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INTL 102 �Extra Slides�Great Depression – Return to Multilateralism

Lauren Ferry

OH: T 12-1pm (SSB 446)

lferry@ucsd.edu

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Subjects

  • Orthodoxy
  • Countercyclical demand management
  • Lessons from WWI
  • The US’ return to multilateralism
  • The WTO
  • Collective Action

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Orthodoxy

  • The economy is self correcting. Based on the ideas of laissez-faire (no government intervention) and business cycles (natural periods of both growth and decline)
  • A depression following the “Roaring 20s” was natural and inevitable
  • Prices and wages would fall until they were low enough to spur aggregate demand. An increase in demand would restore growth
  • The idea of no government intervention was supported by politicians like Treasury Secretary Mellon
  • UNSUCCESSFUL: high unemployment, Hoover-villes

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Countercyclical Demand Management

  • Keynes claimed that orthodoxy wouldn’t work because it didn’t consider expectations. If investors expect demand to remain low, then there will be no improvement.
  • The government could shift public expectations by managing demand
  • Fiscal policies: government spending to create jobs
  • Monetary policies: if countries broke from the Gold Standard they could lower interest rates to stimulate investment

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Lessons from WWI

  • Lessons: (1)Autarky didn’t work, (2) Restricted Trade encouraged war, (3) Harsh settlements created resentment, (4) Honoring war debts didn’t work and (5)The gold standard was restricting
  • So what did the US change during WWII?
    • To solve the war debts problem: Lend Lease program allowed the allies to “borrow” military equipment
    • To solve the isolationist problems: The Atlantic Charter specified multilateralism and increased trade

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US Switch to Multilateralism

  • Endowments: The US became capital abundant after the destruction of Europe. Now the US was both capital AND land abundant.
  • Interests: Newfound capital abundance causes capitalists to join agricultural interests in support for free trade. The election of democrats and the cold war also help to eliminate isolationism
  • Institutions: The RTAA made trade less protectionist and less partisan by delegating authority to the president (national constituency) and requiring reciprocal tariff reductions (made exporters winners)

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The WTO

  • The RTAA set the stage for the GATT. Countries negotiated for reciprocal reductions that would be extended to all members through most favored nation clauses.
  • Successful reduction in tariffs
  • Converted to the WTO in 1994 to include services and intellectual property
  • Dispute settlement mechanism provides a routinized way to address trade disputes.
  • Winners include the abundant factors within individual countries (HO), export industries and small countries (who can’t be bullied)
  • The scarce factors within individual countries continue to lose

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Collective Action Problems

  • Some government policies will benefit everyone, regardless of who contributes
  • This provides an incentive to “free ride” on the efforts of some, since the benefits are enjoyed by all
  • Solutions:
    • Small groups: lower organization costs and larger per-capita gains
    • Unequal groups: the larger members have a lot to gain by contributing
    • Selective incentives: members contribute to receive some additional personal benefits
    • In politics: small, unequal and incentivized groups will lobby