Sunday, April 12, 2009

Commitment Not to Learn

It’s really starting to feel like the Americans want another depression. I’m not talking about a small fringe group hoping for the opportunity to bring down “the evil capitalist system, man”. Or at least I hope I’m not. I’m talking about the political leadership, up to and including the president. I just hope some better thinkers prevail.

Here’s what I’m talking about. An asset price bubble burst in 1929. In 1930 the US passed a law that most economists (not only now but at the time) believe made a significant recession into a depression. It’s generally known as the Smoot-Holly Act. This act erected significant tariff barriers around US markets. Virtually all countries, including Canada, responded in kind. The result was a massive drop in world trade, causing massive drops in employment, and finally incomes. Thus began the Depression.

Now, almost 80 years later, the world is facing the bursting of another asset price bubble and an American economy well into a recession. This time the stupidity started with the so called Buy American clauses in the stimulus package. Next came the reneging on the agreement to allow Mexican trucks to operate in the US (the Mexicans responded with strategically placed tariffs on US produced goods). The most recent step on the slippery slope is the extra red tape and labeling laws imposed on Canadian meat by the US. And this is only the American goofiness. The Europeans are at it too.

Here are a couple of simple examples of where the idea of protectionism really falls short. A lot of people who argue in favour of protectionism also cite end of Apartheid as one of the great successes of the UN. The end of apartheid was caused, in large part, by the economic sanctions enacted by the UN. The elimination of trade with the rest of the world forced the end of a political system that other countries found objectionable.

The other extreme example of what happens when foreign interaction is limited is North Korea. North Korea has been largely cut off from international trade for a long time. North Korea is one of the poorest countries in the world right now. It’s really hard to believe that international trade is bad for economies when you consider those haven’t had any.

In short trade creates wealth. A lack of trade creates poverty. It’s pretty clear unless you have a ideological commitment not to learn.

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