Friday, July 24, 2009

Better than Aid, Increase Trade?

An op-ed piece in today's issue of The Washington Post took me on a roundabout trip, discovering a number of resources that, while not directly useful with most students, offer some ideas and background for teachers. And they some have value for those of us who teach U.S. history as well as economics.

The author of the Post piece discusses how we rationalize turning inward in times of recession, seeking to protect our industries and our workers. The problem is everyone else does the same, despite platitudes to the contrary. However, he offers an interesting alternative that would have the benefit of helping the poorer nations, while putting the U.S. back on a pro-trade track.

I then ran across this article in The Economist. Two American economists, whose work I admire greatly and try to read whenever I run across it, have a paper that examines and connects the gold standard, monetary policy, and trade protectionism during the Great Depression. Barry Eichengreen and Douglas Irwin have co-authored a paper for the National Bureau of Economic Research (full paper here) that offers some interesting as well as perplexing ideas.

While I've only skimmed the paper, the case is intriguing and not unfamiliar to those who are familiar with Eichengreen's and Irwin's work. Eichengreen has previously linked the gold standard and monetary policy to economic performance in the Depression. And Irwin is well-known for his work on trade. The idea that joins these two is one that posits the desire to return to a gold standard, albeit under a different institutional fabric from that which existed prior to World War I. Once in place, the political efforts necessary to support currencies also must respond to different political pressures and goals than existed in the global economy prior to the Great War. I will read it more thoroughly, but the tables and graphs alone have already provided some interesting mental wandering.

Finally, in a related article in The Economist, the potential for a slow recovery to world trade is highlighted. As the author states, if the issue was just global demand, we might be able to expect a rebound that was just as robust as the fall-off was anemic. As demand comes on line, trade should increase virtually lock-step.

But the author points out that two other factors may mitigate the recovery - the previously mentioned rise in protectionism, and trade politics. The two go hand in hand. For policy-makers around the world seek the approval of those they represent. And as we know, once a law or barrier is put in place and a benefit received - real or perceived - it is hard to remove.

I welcome your thoughts. Have a good weekend.

This post references the following Keystone Economic Principles:
1. We all make choices.
2. There ain't no such thing as a free lunch.
3. All choices have consequences.
4. Economic systems influence choices.

5. Incentives produce "predictable" responses.
6. Do what you do best, trade for the rest.

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