Sleeping with Elephants

Good morning, and howdy. "Howdy" means welcome to Texas. I do wish you hadn’t brought this weather with you, however.

I hope you Canadians can stay a while. But if your time is limited, it's good that you chose Texas to visit. Texas is a concentrated version of the United States—a stronger than normal dose. Concentrated usually means with the water removed, but not today.

If the idea is for the Canadian West to visit the U.S. West, some would say you missed it by about 30 miles. They say our West begins in Fort Worth—which would mean that Dallas is where the East peters out. I hope that’s good enough. (Actually, whether Dallas or Fort Worth is the gateway to the West probably isn’t as important as the similar question of Winnipeg vs. Vancouver.)

When I came West as a young man, 10 years ago, the fast-track debate on NAFTA was just beginning. Being a free trader as a matter of religion, I jumped into the fray, and we at the Dallas Fed did all we legitimately could for the cause. I’d like to think our support made the difference, but frankly, we were preaching to the choir. Having come from textile country back East, I expected a tougher fight, but I soon realized that the Texas business community was more receptive to free trade in general and NAFTA in particular. Partly, that reflected general enlightenment, and partly they just thought it would be good for business, especially their export business. Someday, when we become even more enlightened, we will support free trade for the sake of imports rather than exports. But I’m not holding my breath.

I must acknowledge, however, that NAFTA discussions in Texas have focused more on Mexico than Canada. The U.S. already had a free trade agreement with Canada, so NAFTA was viewed—perhaps naively—as adding Mexico. Mostly, however, it results from history and geography—the Tex–Mex border. Canada is the United States’ largest trading partner and Mexico is second. Mexico, however, is Texas’ largest trading partner, but we would certainly welcome more balance. In any case, no matter what our excuse or rationale, I’m afraid we’ve been taking Canada for granted. For that, permit me to offer an official apology.

My wife says I take her for granted, too. I plead guilty to that, but I try to explain to her that taking your wife or husband for granted is not altogether a bad thing. It’s a sign of love. It shows trust. Having to keep up the courtship after the marriage seems like insecurity to me. I tell her it’s a compliment to be taken for granted. Don’t you agree? She doesn’t either.

Not that the U.S. and Canada are joined in wedlock. But we probably should be, given all the talk over the years about the disadvantages of "sleeping with an elephant" or, at least, "sharing a bed with an elephant." Even though Canada is a bigger country than the U.S., I assume we are the elephant in the relationship because we have a larger population and thus a larger economy. Mexico regards us as the elephant as well. What’s the old saying? "Poor Mexico, so far from God, so close to the United States."

For some reason, I’m reminded of a country song. Of course, everything reminds me of a country song—unfortunately this one is not one of Ian Tyson’s or Anne Murray’s. I think it was Barbara Mandrell who sang about "Sleeping Single in a Double Bed," thinking over things I wish I’d said.

Cohabitation with an elephant is especially unpleasant if the elephant gets the sniffles and contagion becomes an issue. As you know, the National Bureau of Economic Research, on Monday, pronounced the United States officially in recession. They said the recession label might have been avoided except for September 11, but since a recession call was now inevitable, they put its beginning date in March of this year, when employment peaked. I’m not sure I understand that logic, but I won’t look a gift horse in the mouth. It could have been even earlier, since our industrial production has now declined for 13 months.

I was in Mexico City in October 2000, discussing the U.S. economy with Mexican policymakers. In the course of the conversation I predicted—actually, I promised—that we wouldn’t slip into recession. I need to find a good Mexican wine that goes well with crow.

Mexican policymakers were particularly concerned about the health of the U.S. economy because they said if we catch a cold, they get pneumonia. Furthermore, they said, as a developing country, their policy options would be more limited during recession than ours. We would be freer than they would be to fight recession aggressively with monetary policy. Fortunately, that constraint does not apply to Canada.

As it turned out, after several quarters of weak but positive growth, U.S. economic activity fell in the third quarter—down 0.4 percent, according to the early estimate. The current quarter will probably be negative as well. Mexico has already had three negative GDP quarters. Canada, on the other hand, has held up better. Canadian GDP growth has slowed sharply, but so far I haven’t heard of any negative GDP numbers. I hope that holds up Friday. The Bank of Canada has been easing fairly aggressively, as I understand it.

The next speaker, I understand, will talk in some detail about U.S.–Canadian trade under NAFTA. Let me just say that I regard NAFTA as hugely successful—beyond even the more optimistic expectations. Incidentally, I define success as increased trade in both directions—not by what happens to either country’s trade balance. We need to keep up the momentum for freer trade worldwide, including a successful free trade agreement for all the Americas.

It’s hard to predict whether the negative impact of the terrorist attacks on September 11 will slow the free trade movement or whether the goodwill generated around the world in its aftermath will speed it up. If it’s not the latter, the terrorists will have scored a major victory in their battle against freedom. I don’t regard free trade as a technical economic issue. I regard it as an important part of our freedom and individual liberty. To avoid giving the terrorists a victory is a secondary reason to move forward on freer trade. The primary reason is the merits.

More liberal immigration laws and policies are even more likely to fall victim to the terrorist attacks. I hope not. The delays at the U.S.–Canadian border in the days following September 11 were a reminder of how good we had it before. We are accustomed to delays on our Southern border, but not on our Northern border. We must return to the openness that is a feature of the liberty that both our countries enjoy.

We must find a way to do that and maintain security at the same time. Were I authorized to do so, maybe we could fix the problem today. We could agree to keep out people who don’t like you, and you could agree to keep out people who don’t like us, and then between us we could both agree on complete openness. Then we could go back to taking each other for granted.