Bringing It All Back Home

PARIS – Global policymakers regularly congratulate themselves on having avoided the policy errors of the 1930’s during the financial crisis that began in 2008. Led by US Federal Reserve Board Chairman Ben Bernanke, an economic historian of the Great Depression, they remembered the ideas of John Maynard Keynes and loosened monetary and fiscal policy to avoid the worst. We are still coping with the budgetary consequences, especially in Europe, but it is true that the world did not end in 2008.

Monetary tightening was not the only major policy error of the 1930’s; so was a retreat into protectionism, symbolized by the Smoot-Hawley tariff increases at the beginning of that decade. Historians continue to debate the centrality of the Smoot-Hawley law itself, but the subsequent tariff war certainly damaged trade and economic growth, making a bad situation worse.

Today’s statesmen like to say that they have avoided the protectionist error as well, but is that true? Certainly I do not expect a tariff war to break out in the near term, but there are dangerous indicators of trade trouble ahead.

The Doha round of global free-trade talks has been abandoned, and the World Trade Organization is now languishing by the lake in Geneva, uncertain of its future. Perhaps Doha was unlikely to achieve much in the current circumstances, but the absence of any continuing dialogue on world trade – at worst, a useful safety valve – adds a new level of risk. While people are talking, they are less likely to act precipitately.