Journal of Policy Modeling 31 (2009) 479–481

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Editorial

1. Part A: “Nobels on ‘Where Is the World Economy Headed for?”’

Part A of this Special Issue on “Nobels on ‘Where Is the World Economy Headed for?”’arose out of the Session that I organized and chaired at the Annual Meeting of the AmericanEconomic Association (AEA) held in San Francisco on January 4, 2009. The panel was set up atthe beginning of 2008 when few people expected that the current financial and economic crisiswould become, by the end of the year, the deepest economic crisis since the Great Depression.

The world economy today faces two distinct, but interrelated, problems: (1) how to overcomethe present crisis and introduce reforms to prevent future crises and (2) how to return to rapidgrowth afterwards rather than face stagnation, as Japan did after its crisis of the early 1990s.These are the questions to which the participants in this AEA Session – all Nobel Laureates inEconomics – shed light and try to provide answers.

In the first paper in this Symposium “Forecasting the Cost of U.S. Health Care in 2040”, RobertFogel points out that one of the most important debates among health economists and biomedicalspecialists in the United States and other rich (OECD) nations is whether rapid advances inbiotechnology will spare their health systems from a financial crisis. He concludes that estimatingthe increase in health costs requires weighing the existence of a particular chronic disease by thecost of treating that condition, which generally increases with age, as well as the growth in thedemand for health care, which itself depends on the growth of per capita income.

In his paper, “Measurement of a Shift in the World’s Center of Economic Gravity”, LawrenceKlein presents data on overall economic activity, national economic accounts, demographics,sexual specifics, education, health, life expectancy, and energy output that show that growthcenters have shifted from North America and Europe to the Asia-Pacific area (primarily China)during the last decade of the twentieth century and especially during the first decade of thetwenty-first century.

Robert Mundell, in his paper “The World Economy: Quo Vadis?”, starts by pointing out that thatthere were no major financial crises during the Bretton Woods period or under the gold standard.Allowing the dollar to sharply depreciate up to the summer of 2008 was a terrible mistake becauseit signaled a tremendous liquidity problem and shortage and drying up of credit, despite the largeamounts of money that the Fed put into the system and interest rates as low as 2% or 1%. Heproposes the introduction of $500 billion of “Dated Spending Vouchers” that have to be spentwithin, say, three months to overcome the present shortfall in effective demand and cutting the

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profit tax to 15% or 20% to increase effective supply. Mundell urges the re-establishment of afixed exchange rate system starting by stabilizing the dollar/euro rate and keeping the dollar/RMBrate at 6.8 anchors for the world economy.

Edmund Phelps, in his “The Uncertain Direction of the World Economy”, points out that fromthe structuralist perspective, it makes sense for the federal government to undertake investment-type expenditures for the nation’s infrastructure, subsidize companies’ employment of low-wageworkers, and provide investment tax credits. He states that “monetary policy simply cannot do theheavy lifting needed to get back to something approaching prosperity when we’ve had adversestructural shocks”. Similarly, the Keynesian solution of stimulating household consumption maybe no remedy because it would aggravate the country’s over-consumption and too many publicprograms would slow down innovations. Phelps stresses that the crucial task in 2009 will be torestructure or reconfigure the financial sector so as to make less mortgage lending and providemore loans for business investment and business innovation.

In the last paper of this Symposium, “The Financial and Economic Crisis and the DevelopingWorld”, Michael Spence points out that until September of last year, developing countries believedthat they could avoid a major economic crisis. But then the de-leveraging process accelerated andasset deflation started in advanced countries, which destroyed the balance sheets of their majorfinancial institutions. The scramble for capital in the face of anticipated redemptions and collateralcalls led to the drying up (and in some cases even the reversal) of capital flowing to developingcountries. Together with the reduction of the demand for their exports, this sharply reduced thegrowth on most developing countries. According to Spence the financial crisis will be on the wayout in developed countries when normal credit conditions and private capital return. In all of this,China is likely to fare better than India and most other developing countries.

2. Part B: Is It Time to Change Trade Policies

Part B of this Special Issue on “Is It Time to Change Tax Policies?” includes some of thepapers presented at the Session by the same title that I also organized and chaired at the AnnualMeetings of the American Economic Association in San Francisco on January 3, 2009, as wellas other papers on the same topic by the leading experts in the field. The papers in this Partdeal with the challenge to the time-honored principles of free trade arising from the allegedexports of jobs and wage pressures resulting from globalization and outsourcing in the contextof the most serious economic and financial crisis that the world has faced during the post warperiod.

