Economists are the absolute worst at this. Not only do they believe that economics determines everything, they also tend to think that economic methodologies can explain all the non-economic social sciences with just a flick of the wrist.
So it’s refreshing to see economist Tyler Cowen’s contribution to Cato’s online forum about how to revive economic growth. Cowen makes the counterintuitive claim that the key to the United States bolstering its growth rate is through its foreign policy:
Just as peace tends to feed upon itself, so does war. If violent conflict became more of a global norm, potential theaters of war could include Eastern Europe, the South China Sea, and the Middle East, as indeed we are already seeing in today’s headlines. If those regions remain enmeshed in violent conflict or even diplomatic ambiguity, as is the case with China and its neighbors, current global norms in favor of peace could crumble much further. Today’s world, in geopolitical terms, is the scariest we have seen for decades, and we are learning to our dismay that progress toward greater peace is not always the dominant trend.It is possible that we are still living inside the biggest bubble of them all and that is called “the peace bubble.” I’ve also heard this described as the bubble of “Pax Americana,” although that is a more partisan take on the role of America in global peace. You might think the chance of this being a “peace bubble” is say only five or ten percent. Maybe so, but still in expected value terms that is still the most important issue to worry about. The breaking of that peace bubble on a larger scale could endanger all of the progress and accumulated well-being of the human race, including the United States….I’m not going to try to solve these conundrums in an essay of this length. I’ll simply put it this way: the single most important thing we can do to boost long-run American growth is to get foreign policy right. Very literally our lives, and the lives of many others, depend on it. And that means the economists aren’t nearly as important as they like to think they are.
I’m in such strong agreement with Cowen’s last sentence, and so grateful that an economist has acknowledged that maybe there are things more important than economics going forward in the world, that it pains me to disagree with Cowen. But here goes.
In one sense, Cowen is right — a surefire way to depress American economic growth in the future is for American foreign policy to blunder into a great power war. Great power wars do a bang-up job of destroying wealth and disrupting economic exchange. Even, say, a Sino-American conflict that mirrored the Cold War patterns of economic exchange would be really bad. This was why I mentioned this possibility in my post a few months back about the five known unknowns for the next generation economy.
The thing is, this is true for a lot of potential catastrophic events. Both unchecked climate change and the uncontrolled spread of a virulent pandemic could have similar effects – which is probably why it might be a good idea to set up some preventive measures now in those areas. But preventing a catastrophe, while important, is not the same thing as boosting economic growth. It’s insuring against a reversal.
It’s also becoming obvious that a lot can actually go wrong in foreign policy without it affecting the U.S. economy all that much. Indeed, in that respect 2014 is an “easy test” for whether foreign affairs can negatively impact American economic growth. Turmoil in Eastern Europe and the Middle East continued unabated, and yet despite all of that, markets have been pretty chill and the U.S. economy has been chugging along.
The key thing that American foreign policy has to get right in the near term to ensure continued economic growth is to suppress conflict in the Pacific Rim. China is the one challenger to the U.S.-created order that has the capacity to disrupt that order. Heightened tensions between great powers in that region would be bad. And yet, if 2014 is any indication, this is an area where the United States and China appear to have reached a reasonably stable equilibrium. Washington and Beijing hardly agree on everything, but they agree on the big things, like maintaining an open global economy, reducing the likelihood of a military confrontation, and tackling climate change. So despite a lot of criticism of the Obama administration’s foreign policy, they have adroitly handled the One Big Thing that could really affect the U.S. economy.
In contrast, consider my colleague Catherine Rampell’s excellent column on why the United States has been outperforming every other economy that experienced a financial crisis in 2008:
[W]hat accounts for the American post-crisis economic exceptionalism, unimpressive though it may feel at home?Some have credited serendipitous circumstances, notably the shale energy boom. That hasn’t hurt, but its contribution to the recovery has been relatively minor. Instead, the biggest factors explaining the divergence between U.S. fortunes and everyone else’s were policies undertaken by our improbably wise public officials, through some combination of ideology, necessity and luck.
The policies that Rampell discusses are… monetary and fiscal policy. Which is unsurprising. Absent that catastrophic reversal, good macroeconomic policy matters a hell of a lot more than good foreign policy — even good foreign economic policy – in maintaining high levels of U.S. economic growth.
I agree with Cowen that a catastrophic set of foreign policy choices could cause a downward spiral in the U.S. economy. But the post-2008 era shows that macroeconomic policies are at least as important as foreign policy. Furthermore, it’s not obvious that the difference between the current U.S. foreign policy and some “optimal” foreign policy would yield much in the way of greater economic growth (and as Cowen acknowledges, there isn’t “any simple formula for getting foreign policy right”).
So as grateful as I am for Cowen’s acknowledgment that other policy realms of the social sciences are important for the economy, I feel obliged to return the favor. Going forward, economic policies matter more for economic growth.