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Looking for a Globalization Strategy

March 6, 2008


In two recent posts, I have focused on how economists and politicians are revisiting past thinking about free trade and globalization [see The Return of Protectionism? and Negative Views of Free Trade]. Steven Pearlstein, columnist for the Washington Post, sees a lot of nonsense being spouted by the U.S. presidential candidates and is calling for them to provide a bolder, positive vision about how the U.S. can remain a player in a globalized world [“Mobilization for Globalization,” 27 February 2008]. He begins his column by reminding us that the U.S. economy (like many others) is always a bit of a roller-coaster ride.

“Remember, in the early 1980s, the U.S. economy was written off as unproductive, unimaginative and self-indulgent, doomed to fall behind Japan and Germany with their superior business cultures and economic models? As it turned out, America’s obituary as an economic superpower was premature. By the turn of the millennium, the Anglo-American economic model was back on top. Communism was dead and buried, an American-led tech boom was in full swing and the rest of the world was looking to the United States as the indispensable source of global growth. It was a glorious comeback, to be sure. But just as we were about to settle into a new period of smug triumphalism, things started to unravel again. Productivity slowed, along with the pace of innovation. And the bursting of two monster-size investment bubbles has raised serious questions about the ability of unregulated financial markets to allocate capital.”

I believe there is a bit of difference with this current downturn because the “two monster-size investment bubbles” to which Pearlstein refers both deal with the fact that Americans have kept their economy going through the unwise use of credit. As noted in my post about the calls for protectionism, this credit crisis was created in part by the stagnation of middle class wages. It’s a point that Pearlstein also touches on.

“The stagnation in wages and income for the vast majority of households — as top executives and industry superstars are walking off with the lion’s share of gains from economic growth — has created a backlash against trade and immigration and badly eroded political support for further globalization. Rather than Germany and Japan, it is China and India that are viewed as the imminent threats to U.S. prosperity and economic hegemony.”

No one denies that good paying manufacturing jobs have been lost. It’s a fact. But neither can anyone deny that to combat stagnant wages consumers have turned to low cost retailers like Wal-Mart to try and stretch their dollars. In order to keep costs down, Wal-Mart and others have turned to the very places that people now single out as the economic adversaries. That’s the conundrum that Pearlstein says needs addressing and nobody is. He writes:

“I have no doubt that Americans overstate the degree to which globalization is responsible for this economic malaise, just as I have no doubt that economists and business executives understate it. We could probably spend the next decade figuring out whether it is free trade or changing technology or the decline of unions or simply the herd instincts of corporate executives that are most to blame for decisions to move production to Mexico or outsource to Lithuania. But as Matthew Slaughter, a Dartmouth economist and one-time Bush economic adviser has written recently, it doesn’t much matter how the responsibility is apportioned. As long as trade and globalization are factors, which they clearly are, then whether they account for 25 percent of the problem of 65 percent, the public will be against them. Given that political reality, it’s disappointing there hasn’t been a more serious debate by the presidential candidates about globalization.”

To be fair, trying to debate the plusses and minuses of globalization in sound bites is unrealistic. If the candidates were to delve very deeply into the subject they would likely put voters to sleep. Any discussion on the subject has to show how all three aspects of globalization — the movement of people, resources, and capital — intertwine . The politicians are currently caught up with trying to explain why jobs have been lost to NAFTA and at the same time explain why illegal immigrants continue to flood across U.S. borders. These are not isolated issues and yet are treated as such in the debates. Pearlstein continues:

“Both [Clinton and Obama] are peddling the silly idea that by renegotiating the treaty, they would somehow magically make plants in Ohio and across the Rust Belt suddenly competitive again. And both unfailingly parrot the empty union mantra about ‘enforceable labor and environmental standards’ anytime trade crops up at a candidate forum. Things are no better on the Republican side, where the party line seems to be that importing workers from Mexico depresses wages and increases unemployment for U.S. workers, but importing goods made by low-wage workers in China does not. So much for economic literacy. To his credit, John McCain has been more consistent in his support of open borders of all sorts but offers little to those who are the losers from trade other than platitudes about education and unshakeable confidence in the ability of Americans to adapt to change. What none of the candidates has offered is what Americans most desire: a grand bargain that would restore confidence in the competitiveness of the U.S. economy and make it possible politically for the country again to embrace globalization. If we could get beyond stale ideology, it’s not hard to imagine what such a grand bargain would look like — a bit of Sweden combined with a strong dose of Silicon Valley, spiced with a pinch of Putin’s Russia.”

