Thursday, April 03, 2008

Avoiding the "bang wallop"

I don't know what else to say other than I thought Brendan Keenan's column on the economy was excellent. Keenan says that we're at the beginning of the third economic cycle since the Great Crash of 1929. We need to avoid making the problems worse, which has happened in the past by applying the wrong solutions to the economic problems that arise at these turning points.
Thanks to a remarkable contribution from Peter Sutherland, the World Trade Organisation replaced the more limited GATT system. Trade expanded mightily, although it has never been liberalised to the degree that was hoped.

Instead, it was global capital flows which were freed on a scale not seen since the 19th century. This is not only a revolution, but a recent one.

… There will certainly be more banking and stock market regulation – much of it replacing 1930s regulation which had gone out of fashion and been abolished. If that is as far as it goes, it will probably be all to the good. But if the pessimists are right about a long, grinding correction of US imbalances and excesses, it might go a lot further than that.

The danger is exactly the one which infected the 1930s and became part of the organised international system after the war – protectionism. It is certainly a concern that cheap Mexican workers seem to be getting more stick in the US presidential campaign than the mega-rich bankers of Wall Street. The impact of low cost labour is easier to understand (and misrepresent), but it is not where the problems lie.

Before opinion swings too far against the excesses of the 1990s and 2000s, we should remember that the period saw the fastest growth in global incomes – more even than during the Industrial Revolution. Around 500 million people have been removed from subsistence poverty – five times as many as in the 19th century.
I was a little unsure what he meant by the "cheap Mexican workers", but I don't think he means the illegal immigrants debate. Maybe he does, but that's only infinitesimal in economic terms compared with the effects of NAFTA and Chinese imports, etc. I suspect that's really what he's getting at there.

Regardless, I thought it was a good summation of how we got where we are and what mistakes have been made at other times - especially in the 1930s - that we should aim to avoid this time.