Lost in Practicalities
Matthew "New Deal" Yglesias and Tyler "SWF" Cowen are still talking about Paul Krugman's "protectionist" about-face. Both oppose Krugman's call for social safety nets to help the losers from free trade.
The Economist points out two problems with SWFs, or sovereign wealth funds: transparency and knowledge. "The last time governments were this involved in sinking money into private assets, the process tended to be called nationalisation. Now the funds are invested both abroad and domestically. A new term will have to be coined: internationalisation, perhaps." An American SWF could hide its decision-making in a blizzard of paper and regulations. Moreover, it is mostly likely an SWF would invest less efficiently than a private investor. That goes for Yglesias' and Cowen's arguments.
Both Cowen's and Yglesias' proposals would create more problems than they solve. Foreign governments would certainly take Washington's creation of SWFs as a cue, that multilateral trade reform is dead. Also, individual governments might oppose American SWF-led investment just as America does. As many have commented on both sites' boards, an SWF wuld be prone to corruption caused by lobbying. SWfs would likely exacerbate already existing market distortions, like tariffs and subsidies. The first-best solution is reducing these barriers; the second-best involves the right combination of domestic employment insurance, domestic healthcare reform, domestic pensions reform, multilateral immigration reform, multilateral financial reforms, private investment, and education needed to maintain an increasing rate of global and domestic economic growth.
Krugman is right.
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