Alas, We Are Not All Keynesians Now

Policy Innovations contributor Susan Aaronson suggests that the G-20 can use trade and labor policy coherence to fight the global economic downturn, especially its effect on developing countries (Originally posted on VoxEU.org):

The most famous economist of the 20th century, John Maynard Keynes, had an evocative image of capitalism. He once said that markets were propelled by animal spirits. These spirits could yield growth, but at times they must be domesticated to ensure that the law of the jungle—eat or be eaten—does not apply. As markets run wild, policymakers must work at both the national and international levels.

Keynes was particularly concerned with how these animal spirits might affect workers. His views were colored by the massive unemployment he saw during the Great Depression. Keynes feared a "senseless international competition" for jobs. He wanted "new and better arrangements" to link trade and employment. These views influenced the international economic architecture.

After years of negotiation, policymakers agreed to new and better arrangements, as stated in the preamble of the General Agreement on Tariffs and Trade (GATT), which governed trade from 1948–1995, and its successor organization, the World Trade Organization (WTO). Both affirm the parties recognize "that their relations in the field of trade and economic endeavour should be conducted with a view to raising standards of living, ensuring full employment and a large and steadily growing volume of real income and effective demand."

Thus, the members of the GATT and WTO posited trade could create a virtuous circle: By regulating protectionism, trade would expand. Firms could achieve economic efficiencies—producing more goods and services at lower costs. More people would have jobs, access to new opportunities, and ultimately see improvements in economic welfare. By collaborating to regulate protection, the signatories could ensure that trade works for more workers.

However, as the world confronts the worst downturn since the Great Depression, the idea that expanded trade will create and maintain jobs is losing support. The World Bank has forecast that in 2009 global industrial production could decline by 15 percent and world trade may record its largest decline in 80 years. Policymakers have not yet devised effective multilateral responses. Most countries have adopted a wide range of domestic strategies including domestic stimuli; make-work programs; buy-local policies; and sector-specific subsidies. After examining these strategies, last month the WTO found "limited evidence" that its members were adopting trade-distorting measures.

However, while such strategies may not be protectionist in intent, they are not internationalist in their ends. Few policymakers appear to have considered how these strategies designed to restore domestic employment and growth might affect conditions abroad. Because they have eschewed collaboration, the fabric between global trade and national employment is increasingly frayed.

In 2008, for the first time, the WTO and the International Labor Organization partnered to examine the relationship between trade and national employment. The two organizations recommended that national policymakers find ways to make their trade and labor policies more coherent. They also suggested that policymakers could focus on their own citizens' employment needs and act to help developing countries job markets and policies. Many developing countries don't have the funds or capacity to provide such services. But the report suggested no incentives to make such strategies a reality.

So here is a suggestion. The world's largest economies (which include developed and industrialized countries) met in London. These members of the G-20 should consider a two-pronged approach to expanding trade and increasing employment. As evidence of their commitment to multilateralism, these countries should go beyond their pretty words about the Doha Round and commit funds to help developing countries build a social safety net for their workers, and establish programs for lifetime learning.

Along with this incentive, these countries should agree to (and ask other WTO nations) to adopt a "no standards lowering clause." With such a clause, members agree that they will not attempt to attract or maintain investment by lowering labor (or other standards) in the interest of maintaining jobs. Such a clause is consistent with a key objective of the WTO: to increase market access. Governments can distort market access when they change the rules governing markets. 1

In addition, the WTO should disclose (on a public website) which countries are adopting trade-distorting policies, discuss the specific policies these countries have adopted, and encourage scholars to examine how these policies might affect national and international employment. Such transparency can also play an important role in making global markets more efficient and more equitable. 2

Some have argued that, because so many governments have adopted Keynesian solutions to the downturn, "We are all Keynesians now." But we are not truly Keynesian unless we are willing to find global strategies that expand trade and stimulate employment at home and abroad.

Susan Ariel Aaronson is Research Associate Professor and 2009 Policy Research Scholar at the George Washington University.

1. Kyle Bagwell; Petros C. Mavroidis and Robert W. Staiger, "It's a question of market access," American Journal of International Law, 96, No. 1 (Jan. 2002), 56–76.

2. Susan Ariel Aaronson and Jamie M. Zimmerman, Trade Imbalance: The Struggle to Weigh Human Rights in Trade Policymaking (Cambridge: 2007), Conclusion, 186–207.