The Myth of the Global Economy
Record (NJ), March 13, 2002
Knight-Ridder/Tribune Information Services, March 11, 2002
Now that the US recession is over (Federal Reserve Chairman Alan Greenspan has pronounced it), it is worth glancing back at the widespread concerns of a global economic slowdown that prevailed just a few months ago. These fears turned out to be overblown, and there's a reason for that: the "global economy" is itself somewhat of an exaggeration.
Last year, when the economies of the United States, Europe, and Japan were all slowing at the same time, many people took this as further evidence that globalization had finally put us all in the same economic boat. But the slowdown of the three major economies—which together account for more than three-fourths of the world's output—was, more than anything, a coincidence.
The downturn had different, mainly internal, causes in each of these economies. In the United States, it was the partial bursting of the stock market bubble that ended the longest economic expansion in our history. Europe is constrained primarily by the tight monetary policy of its central bank: it is holding short-term interest rates twice as high as ours, despite much higher unemployment there. And Japan is caught in its own unique deflationary slump—with consumers and businesses holding back on spending—that has persisted for most of the last decade.
More importantly, any one of the Big Three economies can pull itself out of its own slump without help from the others. This is especially true for the United States, where more than 88 percent of the goods and services we produce are still sold right here at home.
The larger-than-life portrayal of our global economic inter-connectedness is but one of numerous exaggerations that have come to dominate the discussion of globalization. Think of it as a marketing strategy: our political leaders, backed by most economists at major think tanks, are trying to sell a particular brand of globalization to an increasingly skeptical public. Call it "the Washington Consensus," for its place of origin.
This brand is marketed as an inexorable march of progress, driven by technological advances in such areas as communications and transportation. If the majority of Americans have actually lost out in this process—as economic research and wage data for the last quarter-century clearly show—well, they will just have to adapt better to the "global economy."
To question the consensus is portrayed as futile and senseless, like opposing the weather. But in reality, the rules that govern global commerce are made by people—mostly politicians. These rules can be changed so that the majority of people—in the world as well as here—benefit from globalization.
That certainly hasn't happened yet. Contrary to the mythology of the global economy, the vast majority of low and middle-income countries have suffered a drastic decline in economic growth over the past 20 years. From 1980-2000, the per capita income of the world’s low and middle-income countries grew at less than half the rate of the previous two decades. This is World Bank data, and any economist who is literate in this area knows what happened—but few are willing to even talk about this profound economic failure. They do not want to be seen as spoiling the overall effort to market the Washington Consensus.
Meanwhile, in the United States, we are by no means out of the woods just yet, despite positive growth in the fourth quarter of last year and the current quarter's expected improvement. US consumers, with their debt at record levels, cannot continue to drive the engine of recovery by themselves. And there is no indication so far that business investment, down 9 percent from its peak a year ago, is coming back. Exports could help, but not so long as the US dollar remains over-valued.
That leaves the government. But the bond markets are already anticipating that the Fed will raise interest rates as early as May (the Fed has never been all that comfortable with unemployment below 6 percent).
And sadly, more than 60 years after World War II pulled this country out of the Great Depression, military Keynesianism is still the only expansionary fiscal policy that can command a majority among our political class. Hence the real economic stimulus package of the Bush Administration, whether calculated as such or not: the War Without End. It seems that globalization is not the only area of economic debate where ideology has crowded out reason.