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Jewish World Review Dec. 3, 1999 /24 Kislev 5760

Ben Wattenberg

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Herb Stein and Seattle -- SPEAKING OF THE ANTI-TRADE RIOT in Seattle, and as expected by those who knew him, economist Herbert Stein keeps influencing us after passing away in September. Stein was a colleague of mine at the American Enterprise Institute, and it was a privilege to know him, learn from him and even occasionally disagree with him.

He was a former Chairman of the Council of Economic Advisers, and was one of a kind: a wise economist who could write interestingly and gracefully, with both humor and bite. He was a Republican, but during the 1980s he took the supply-side theories of Reaganomics to the woodshed, often in the Wall Street Journal, a supply-side haven. His work was based on sound economic principles, and typically rooted in data, presented fairly, noting when the data were weak, when there were legitimate differences of opinions, yet prepared to unmask views that were based on hokum statistics.

In 1992, Stein and his AEI colleague and friend Murray Foss published "The Illustrated Guide to the American Economy," a slender volume both elemental and sophisticated, dedicated to relating what was known, and what was not, about what was going on economically. The book was backed up by 135 colorful charts, with lucid explanations and comments.

As it happened, it came out at a hothouse moment, when a brief and shallow recession, which had lasted all of nine months in 1990-91, was hailed as an economic maelstrom ("It's the economy, stupid"). Ross Perot was preaching conspiracy. Pat Buchanan discovered that the unemployed didn't have jobs.

Supply-siders had their own cures for catastrophe. Although not prepared for political purposes, the book was a tonic, designed to address "ignorance of basic facts about the American economy or, what is worse, (those who) make assumptions about it that are not so -- or at least are highly doubtful."

The Stein-Foss volume clearly acknowledged that economic growth since the mid-1970s had slowed somewhat, but that it was still an awesome force. Had American voters in 1992 seen the charts, perhaps the vote count might have been different. Certainly, some of the television commercials by Perot and Bill Clinton would have been giggle-bait.

Now, the third edition of "The Illustrated Guide to the American Economy" has just been published (AEI Press, $39.95 cloth; $19.95 paper). The new book is larger than its predecessor (175 charts), with additional research material. Again, the tone is moderate and generally up-beat. Without disclaiming it, neither Stein nor Foss was not (yet?) ready to sign on to the optimism (realism?) of those who claim there is a "New Paradigm" driving a "New Economy." Notwithstanding five years of vigorous growth, Steinfoss steadfastly chose to show a long view of the American economy, highlighting a 1973-1998 growth rate substantially lower than earlier in the 20th century.

With such credibility established, and with yahoos of both the left and right on the march in Seattle to roil the meeting of the World Trade Organization, it is interesting to see where The Guide guides us regarding trade.

In 1958 just 9 percent of American Gross Domestic Product was in foreign trade and other international transactions (4.4 percent in import, 4.3 percent in exports). By 1998 the share of GDP had risen to 31 percent (17 percent imports, 14 percent exports).

Why did it happen? Steinfoss stress reductions in tariffs and reduced costs of transportation and communication, as well as higher incomes in emerging economies. Such trade allows countries "to concentrate on producing things at which they were relatively efficient..." and that helps consumers on both sides of the trade equation through better products at lower prices.

But what about the allegedly negative "balance of trade"? We import more than we export, don't we? Doesn't matter, says Steinfoss. We're sending out U.S. dollars for those imports, and those dollars can either be kept overseas, in which case we've bought something for nothing, or invested back in America in securities, real estate or businesses, which create jobs and capital here. In fact, this foreign-owned "capital stock" in America has climbed from 11 percent of all U.S. assets in 1987 to 22 percent in 1997.

(Meanwhile, assets owned by Americans abroad climbed, but not as sharply, from 11 percent to 17 percent.)

Stein and Foss readily concede that some American businesses and American employees are hurt from foreign trade competition, but also add deftly "just as some businesses and workers have suffered as a result of increased competition from other American businesses and workers." (The textile mills of New England moved to the American South, and look what nasty Microsoft allegedly did to its competitors.)

On balance? Says The Guide: "...there is no doubt that the increase in foreign transactions has been a substantial net benefit to Americans." I am most impressed by the words "no doubt," coming from a man who used such language very rarely. Think about that, Seattle demonstrators!

I have no doubt about it either, and not just because I read it in The Guide. Over the years I had the privilege of hearing it personally from Herb Stein.

Ben Wattenberg is a senior fellow at the American Enterprise Institute and is the moderator of PBS's "Think Tank." You may comment by clicking here.

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