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.
Another Marine exonerated: "A Marine intelligence officer accused of trying to cover up the killings of 24 Iraqis appeared stunned at first when a jury acquitted him of the charges. For more than two years, 1st Lt. Andrew Grayson had been under suspicion, accused of ordering the destruction of evidence in the biggest U.S. criminal case involving Iraqi deaths to come out of the war... Grayson was the first of three Marines to be court-martialed in connection with killings of men, women and children on Nov. 19, 2005, in Haditha. Investigators allege that after the bombing, Staff Sgt. Frank Wuterich and a squad member shot five men by a car at the scene. Wuterich then allegedly ordered his men into several houses, where they cleared rooms with grenades and gunfire, killing more Iraqis in the process. Four enlisted Marines initially were charged with murder and four officers were charged with failing to investigate the deaths. Charges were dropped against five of the Marines."
A wonderful triumph against great odds: "Finley Crampton really shouldn't be here. Although his parents would have loved another child, they knew their baby could inherit a life-threatening kidney condition - and they couldn't take the risk. After all, their first son had died of the condition and the second was born with serious kidney damage. So when Finley's mother, Jodie Percival, became pregnant while on the Pill, she and her fiance Billy Crampton, 35, made the agonising decision to abort this child... However, Finley had other ideas. And some time after the operation, Miss Percival felt a fluttering in her stomach.... The child had survived the abortion and thrived in the womb... But a week later, another scan confirmed that this baby had kidney problems too, like the couple's previous children.... Her first baby, Thane, had lived for only 20 minutes after she was forced to deliver him prematurely. Her second son, Lewis, now 20 months, was born with a similar condition. He survives on one kidney... And in November, Finley was born three weeks premature, at 6lb 3oz. He had minor kidney damage but is expected to lead a normal life."
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."
Officials OK jail time for failing to mow lawn: "City council members in Canton have approved a measure that's grabbed widespread attention in recent weeks. Homeowners in the northeast Ohio city who don't mow their grass now face stiffer penalties - including a possible 30-day jail term. The council on Monday night unanimously passed the proposal, which makes a second high-grass violation a fourth-degree misdemeanor that carries a fine of up to $250 and up to 30 days in jail. The law is to take effect in 30 days. The proposal drew national attention, much of it negative, when it was unveiled last month. City officials have said the tougher penalties are meant to reduce city costs for mowing grass. The city cuts about 2,000 overgrown private lots a year."
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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