Worried About a Recession? Don't Blame Free Trade

Speculation is growing that the U.S. economy may have already slipped into recession. If the past is any guide, politicians on the campaign trail will be tempted to blame trade and globalization for the passing pain of the business cycle. But an analysis of previous recessions and expansions shows that international trade and investment are not to blame for downturns in the economy and may, in fact, be moderating the business cycle.

In recent decades, as foreign trade and investment have been rising as a share of the U.S. economy, recessions have actually become milder and less frequent. The softening of the business cycle has become so striking that economists now refer to it as "The Great Moderation." The more benign trend appears to date from the mid-1980s. If the U.S. economy does tip into recession this year, free trade and globalization will be among the likely scapegoats.

The Great Moderation means that Americans are spending more of their time earning a living in a growing economy and less in a contracting economy. Our economy has been in recession a total of 16 months in the past 25 years, or 5.3 percent of the time. In comparison, between 1945 and 1983, the nation suffered through nine recessions totaling 96 months, or 21.1 percent of that time period.

America's recent experience of a more globalized and less volatile economy has not been unique in the world. Other countries that have opened themselves to global markets have been less vulnerable to financial and economic shocks. Countries that put all their economic eggs in the domestic basket lack the diversification that a more globally integrated economy can fall back on to weather a slowdown. A country that increases trade as a share of its gross domestic product by 10 percentage points is actually about one-third less likely to suffer sudden economic slowdowns or other crises than if it were less open to trade. As the authors of this study concluded:

Some may find this counterintuitive: trade protectionism does not "shield" countries from the volatility of world markets as proponents might hope. On the contrary...economies that trade less with other countries are more prone to sudden stops and to currency crises.

Globalization is not the only possible cause behind the moderation of the business cycle. Improved monetary policy, fewer external shocks (what some economists call "good luck"), and other structural changes in the economy may have all played a role. For example, the decline in unionization and the resulting increase in labor-market flexibility have allowed wages and employment patterns to adjust more readily to changing market conditions, mitigating spikes in unemployment. Better inventory management through just-in-time delivery has reduced the cyclical overhangs that can disrupt production.

Combined with those other factors, expanding trade and globalization have helped to moderate swings in national output by blessing us with a more diversified and flexible economy. Exports can take up slack when domestic demand sags, and imports can satisfy demand when domestic productive capacity is reaching its short-term limits. Access to foreign capital markets can allow domestic producers and consumers alike to more easily borrow to tide themselves over during difficult times.

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Detroit caught flat-footed again: "The auto industry suffered whiplash during May, as sales plunged for big pickup trucks and SUVs as $4-per-gallon gas prompted consumers to ditch their gas guzzlers in favor of more economical passenger cars. The strong shift from trucks to cars reverses the trend of the past decade, and domestic automakers were caught with a huge surplus of unsold trucks. Industry analysts say that with gas prices expected to remain in $4 territory for the foreseeable future, the May truck-sales drop could signal the end of an era. In Detroit, Jim Farley, Ford's vice president for marketing and communications, said sales figures released Tuesday show that the ground rules have changed for good."

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Italy: Seizing cars from drunk drivers: "Italy has begun confiscating the cars of people driving under the effect of drugs or alcohol in the latest attempt to lower one of western Europe's highest rates of road casualties. Two drivers in their early 20s, a woman under the influence of alcohol and a man who had smoked a cannabis joint, have had their cars seized in northern Italy since the legislation came into effect at the end of last month. The new legislation states that any driver who tests positive for any illegal drug or has blood alcohol levels exceeding set limits can have their car confiscated, as well as toughening fines and jail sentences. The cars are to be auctioned off or used by the police, as is already the case for vehicles confiscated from mafia offenders and drug dealers."

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The Big Lie of the late 20th century was that Nazism was Rightist. It was in fact typical of the Leftism of its day. It was only to the Right of Stalin's Communism. The very word "Nazi" is a German abbreviation for "National Socialist" (Nationalsozialist) and the full name of Hitler's political party (translated) was "The National Socialist German Workers' Party" (In German: Nationalsozialistische Deutsche Arbeiterpartei)

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