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Save the Baby; Throw Out the Bath Water

The current mood of fear regarding the global economic downturn has, unfortunately, caused some in the policy community to cast back, both philosophically and theoretically, to a time before the rhetoric and action of trade liberalization.  The lack of oversight in the market that led to abuses by a few has compelled some thinkers to want to “throw the baby out with the bath water” when it comes to free market principles.

It has become vogue to think that increased government intervention into the affairs of private firms, and, even in the most extreme cases, nationalization of private assets, could be the new panacea that will help to lift world governments out of their current crisis. As a practitioner, it is my sense that government decision-makers around the world need to avoid such knee-jerk reactions.  Critical review and oversight of the actions of market actors should be preferred over outright governance of these entities.  The need to encourage entrepreneurial and innovative action is now more important than ever.  If we look at public policy over the 20th century we see several  swings back and forth from Keynesian approaches (read:  more government spending) to Hayek and Von Mises’ ideas (read:  free market).   The pendulum seems to have swung more in the direction of the Keynesian approach during this time, given the down-turn of the banking system and the world economy over the past few months.  As we move forward, we need to reflect on the wisdom of Niccolo’ Machiavelli’s 15th Century maxim that “the most vital states are those republics where their citizens enjoy the maximum freedom to be masters of their own destiny.”

The Senate, House and the Obama administration have been working steadily for the past few weeks on a stimulus package which finally was signed into law February 17.  Obama’s administration is employing some innovative approaches to getting input from the citizenry of the U.S. to help make the case for certain aspects of the stimulus package.  These approaches include holding home-based meetings and providing input into the democratic process at a grass-roots level.   There was one such meeting in the Sedona area.  Regardless of what hardships the people of the U.S. and the world are enduring, the decisions on just how to stimulate the economy will be made on the basis of theoretical frameworks, such as those identified above, not on the basis of a political input.  Nonetheless, this input puts a human face on the suffering that people are going through right now.

Professional economists around the world should consider some of the technical issues and implementation constraints (e.g., social, political, geographic) that confront world leaders as they put forth their opinions on how to bring the world economy around.  I urge caution in the implementation of policies that would undermine the recent progress in global trade and financial liberalization.

Granted, some of the multilateral institutions need to be updated to reflect the modern balance of economic power, as some have argued (e.g., the United Nations Security Council).  And, the hypocrisy of different standards for the developing world versus the developed world needs to be confronted (e.g., International Monetary Fund “rescue-packages” after the 1997 currency crisis).  Nonetheless, the work of the World Trade Organization (WTO) is even more critical than ever for continuing to beat the drum of global trade.  Further, the work of the WTO in mediating trade disputes plays a vital role in the ongoing interplay between the developed and developing countries.  Concerns about national sovereignty aside, the institutional approach to rationalizing trade actions has been proven to be MORE important and MORE significant than its critics have acknowledged, given the current crisis.

An updated notion of the ‘collective good’ needs to be defined; one that sheds the shackles of socialist rhetoric and casts forward to a society where the economy has been stabilized and programs that build on trade liberalization have been established.  The ‘rescue’ package has combined tax relief with infrastructure development with aid to states for education and other vital programs.  Hopefully, we will be successful at using the additional stimulus from this package effectively and enhancing our export potential.  Hopefully we’ll cast off the protectionist attitude that has been infecting the public mind.  Hopefully, we will be just throwing out the bath water, and keeping the baby.