, even small ones, would be bad news for the stretched budget. But Bush has made it clear that he cares little about fiscal matters; he will only seriously turn his attention to budget reduction if the markets force him to, through higher bond yields or an unacceptable weakening of the dollar.

Until that happens, he will merely try to keep the deficit from getting worse. More spending for homeland security and for healthcare will make that difficult.

Tariffs

US economic policies abroad are also expected to be unchanged. On this score, Bush's record has been more balanced. An unhealthy series of protectionist measures, like the steel tariffs, farm subsidies and high duties on some Chinese imports were balanced by a series of free trade agreements and a strong effort in the last year to jump-start the global trade talks.

For Bush, as for most presidents, free trade instincts are tempered by political expediency: when an election is pending, or an industry needs coddling, liberal trade is a casualty.

It's widely expected that President Bush is sure to outrage free traders in the next four years, possibly by protecting US textile companies as an international apparel quota regime expires at year's end. But he will keep the wheels of freer trade mostly turning.

Admirably, he has been generally measured in his criticisms of China and India, respectively bogeyman for their currency and outsourcing policies.

The prospect of such an agenda is not that rosy for the GDP growth rate. Though some indicators came just after the election to cheer businesses, previous estimates of growth moderating in the last quarter of the year still hold.

On Friday, it was announced that the US economy added 337,000 jobs to non-farm payroll numbers between September and October.

This is the largest monthly gain since March, when 353,000 jobs were created, and is double the market consensus. In addition, job creation for August and September proved stronger than originally thought. Upward revisions to both months showed a collective gain of 337,000, compared with a previously estimated increase of 224,000.

Job creation

Both services and the goods-producing sector added jobs in the period, with the bulk of the gains in the goods-producing sector coming from construction, which added 65,000 jobs, boosted by cleanup and reconstruction activities in hurricane affected areas of the Southeast.

The upturn in job creation is good news for the economy, even if transient factors, such as recovery from the hurricane in Florida, played a large role.

The US economy will need a sustained period of job creation above 200,000 a month to make a serious dent in the number of unemployed. After pushing past that mark earlier this year, monthly job totals of late have fallen back. But the upward revisions for August and September also paint a somewhat better picture of the labour market.

Even so, job creation on the order of 150,000 a month is sufficient only to absorb new entrants into the labour force.

The sharp gain in non-farm payroll employment data was not reflected in the household data series, which is used to calculate the headline unemployment rate.

According to this series, employment rose by 298,000 compared with the previous month, but unemployment numbers also increased. Between September and October, unemployment rose by 69,000 following three consecutive months of declines.

The corresponding unemployment rate rose to 5.5 per cent from 5.4 per cent in September, owing to a sharp increase in the labour force.

However, this rate is consistent with the forecast of moderating growth in the final quarter of the year.

Markets and businesses will now wait to see what second-term Bush is going to do. The party will be over this week, the euphoria gone, and then it will be back to basics.

Dr Ahmad Mustafa is an Arab writer based in London