Globalization Initiative

John Plender in the Financial Times says that the way global finances look now certainly isn't it:

To escape from the global imbalances that are at the root of this financially induced recession, creditor countries need to stimulate their economies while the mainly Anglophone debtor countries moderate their excesses.

Japan, China and Germany, the biggest surplus countries, have, in the event, embarked on greater domestic stimulus than some had expected. Yet the US stimulus remains disproportionately large, while investors are looking to the already heavily indebted American consumer to do more to drag the world out of recession.

This does not amount to a sustainable exit strategy and in policy terms looks curiously like a re-run of the early 1930s in reverse. Then, countries that adhered to the Gold Bloc matched deflation in the US with their own deflationary response. Today, an exchange rate regime where many Asian currencies are pegged to the dollar means that asset price inflation in the US is being matched by asset price inflation in Asia.
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There is an echo here of the debate at Bretton Woods, where the postwar international financial architecture was thrashed out in 1944. In the negotiations, John Maynard Keynes for the UK tried to secure an international adjustment mechanism that was as tough on countries that ran persistent surpluses as on countries that ran persistent deficits. Such was the weakness of the UK's economic position that Harry Dexter White, the US Treasury secretary, prevailed.

The US was the world’s biggest surplus country and expected to continue that way. So the Bretton Woods agreement incorporated no sanctions on surplus countries and no real incentives for adjustment by countries that persistently piled up reserves. Bretton Woods did not last very long. Current exchange rate regimes look no more durable. Meantime, the risk that mercantilist exchange rate policies will prompt trade retaliation remains high, as does the risk of investor disappointment if US consumers choose to continue to rebuild their savings. They have no obligation, after all, to embark on a further binge purely to justify share prices that have run ahead of events.

The issue of how American consumers were going to act following the Great Recession is one we at NDN have written about quite a bit. For more, take a look at:

• The Housing Crisis and Our National Attititudes Toward Saving by Dr. Robert Shapiro, 4/17/2009 – Shapiro observes that, as a result of the burst of the housing bubble, the Millennial generation will likely be more interested in saving than investing in homes.

• Spend? Save? The debate continues by Simon Rosenberg, 2/11/2009 - Building on a previous post, Rosenberg follows the growing debate about whether American families should be focusing on saving.

Some not so great economic news on producer prices and housing, courtesy of today's New York Times:

New figures showing a decline in wholesale prices and a drop in new-home construction highlighted how weak the economy remains, even as some optimists declare the recession to be over.

Producer prices fell more than expected in July as the costs of food and energy slipped, the Labor Department reported on Tuesday. The 0.9 percent monthly decline came after three months of increases, and suggested that demand was weak up and down the ladder of production, from consumer goods to intermediate goods like chemicals and rubber to raw materials.

Producer prices declined a record 6.8 percent from last July, when crude oil prices soared above $145 a barrel and pushed the costs of fuels, food and other products sharply higher, before they fell back amid the global financial crisis. The decline in the last 12 months is the largest drop in 60 years, since the government starting keeping such records.

So-called core prices excluding food and energy costs fell 0.1 percent, their second monthly decline of the year.

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Despite several glimmers of rising prices and increased activity in the housing market, the Commerce Department’s report on housing starts and building permits showed that the market for new homes remained weak with building loans tight and so many foreclosures on the market.

New-home construction fell a seasonally adjusted 1 percent in July from a month earlier, to an annual rate of 581,000, the government said, and building permits were down 1.8 percent from June. Housing completions also dropped, falling 0.9 percent for the month.

The housing piece is not particularly surprising, as that market remains weak overall. At a time when unemployment is so high and houses so diminished in value, now seems an unlikely time for people to sell their homes to move for a new job and therefore have a house built.

While the economy seems to be getting worse more slowly, it is still getting worse and remains incredibly unstable. The one element able to raise producer prices most quickly, a rise in energy prices, could be disastrous.

Tremendous excess capacity remains in the economy, and many of the pieces of the stimulus that have yet to come online, namely infrastructure spending, are needed in the coming months (despite what we may hear on conservative cable networks). These projects will be noticed and helpful, both to the economy and the politicians who made them happen.

