Thursday, February 19, 2009

Riders on the Storm

The world economy has recently experienced several slowdowns that have US security experts, including Director of National Intelligence Dennis Blair, worried about long-term US economic interests. Furthermore, shifts in world economic paradigms, ushered in by the weakness and instability of world markets, are likely to wreak havoc on the current system of international trade. While some degree of protectionism is prudent in such dangerous waters as these, it is critical that the US remains focused on its long-term interest of emerging from this storm in a continued position of competitive dominance. In order to do so, we must not practice protectionism as a tool of beggar-thy-neighbor mercantilism, but we should continue the time-proven US policy of unilateral trade liberalization.

Worldwide consumer demand, economic growth and globalized finance – those engines of shared economic prosperity that have kept globalization humming along – are suddenly screeching to a halt. Developing countries are dumping their decades-long export-led economic growth strategies as US consumer demand turns out not to be insatiable.

The immediate consequence of this is worldwide rioting as many countries have taken a free-fall jump toward the culture of capitalism but haven't yet built up social welfare programs. The safety nets of community support that existed just a decade ago in many countries have disintegrated as cultures around the world have become more urban, more work-oriented, less family-oriented and less community-oriented. This will likely cause great social upheaval and a re-examination of cultural values as city slums fill with the recently employed and urban immigrants return to their old villages and farms.

In the longer term, this pressure from their constituents will push world leaders in favor of protectionism and government policies directed toward social welfare. Many free-market theorists are already either keeping quiet or have outright switched camps as liberal economic theorists have been vilified as the wizards behind the economic crisis.

As economies contract and as trade and finance become less globalized, developing countries will have to adapt culturally, economically and politically. All change inevitably helps some and hurts others; this change too will certainly be unhealthy for some parties’ interests. The overall growth of the world economy and competitiveness of the large economies will most likely suffer as trade liberalization is associated with growing economies as it is helping high-wage economies maintain their competitive edge in the marketplace.

On the other hand, more regulation of imports will be good for local businesses and will lessen the likelihood of social disruption caused by the increasingly unstable demand and supply of such commodities such as food and energy in the international marketplace. As their unemployed constituents demand affordable food and oil, world governments will be forced to provide it in spite of rising international prices. The only way to do this is to produce it internally and subsidize the price inefficiencies. Just as many US families are already planning to grow more of their own food, many governments will invest their dollars into looking out for their own security, in the form of protectionist trade and financial laws, like the Buy-American provision in the latest stimulus bill passed by US President Obama.

Of course, some protectionist measures in the interests of maintaining an adequate supply of affordable food and energy, especially if done sensitively to avoid retributive protectionism from other nations, would be reasonable precautions toward protecting our nation’s most vulnerable citizens. However, outright discouragement of all forms of economic liberalization, such as the provision in the stimulus bill, is short-sighted, politically motivated and is likely to hurt our long-term economic and political interests.

The US would do well to remember that it is an economic trading superpower, i.e. the biggest lemonade stand on the block – and if any economy is going to be hurt by a worldwide retreat of capital back inside of its owners’ pockets, it is ours. Furthermore, a history lesson in basic economics by David Ricardo’s theory of comparative advantage, a theory practically considered a law by modern-day economists of all persuasions, would remind us that even one-sided trade is better than no trade at all. So even if our neighbors refuse to buy our lemonade, we should continue to buy theirs.

In short, the current pull toward protectionism is due to a desire by governments to avoid an unreasonable amount of risk. As a reliance on international markets today makes for unreasonably risky waters, people are willing to give up in efficiency what they hope to gain in security. When economies eventually recover, however, people will begin to feel that the international marketplace is a treat from which they are being deprived, rather than a dangerous threat from which they demand to be protected.

When that happens, governments will again be pressured to release their hold on the markets and allow the invisible hand to find the best product, the best borrower and the best builder for the best price. If we are too successful in “protecting” ourselves against the world economy, our businesses will no longer have the cheap parts, capital and labor they need to remain competitive, other nations will not be as able to afford our products and we may lose our dominance in the global marketplace.

In summary, the distant shouts of those who were not on board the globalization gravy train to begin with, mainly labor groups and some local business owners, are suddenly being echoed all around us by the newly unemployed and those disadvantaged by the global economic tumult. While taking some measures to protect its citizens most basic needs, the US government should keep its eye on the prize – the long-term goal of ensuring that when the storm clears and the clouds part that we still have the busiest lemonade stand on the block.

1 comment:

Artificial Wisdom said...

True. The American economy won't be able to recover unless it successfully transitions a significant portion of its blue collar jobs into technical jobs.

The only way to compete with the lower wages in other nations is to increase productivity, which means increased automation. Expecting a factory job paying 90k a year is a thing of the past. Isolating the economy from the global economy will only cease to further reduce the available job market as the variety of jobs that depend on globalization will decline.