LOWER TAXES, DON'T RAISE THEM:

The economics of the madhouse: We live in difficult times, but protectionism is not the answer (Philippe Legrain, March 2009, Prospect)

The failures of global finance have brought the world economy to its knees, threatening a rerun of the great depression. But such a terrible outcome is much more likely if policymakers follow Ha-Joon Chang’s suggestion that the world needs a dose of protectionism to see it through these troubled times.

Around the world, we are witnessing the devastating impact of globalisation going into reverse. What was once a virtuous circle of rising trade and booming economic growth has become a vicious spiral of collapsing demand and plunging exports. The question is: how to break this spiral? The answer, in my view, is coordinated government action to boost global demand, combining large fiscal stimulus packages, unconventional monetary policy measures, and the nationalisation and restructuring of zombie banks that are dragging the economy down with them. Most governments are scrambling to boost spending and cut taxes to stimulate demand.

Chang, in contrast, favours limited protectionism—in effect, a tax on imports. The immediate impact would be to reduce people’s purchasing power in a highly regressive way. And since Chang proposes that all governments agree to raise their import taxes, demand would be dealt a further knock by the fall in demand for our exports. Higher taxes and lower exports as a cure for the global recession? This is the economics of the madhouse.

Chang is surely aware of this. After all, even he concedes that an all-out trade war would be a bad thing. But the difference between limited protectionism and a trade war is a matter of degree: the former would involve fewer casualties, for sure, but it would not lead to economic resurrection. And history shows that limited protectionism is often a precursor to much larger conflicts.