The first paper of Part B of this Special Issue opens with Jagdish Bhagwati’s paper entitled“Does the U.S. Need a New Trade Policy?” in which he refutes arguments in favor of trade pro-tectionism against poor-countries in order to protect American jobs and wages advanced by somepoliticians, economists, and labor unions; he ends by hoping that President Obama is listening.

Robert Baldwin, in his paper “Trade Negotiations within the GATT/WTO Framework: ASurvey of Successes and Failures,” points out that successive rounds of multilateral trade negoti-ations have resulted in a sharp reduction in tariffs and nontariff restrictions. There were, however,frequent breakdowns that threatened the success of the negotiations, as manifestations of the diffi-cult process of adjustment among the participants to relative shifts in their political and economicpower. He recommends reducing the number of items in future negotiations and more detailedearly analysis of the trade implications of negotiating proposals.

In their paper, “Alternatives to the Doha Round,” Alan Deardorff and Robert Stern state that ifthe Doha Round failed, the biggest losers would be developing countries, depending on the major

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export sectors of each country. The authors then explore the various options available to them ifthe Doha Round failed. These include entering into regional and/or bilateral arrangements, aidfor trade, sectoral initiatives, and unilateral liberalization.

Ralph Gomory and William Baumol in their “Globalization, Prospects, Promise, and Prob-lems,” seek to demonstrate that the same theory that shows that free trade is beneficial can alsocan be harmful to at least one of the trading countries with globalization and that the interestsof a country and its companies may diverge. The authors examine the conditions under whicheconomic development in a trading partner can be harmful, or alternately, helpful to the homecountry. This reality differs markedly from Ricardo’s world in which natural capabilities playeda much larger role than in today’s world.

In his “Miracles and Debacles,” Arvind Panagariya addresses the critical question of whetherlow or declining barriers to trade and increasing volumes of trade are more conducive to growththan high or rising barriers and stagnant or declining trade. Although a sustained movement to anoutward-oriented trade regime did not always lead to faster growth of both exports and incomes,this does not destroy the case for free trade. The author shows that miracles were almost alwaysaccompanied by rapid growth in trade while debacles were rarely accompanied by import surgesduring the 1961–2005 period he examined.

In his “Protectionism in Western Europe Risk Financial Meltdown to the East,” James Deanpoints out that Europe is in danger of slipping into neighbor-beggaring trade and financial policies.Beyond the EU’s eastern borders, in Central and Eastern Europe (CEE), neighbor-beggaring isalready well underway, as Western European banks and other lenders withdraw capital rangingfrom short term trade finance to long term FDI. Western European governments are also beginningto implement chauvinistic financial policies, particularly via banks into which they are injectingequity.

Sebastian Edwards, in his “Protectionsim and Latin America’s Historical Economic Decline,”concludes that protectionism was extremely costly in the Latin American region. In most countriesgrowth was lower than in the advanced nations or the East Asian countries, the industrial sectorwas highly inefficient, a dual labor market developed, and social conditions did not improve.Indeed, the author concludes that the historical record suggests strongly that protectionism wasone of the most important causes – if not the most important one – of Latin America’s relativedecline during the second half of the 20th century.

In his “The Challenges to the Liberal Trading System,” this author points out that in recentdecades the liberal trading system has come under increasing attacks. Protection has been and isjustified for strategic trade and industrial policies, in order to reverse the process of deindustrial-ization in advanced countries, to protect jobs and wages from globalization and outsourcing, bydemands by advanced countries for strict labor and environmental standards in emerging marketsso as to establish a level-playing field in international trade and competition, from the prolifer-ation of overlapping regional trade agreements, and in order to mitigate the effects of the worldeconomic crisis. None of the above, however, justify changing trade policies and moving awayfrom the goal of a liberal multilateral trade system.

Dominick Salvatore ∗Fordham University, New York 10458, USA

∗ Tel.: +1 718 817 4045; fax: +1 914 337 3355.E-mail address: Salvatore@Fordham.edu

Available online 6 June 2009