Turning Inward?

The economic crisis is pushing nations in two directions: first, inward toward protectionist or isolationist policies; second, toward developing an international system that can respond to and prevent these crises. How we handle these pressures will affect our economy, our security, and the way we think about the world.

These issues have been getting a lot of talk lately. The cover story of the new issue of Foreign Policy magazine is on what they dub the “Axis of Upheaval” – fragile or failed states that are being destabilized by the economic downturn. The story fits neatly with last week’s report from Adm. Dennis Blair, the Director of National Intelligence, which for the first time in years demoted terrorism as the foremost national security threat in favor of the threat to global stability posed by the economic crisis. As the economy spirals, populations will potentially become more radicalized just as governments become weaker. Pressure grows on those governments to become increasingly nationalistic, while pressure builds for the rest of the world to step in and lend support to these weaker states.

The European Union is facing similar pressures. Last week saw reports that the EU is considering having its bigger economies bail out its smaller ones, possibly by creating a fund financed by the European Investment Bank that would buy the smaller countries’ government debt. And while concerns that the economic crisis might foment Euroskepticism, the Czech Republic’s lower house just approved the Lisbon Treaty, while a recent poll in Ireland shows that 51% of voters there would now back the treat in a new referendum, which is expected in October but may be moved forward (last year referendum voters rejected the treaty by a 53.4% to 46.6% margin). At the same time, the Czech president recently compared the EU to a communist dictatorship and refused to say whether he would sign the treaty.

And, of course, the United States has gone through its own little bout with protectionism via the so-called “Buy American” provision in the stimulus bill. Pressure from the White House led to Congress taking most of the teeth out of the provision by inserting language that the United States is still bound by its international trade obligations, meaning that Canada and Mexico (as members of NAFTA), any states we have bilateral trade agreements with that cover government procurement, and any states that have signed onto the WTO government procurement agreement cannot be discriminated against. That notably leaves out China and Brazil, but still, it’s not the biggest deal in the world. It does, however, demonstrate the tug-of-war between protectionist impulses and globalist necessities.

The stimulus itself is a bigger example of the problem. Obviously there are several readers of this blog who think the stimulus won’t work no matter what. But if there is any hope of it working, it needs to be a global stimulus given that it is a global crisis. A lot of big economies, including China, have passed massive stimulus plans, but others, like Germany, have been holding out, and the more holdouts there are, the less effective the stimulus will be. (More on this point in a good Matthew Yglesias column here.)

How all this turns out is anybody’s guess, and it likely depends a great deal on just how bad the economy gets. The Great Depression led to the transformation of the federal government, and WWII led to the creation of relatively powerful international institutions. Those are two events of massive historical significance, and nobody seems to be predicting that things will get quite as bad as they got int he 1930’s, nor is there any reason to anticipate a global conflict on the scale of a world war. That suggests that the world’s response to this crisis will be less dramatic and more incrementalist.

Still, it seems to me that with institutions like the UN and the WTO already in place, it will be easier to build off those institutions in the future. And because of institutions like the WTO and the general proliferation of trade agreements around the world, it’s a lot more difficult to act on our protectionist impulses – a measure like Smoot-Hawley would be unthinkable in today’s world, both because we have learned from our mistakes and because we institutional checks against such actions. At the same time, that reality might just make the need for greater integration less pressing and therefore less likely to happen.

Harold Meyerson wrote an excellent piece for the American Prospect recently on the potential for a “Global New Deal.” In it he wrote about the impetus for greater global economic integration:

The most far-reaching case for global regulation — indeed, for a global New Deal — comes from the global labor movement. That unions favor New Deal?like social and economic arrangements comes as no surprise; that the labor movement now has genuinely global institutions probably does. In recent years, hitherto national unions and union-federations have begun to go global simply to keep up with their employers. [...] On Nov. 15 — the same day that the G-20 leaders met in Washington — three such new global entities, the International Trade Union Confederation, the Trade Union Advisory Council to the Organization of Economic Cooperation and Development, and the Global Union Federations (sectoral organizations of individual unions), released their own “Washington Declaration.” It called for nothing less than a new Bretton Woods system that would create a global economy with compacts and laws to regulate capitalism and foster countervailing institutions — such as global unions themselves — that would reduce the economic inequality inherent in unregulated capitalism.

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Pushing for stronger global regulation of finance, product safety, labor rights, and the like might seem an indulgence Obama can ill afford. Or, given the exigencies of coping with a global economy, such global reach could prove surprisingly necessary.

My thoughts above are admittedly a little jumbled – I’ve written this over a couple days and with a bit of a cold. But what Meyerson says above gets at the basic point I’m making. I wouldn’t predict anything as ambitious as what he describes, but it seems to me we have the political actors and the institutions in place that could set the stage for something pretty dramatic. If things really start to tank, we could be in for some radical changes one way or another.