Three leaders at Tufts' Global Development and Environment Institute (GDAE) on Jan. 31 were among over 250 economists to contribute to a letter sent to President Barack Obama's administration encouraging trade policy reforms in the wake of the financial crisis.
The GDAE, a research institute run jointly by the Fletcher School of Law and Diplomacy and the Graduate School of Arts and Sciences, cosponsored the letter with the Institute for Policy Studies (IPS), a think tank in Washington. The letter reflects recent developments in the general academic consensus on the most effective trade policies and follows new findings across economic research that show support for capital regulation.
Kevin Gallagher, a research associate at GDAE, and Sarah Anderson, global economy project director for IPS, authored the statement late last year.
GDAE co-director Neva Goodwin and Director of GDAE's Research and Policy Program Timothy Wise were among the signatories.
In writing the letter, economists wanted to convey to policy makers their support of capital regulation and recommend that the administration consider capital control as a legitimate policy option for future U.S. trade negotiations, according to Gallagher.
"Academic journals and articles don't always make it to everyone's coffee tables," Gallagher said. "We wanted to make a statement that was short, sharp and crisp to synthesize with policymakers what research is showing at this time."
The use of capital controls restricts rapid flow of capital across international borders so it can be directed toward the public good. Current U.S. trade rules, in accordance with more traditional economic theory, do not permit capital controls in the interest of free market flow, according to Anderson.
"There has been this idea that the free market should rule the international financial system, that government shouldn't be meddling in financial issues," Anderson said.
According to Gallagher, however, recent economic research suggests that unmanaged capital inflow can cause inflation, currency appreciation and real estate and stock market bubbles or rises in prices above goods' fundamental value.
These consequences all could contribute to a financial crisis, according to Gallagher.
"In the wake of the financial crisis, people should see that it's very dangerous to have completely unregulated financial markets," Anderson added.
Gallagher explained that the timing of the letter coincides with a number of trade deals currently being considered in Congress. The 112th Congress will soon vote on trade deals from U.S. negotiations with South Korea and Colombia during the Bush administration and new negotiations with Pacific Rim countries, such as Chile, New Zealand and Singapore, according to Gallagher.
"As Congress thinks about deals it's going to make this year and sets up the template for future negotiations, it's an opportune time to make some amendments and adjust trade policy in the wake of the financial crisis," Gallagher said.
Gallagher and Anderson both served on an advisory board to the Obama administration regarding the financial crisis, Anderson said. The two academics were prompted to draft the letter because they felt that the new research regarding capital control deserved more attention, she said.
Seventeen groups of corporate lobbyists on Feb. 7 endorsed a response statement opposing the economists' research and statement, according to Anderson.
The corporations asserted that controls should not be strengthened, according to Jonathan Huneke, vice president of communications and public affairs for the United States Council for International Business, a private lobbyist group representing many multi-national corporations.
"We're trying to push back against the efforts of academic advisors to change the model," Huneke, who contributed to the response statement, told the Daily. "The change could make it difficult for companies to do business and could curtail the benefits of investment between the U.S. and other countries."
This resistance to restrictions is to be expected, Anderson said. Congress is responding with much more interest to the economists' recommendations than ever before, though currently the government seems to be siding with the corporations, she said.
"Clearly there's a big battle that's going to go on for a while over this issue, but we hope the door towards change isn't shut," Anderson said. "There seems to be a lot of interest in Congress in taking a fresh look, so we'll see how it all plays out."