Pearlstein’s formula of a grand “bargain” or vision is likely to be very controversial on all sides of the political spectrum. Before looking at how he would blend Sweden, Silicon Valley and Russia, a word needs to be said about “the empty union mantra about ‘enforceable labor and environmental standards’.” If globalization does not (or cannot) improve the lives of the billions of people living in poverty, then maybe it is not a vision worth pursuing. The fact is, however, that the latest wave of globalization has lifted over two billion people out of poverty’s grip. The vision should be to continue this trend and by doing so help level the playing field with the very labor laws and environmental standards that Pearlstein so easily dismisses. The developed world can’t look back with much pride on how it treated either workers or the environment as they climbed the economic ladder. Do we really want to see that checkered history repeated in emerging market countries? I don’t think so. Corporations tend to forget that the global economy rests on the shoulders of consumers. By increasing the number and improving the lot of consumers, the global economy can continue to grow. The union “mantra” is short-hand for that argument. I realize I too have over-simplified it, but being dismissive of good working conditions and a cleaner environment is going to get no one closer to a grand vision for globalization that most people can embrace. Off my horse and back onto Pearlstein’s.

“Sweden has been successful in retooling its once-socialist economic model by embracing the notion that the government should protect workers rather than jobs. In the U.S. context, that would mean reforming the health-care system so that losing your job didn’t mean losing your health insurance. It would mean putting serious money into an expanded unemployment insurance program that would cover all workers and include education and training grants, and wage insurance. And it would include an explicit goal of offsetting the alarming increase in income inequality by using the progressive income tax to redistribute income from the highest-income households to everyone else. What Silicon Valley can contribute to a new American economic model is not just its fantastic technology, but its entrepreneurial spirit. Silicon Valley is about a culture of risk-taking, not just by companies and investors, but workers as well. It’s about companies where everyone understands that the way to get rich is to make great products that change the world. And it’s about management that eschews bureaucracy, that values talent above all else, that includes fun in the compensation system and expects ideas and inspiration to flow from the bottom up rather than the top down. I realize that it’s pretty hard for a blue-collar worker in Toledo to understand what any of that has to do with his factory closing, but in fact it has everything to do with it. The U.S. economy wouldn’t be in the funk it’s in if it took more cues from Silicon Valley and fewer from Wall Street. Finally, we might learn a thing or two from Putin’s Russia about playing hardball on the global stage. Rather than spending a decade begging China to stop manipulating its currency for mercantilist advantage, we should slap a 30 percent tariff on all Chinese imports and let them spend a few months negotiating with us on when and how we’re going to reduce it. In the same spirit, why not announce that the United States welcomes investment from the sovereign wealth funds of any nation except those that are members of OPEC and other price-fixing cartels?”

If there wasn’t something in Pearlstein’s recommendation for a “grand bargain” that got your fires burning, I suspect nothing will. Personally, I believe income distribution through taxation is a stillborn idea that has not proven workable in the past. I believe in paying fair wages for hard work. It’s counterproductive to tax away the income of the very entrepreneurs whose spirit Pearlstein is trying to instill throughout the economy. Entrepreneurs create jobs and it is those jobs that should be the focus of the grand bargain. Nevertheless, I applaud Pearlstein for having the courage to address a very difficult subject and put his neck on the line by providing some recommendations. I have noted before that there are too few leaders on the global stage with the insight and courage to offer a vision behind which people can rally. Such a vision, as Pearlstein notes, has not emerged during this U.S. presidential season and it looks like it probably won’t.

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