Smoot-Hawley, Redux?

It is conventional wisdom that our current crisis -- even if it blossoms into World Depression II (Michael Kinsley's phrase) -- won't be as bad as the Great Depression.

After all, policy-makers have many more tools at their disposal, and we won't make the same mistakes (worrying about balancing the budget, restricting unemployment relief, and passing the Smoot-Hawley Tariff Act.)

The last of these -- Smoot-Hawley -- is seen as a symbolic, and prolonging, but not causing the Depression. While tariffs had long played a role in US economic development, Smoot-Hawley (ultimately passed in 1930) had the misfortune of being debated on the front pages of New York newspapers while the 1929 Crash was occurring. As one observer at the time said, the Act "'intensified nationalism all over the world.'"

But the continued threat of terrorism -- fueled by theocratic leaders that wish to 'return to an earlier age' -- may have some of the same effects as Smoot-Hawley. This morning's attack in Pakistan on a visiting cricket team from Sri Lanka will undoubtedly have a chilling effect on cultural exchanges in that part of Asia. (The Sri Lankans were actually replacing an Indian team that cancelled after last year's Mumbai attacks.)

Does "sports tourism" have a material effect on international economic activity? Of course not. But the symbolic effect of 'closing off' parts of the global economy may have some psychological effect that, like Smoot-Hawley, make take years to overcome.

And that doesn't even begin to account for the potential global ramifications of the first failed state with nuclear weapons.