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2002 Annual Report—Federal Reserve Bank of DallasThe Fruits of Free TradeA Letter from the President2002 was not the best of years. The pall of September 11 lasted all year and beyond. We had to adopt security measures and change our behavior in ways that eroded our personal liberty and economic efficiency. These necessary changes may not have reduced GDP much, but they lowered our standard of living nonetheless. GDP isn't everything. The Economy in 2002Following the 2001 recession, economic activity expanded throughout 2002, but not vigorously enough to sustain or promote employment growth. Increases in output and income were driven by continued gains in productivity. Although the unemployment rate never exceeded 6 percent during the year, the recovery so far has been a jobless one. Productivity gains may substitute for job growth in the short term when the economy is weak, but they augur well for a higher standard of living in the long run when both productivity and job growth are rising. With aggregate demand too weak to stimulate job growth, monetary policy in 2002 did not reverse its accommodative stance. In fact, the FOMC reduced the federal funds rate another half percentage point in November, bringing the target rate down to 1.25 percent. Inflation remained subdued, however, with continued disinflation giving rise in some quarters to concerns about potential deflation. The Fed and BankingBanks in the Eleventh Federal Reserve District, like those in the nation, are generally in good condition. Unlike the aftermath of the 1990–91 recession, there has been no hint of a credit crunch to hinder economic recovery. The operations of the Federal Reserve Bank of Dallas remained on a sound footing during 2002, although we did experience a slowing in the volume of checks processed. After years of anticipation, electronic payments transactions have finally made a dent in paper check volumes, and we are having to adjust our check infrastructure. When the churn affects our own employees, we have to remind ourselves that a transition from paper to electronic payments is probably good for the payments system overall and has been a goal of the Federal Reserve for many years. Watch out what you ask for. You may get it. The EssayOur essay this year discusses "The Fruits of Free Trade." The rhetoric of the free trade debate has always fascinated me. Sara Evans tells how her significant other won her over in a song titled "Three Chords and the Truth." Economists have known the truth about free trade since Adam Smith published Wealth of Nations in 1776, but they've had trouble finding the right three chords to resonate with the doubters and skeptics. They succeed temporarily, but they have to retake old ground over and over again. The problem is that the benefits of free trade are widely diffused and often difficult to trace to trade policy, while the costs of free trade are more concentrated and identifiable. Perhaps the most eloquent defense of free trade was given by my hero, Frédéric Bastiat, the French Adam Smith, who used satire as his chief rhetorical weapon. In his famous petition on behalf of the French candlemakers, he urged parliament to pass laws requiring the closure of all blinds and shutters to block out the sun, which competed unfairly with the candlemakers in the production of light. Another favorite of mine is an observation attributed to economist Henry George that protectionists want to do to their own country during peacetime what the country's enemies would wish to do to it during wartime—that is, close its borders to imports. I must confess to wondering, If such wisdom can't win the free trade argument once and for all, what chance do our authors have? What can they add that is fresh and new? Well, I should know by now not to underestimate them. Mike Cox and Richard Alm have made a real contribution by following the lead of two of my favorite economists: Yogi Berra, who said, "You can observe a lot just by watching," and Richard Pryor, who famously asked, "Who are you going to believe? Me or your own lying eyes?" Rather than relying exclusively on arcane arguments, the authors take us into a supermarket and let us see the fruits (and nuts) of free trade for ourselves. —Robert D. McTeer, Jr. President and CEO
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