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Trade and Depression

By Matthew Yglesias on November 30, 2009 at 12:16 pm

"Trade and Depression"

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Paul Krugman highlights this chart from a new paper by Barry Eichengreen and Doug Irwin which makes the point that contrary to what you sometimes hear, it’s very hard to see how rising protectionism could have caused the Great Depression:

20090317Irwin1

Protectionism was a result of the Depression, not a cause. Rising tariffs didn’t even play a large role in the initial trade contraction; like the spectacular trade contraction in the current crisis, the decline in trade in the early 30s was overwhelmingly the result of the overall economic implosion. Where protectionism really mattered was in preventing a recovery in trade when production recovered.

I think this illustrates one of the reasons why conventional, market-oriented neoliberal types ought to be more concerned about the labor market situation. If you convince people that it’s not possible for monetary authorities to boost employment, and that it’s unwise to use fiscal policy to boost employment, then it starts to look irresponsible for politicians not to use trade restrictions to protect the jobs of people in their state/district. When an economy is near full employment you can say trade makes the pie bigger and people who lose their jobs will get new jobs. But we’re years away from full employment—which both the Fed and the White House seem to think—then getting laid-off is catastrophic.

The trade restrictions put in place as a response to the Depression exerted a small-but-meaningful drag on growth year after year after year for decades. Going back in that direction would have very deleterious long-run consequences. But it’s going to be extremely difficult to avoid if we can’t prouduce a healthy labor market.

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