Southern US states should improve workers' skills to compete in the global economy rather than look to trade restrictions for protection, three Federal Reserve (Fed) bank presidents said.
Barriers to commerce can backfire and hurt the economy as overseas partners retaliate by imposing their own restrictions against US-made goods, the Fed chiefs from Dallas, St. Louis and Atlanta told a meeting of the Southern Governors' Association in Biloxi, Mississippi, yesterday. The Fed presidents didn't discuss the current economic outlook or monetary policy.
"The answer is not protectionism," Richard Fisher of the Federal Reserve Bank of Dallas said in his speech. "Rather than labor fruitlessly to protect your constituents from foreign competition, you and your legislatures must prepare them for it."
Fed officials have been touting the benefits of free trade as members of Congress call for restrictions on imports from China, accusing the world's fastest-growing major economy of keeping its currency artificially cheap to benefit exporters.
"Some US legislative proposals seem to be based on a presumption that trade retaliation is an effective strategy; however, economic history suggests otherwise," St. Louis Fed president William Poole said yesterday.
Improving workers' skills can also help lure overseas capital to the US, said Atlanta Fed chief Dennis Lockhart.
"Attracting investment, foreign or domestic, depends crucially on having a workforce with the right blend of skills," he said.
Biloxi was devastated by Hurricane Katrina, which struck the Gulf Coast of the US on Aug. 29, 2005. The storm swamped low-lying areas, including the city of New Orleans, killed 1,330 people and caused an estimated US$96 billion in damage in Mississippi and Louisiana.
"The people in Biloxi have done a tremendous job in bouncing back," Lockhart said in his speech. "While there's still a lot more work to be done, this region's ongoing recovery serves as a reminder of the resilience of the broader American economy."
Responding to questions from governors led by Mississippi's Haley Barbour, the Fed officials said that job training can help workers thrive after they lose employment when low-skilled manufacturing plants close.
"Some people will sit in relatively low-value employment until they get a kick from the behind that forces them [to make a change]," Poole said. "And they will be happier having gone through the transition," he said, telling the governors of his own experience losing a job when he failed to get tenure as a university professor.
"How do we deal with the pain of job loss?" Poole said. "To some extent we have to understand that pain is unavoidable. I had to go through it and I came out the other side OK."
The Fed bank presidents didn't refer to recent actions by the central bank to stem a credit crunch caused by falling values of securities backed by subprime mortgages.
On Aug. 17, the Fed cut the discount rate on direct loans to banks in an effort to increase the availability of capital as investors shunned assets linked to subprime mortgages. Policy makers pledged "to act as needed" to ease the impact of market turbulence on the economy.