When Borders Don't Stop Problems

Joseph Stiglitz is calling for a UN legal framework to control future cross-border meltdowns.

Before I get into that, I want to cite an example of how international agreements lead to extra-territorial actions that over-ride local democracy. This is similiar to two cities trying to set laws that extend beyond city boundaries (say a downtown core versus a suburb fighting over zoning or transportation). This is the reason for super-city legal framework, a regional authority, that takes responsibility for the larger picture. This is exactly what Stiglitz is calling for. Here is an example of the need under NAFTA:

When the US created NAFTA it reserved the right to exempt itself and its corporations from sanctions across borders because it wanted to protect itself from uneven environmental laws:

At the time President George H.W. Bush signed it in 1992, the North American Free Trade Agreement (NAFTA) seemed to many environmentalists to threaten hard-won U.S. environmental standards because of Mexico’s historically weak enforcement of its environmental (and other) laws.

To secure support from the new Clinton administration and approval by Congress, the NAFTA parties adopted a contemporaneous side agreement establishing the North American Commission for Environmental Cooperation (CEC), with a mandate to assess and report on the NAFTA parties’ enforcement of their environmental laws.

At the same time, however, U.S. investors concerned that investments in Mexico would be vulnerable to expropriation, either by direct governmental action or by burdensome regulation, sought protection through a special arbitration procedure set forth in NAFTA’s Chapter 11.

From the US perspective, this was needed because:

Investors aggrieved by a breach of these guarantees may seek damages, through arbitration proceedings, directly against the offending NAFTA party, bypassing sovereign immunity and providing a neutral forum insulated from the political pressures affecting host countries’ administrative and judicial systems.

Here is a typical consequent of the "extra territoriality" aspect of the NAFTA agreement:

In 1996, the gasoline additive MMT was brought into Canada by an American company. At the time, the Canadian federal government banned the importation of the additive. The American company brought a claim under NAFTA Chapter 11 seeking US$201 million,[25] and by Canadian provinces under the Agreement on Internal Trade ("AIT"). The American company argued that their additive had not been conclusively linked to any health dangers, and that the prohibition was damaging to their company. Following a finding that the ban was a violation of the AIT,[26] the Canadian federal government repealed the ban and settled with the American company for US$13 million. (from here)

Hopefully that motivates Stiglitz's claims. Here's Stiglitz:

While discussions about economic “green shoots” continue unabated in the United States, in many countries, and especially in the developing world, matters are getting worse. The downturn in the US began with a failure in the financial system, which quickly was translated into a slowdown in the real economy. But, in the developing world, it is just the opposite: a decline in exports, reduced remittances, lower foreign direct investment, and precipitous falls in capital flows have led to economic weakening. As a result, even countries with good regulatory systems are now confronting problems in their financial sectors.

On June 23, a United Nations conference focusing on the global economic crisis and its impact on developing countries reached a consensus both about the causes of the downturn and why it was affecting developing countries so badly. It outlined some of the measures that should be considered and established a working group to explore the way forward, possibly under the guidance of a newly established expert group.

...

One might have thought that the United States would have taken a leadership role, since the crisis was made there. Indeed, the US Treasury (including some officials who are currently members of President Barack Obama’s economic team) pushed capital- and financial-market liberalization, which resulted in the rapid contagion of America’s problems around the world.

While there was less American leadership than one would have hoped, indeed expected under the circumstances, many participants were simply relieved that America did not put up obstacles to reaching a global consensus, as would have been the case if George W. Bush were still president.

...

The US and other advanced industrial countries pushed globalization. But this crisis has shown that they have not managed globalization as well as they should have. If globalization is to work for everyone, decisions about how to manage it must be made in a democratic and inclusive manner – with the participation of both the perpetrators and the victims of the mistakes.

The UN, notwithstanding all of its flaws, is the one inclusive international institution. This UN conference, like an earlier one on financing for developing countries, demonstrated the key role that the UN must play in any global discussion about reforming the global financial and economic system.

The above seems obvious and undebatable to me. But libertarian economist Tyler Cowen is very upset by the above suggestion:

Joseph Stiglitz's idea that "the UN has a key role to play in "reforming the global financial and economic system"" is a bad idea. It is a very bad idea. We're past the point where "they can't do any worse than we did" is a good or usable argument. Has the Public Choice revolution been such an unpalatable pill to digest?

I see the emotion, but I don't see the argument. If Cowen wants to be taken seriously he has to offer serious arguments and not simply "vent" at something he doesn't like. Worse, he seems to think that Public Choice theory somehow supercedes the need for intra-jurisdictional mechanisms. I can't make any sense out of that claim.