If you take an interest in the ‘free trade versus protection’ debate – which I’ve tried to use a rather more general formulation of in the heading above – and you are alive to the possibility that the debate might be about something rather than just the ranting of people who just don’t understand Ricardo against those who do, you end up understanding the lie of the land rather like Dani Rodrik does in the post which I’ve reproduced below the fold.  After considering the arguments, and especially in a place like Australia, I come down fairly strongly in the free trade camp, but mainly for political reasons.  Our own attempts at picking winners remain woeful.  And the advocacy of ‘active’ industry policy is pretty awful too, dominated as it is by unions and manufacturing firms. Not normally where I go for enlightenment or inspiration.

Still, I would probably think differently if this were a developing country.  And even if one is in favour of free trade (I’m actually in favour of very but not completely free trade if we’re talking about Australia’s interests acting unilaterally as I’ve explained numerous times on this blog to the apoplexy of one or two commenters) it’s a great pity that we head for the ‘free trade v protection’ trenches whenever we’re discussing policy.  One of the strengths of Dani Rodrik’s view of the world is that recipes for countries have to be suited to them – have to pick their most important bottlenecks in economic expansion and deal with them, rather than apply a kind of template approach to any and all issues.

Anyway for those who are interested, Rodrik’s column on the subject is over the fold.  I could quibble with bits of it, or with its emphasis here or there, but it sets out the issues well enough for me to want to mark it here so I can come back to it if I want to in the future.

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Michael Stutchbury addresses Rudds assault on neo-liberalism in The Australian, 28/7/09.

Stutchbury has some good points to make but he is, like everyone else in The Australian, obsessed with the debt question and the justification for active (discretionary) government intervention. I wrote a letter to the Australian my first such letter for over 12 months.

In a slightly revised form, my letter is outlined below. It offers a different perspective.

Stutchbury has four particular concerns.

• First, Rudd pokes holes” in the efficient market hypothesis. But can he ensure that governments know or can do better? This is a fair claim. I have argued for more financial regulation but others have different views.
• Secondly, Rudds debate is largely confined to financial markets, not the whole sweep of pro-market economics. True enough – but isnt that fully conceded by Rudd? He nominates five key areas to boost productivity (including innovation, skills, tax etc). With such a program, he demonstrates that Rudd is a long way from being anti-liberal. He is only critical of financial regulation and related issues.
• Thirdly, even at the financial level, the Rudd debate is largely a northern hemisphere argument. This view of Stutchbury is very hard to accept. Recent macroeconomic interventions, in beefing up consumption and the real estate market and offering guarantees to the banks, has acted to recreate confidence and to delay the inevitable rise in bank bad debts and unemployment. Faced with a $210 billion shortfall in revenue, compared with a rise in revenue of $334 billion from 2004/5 to 2006/7, what sort of economy would we have without such intervention? And, in the absence of any discretionary spending, wouldnt Australias public debt levels be as, or almost as, high (simply to to pay for the higher unemployed and lower profits) as they are now – yet with much more individual hardship?

  The big challenge for the Government will be to spell out a gradual return to fiscal normalcy by withdrawing the stimulus and retiring debt.

• Finally, Stutchbury deplores Rudds retreat into workplace re-regulation. Yet in most respects, we have a more flexible workplace today than we had back in 1996. And it now has the clear endorsement of the general public.

There is a thoughtful article in the Financial Times by Paul De Grauwe which is found in http://www.ft.com/cms/s/0/478de136-762b-11de-9e59-00144feabdc0.html?ftcamp=rss

It notes the big disagreement between two opposing camps on macro-economics (the Ricardians versus Keynesians), regarding the application of budget deficits in a period of severe recession. It then argues that this disagreement between the two camps is not just of academic interest it matters a great deal for the future decisions of investors and policymakers.

For share investors, it tells them whether, as a consequence of the temporary budget stimulus, they should be buying or selling long term government bonds and whether they should expect inflation to deteriorate or to remain under control.

For policy makers, it tells them if the additional GDP is stable and sustainable – or whether it will produce big rises in interest rates and, with it, another big recession. They must also decide if monetary policy will simply build up massive amounts of liquidity and lead to higher inflation – or whether the central bank can withdraw the liquidity as fast as they injected it, with no risk of inflation.

Most people are not sure which camp is right (with a modest majority in the Keynesian camp). The world is deeply divided.

How can the science of macro-economics resolve the crisis? On this issue, Paul de Grauwe has no solution. Efficient markets cannot take care of themselves and are not superbly informed. They need a lot of prudential regulation to address animal spirits. But how much regulation is appropriate?