The Second Great Depression

Right now, things are so bad that every time you turn on the TV, flip to the op-ed page, or fire up the internets, it’s almost impossible to avoid histrionic comparisons to the Great Depression. 6 in 10 Americans think the country is headed for a depression. Are we? Well, nothing is set in stone, and this is obviously an enormously complicated question. (Translation: I don’t know, but I doubt it.) In this post I want to look at one particular piece of the puzzle: the role of trade policy.

The Great Depression was in large part such a great depression because a recession was severely aggravated by poor government policy choices. On the one hand, an excessively tight monetary policy choked the economy. On the other, international commerce and trade were massively constrained by the infamous Smoot-Hawley Tariff, a very misguided attempt to protect American jobs and industry that ravaged the economy.

When looking for parallels to our own time, it’s reasonable to ask whether the backlash against financial globalization will spill over into the other pillar of globalization, international trade. Very smart people have recently fretted about this possibility. And that would be disastrous: whatever your thoughts on trade, it is an absolutely essential driver of economic growth.

The good news is, free trade is relatively safe. Unlike international finance, trade is regulated and enshrined in an international organization: the World Trade Organization, which is the successor organization to the General Agreement on Tariffs and Trade (GATT); the product of 60 years of multilateral trade negotiations that have successively lowered barriers to trade; and an organization with arguably the world’s strongest international adjudication body that protects the integrity of WTO trade rules. During the interwar period, when the Great Depression occurred and Smoot-Hawley was passed, you had nothing remotely comparable to the WTO. Any politicians who want to pass a new Smoot-Hawley (the Brown-Tancredo Tariff, perhaps?) must be willing to undo 60 years of foreign economic policy, infuriate all of our trade partners, and completely cede any credibility the US has in observing its treaty obligations. A tall order, indeed.

Plus, as I’ve noted before, integration is much deeper now than it was in the 1930s. Production is sourced all over the world, wherever it is most efficient. Trade in tasks. I guarantee you that if Congress were to threaten a new massive tariff, international firms would lobby very strongly behind the scenes to block it.

A more legitimate worry is whether transportation costs will strangle international trade (same link as above). But as I’ve also noted, this too is unlikely.

So take solace: perhaps trade isn’t moving forward, but it’s certainly in little danger of going backwards as well.

(Photo by teotwawki)