From the New York Times:

A World Trade Organization panel ruled on Wednesday that China had violated international free trade rules by limiting imports of books and movies, in a decision that buttresses growing complaints from the United States and Europe about Chinese trade policies.

The W.T.O. decision in Geneva is a victory for the United States at a time when a growing number of business executives and politicians perceive China as becoming increasingly nationalistic in its trade policies.

The restrictions also required foreign financial news services to operate through a government-designated distributor.

Ron Kirk, the United States trade representative, praised the panel’s legal finding. “This decision promises to level the playing field for American companies working to distribute high-quality entertainment products in China,” Mr. Kirk said, “so that legitimate American products can get to market and beat out the pirates.”

The W.T.O. ruling can be found here.

President Obama, President Calderon of Mexico, and Prime Minister Harper of Canada met in Guadalajara, Mexico, and, as is the standard procedure, yesterday released a joint statement. The leaders affirmed their commitments to trade, intellectual property, and a solution to climate change:

On IP:

We will cooperate in the protection of intellectual property rights to facilitate the development of innovative economies. We commend the progress achieved on reducing unnecessary regulatory differences and have instructed our respective Ministers to continue this work by building on the previous efforts, developing focused priorities and a specific timeline.

On trade:

North American trade is a vital component of our economic well-being and we pledge to abide by our international responsibilities and avoid protectionist measures. We reiterate our commitment to reinvigorate our trading relationship and to ensure that the benefits of our economic relationship are widely shared and sustainable. We will seek to promote respect for labour rights and protection of the environment with a continuing dialogue to address the functioning of the Labor and Environmental side agreements. This dialogue must result in mutually agreeable and cooperative activities with the aim to enhance the well-being and prosperity of our citizens and the economic recovery of our countries.

On Climate Change:

We recognize climate change as one of the most daunting and pressing challenges of our time and a solution requires ambitious and coordinated efforts by all nations. Building on our respective national efforts, we will show leadership by working swiftly and responsibly to combat climate change as a region and to achieve a successful outcome at the 15th Conference of the Parties of the UN Framework Convention on Climate Change. We also recognize that the competitiveness of our region and our sustainable growth requires a greater reliance on clean energy technologies and secure and reliable energy supplies across North America. Today, in agreeing to the "North American Leaders’ Declaration on Climate Change and Clean Energy", we reaffirm our political commitment to work collaboratively to combat climate change.

The aforementioned agreement on climate can be found here. For more on trade policy, take a look at yesterday's GAO report on recent Free Trade Agreements.

U.S. Senator Chuck Schumer (NY) yesterday introduced a companion bill to one sponsored by U.S. Rep. John Larson (CT-01), Chairman of the House Democratic Caucus, that taps the resources of the nation's approximately 1,200 community colleges to offer free computer training to workers and others seeking to improve their IT skills.

The Community College Technology Access Act of 2009 – S. 1614 and H.R. 2060 - is based on a paper written in 2007 by NDN Globalization Initiative Chair Dr. Robert Shapiro, Tapping the Resources of America’s Community Colleges: A Modest Proposal to Provide Universal Computer Training. During the presidential campaign, then-U.S. Sen. Barack Obama endorsed the idea as part of his platform and, as President, recently announced the American Graduation Initiative, which includes a massive investment in the nation’s community college system.

As Shapiro wrote in his 2007 paper:

The typical community college computer lab is open and used by students 66.5 hours per week. These hours are highly concentrated in the daytime of weekdays, when most working people are on their jobs. Under our proposal, the federal government would provide grants to defray the costs of keeping these labs open and staffed by community college instructors an additional 30 hours each week, on evenings and weekends when these labs are generally closed or little-used. During those hours, any person would be able to walk in and receive instruction in computer-related skills, at no cost. We estimate that if two-thirds of community colleges participate, and each provides three instructors for 30 hours a week, 48 weeks a year, Congress could provide every worker in America access to IT training for about $125 million a year.

Said Schumer, the Vice-Chairman of the Joint Economic Committee, "Anytime that we can increase opportunities for our workers to gain access to computers and IT training, we are investing in the future of our job market and our economy. Our community colleges play a critical role in workforce training, and this program will enable workers and students to access community college computer labs for free during times when they would otherwise go unused. I am proud to have introduced this legislation in the Senate to help brighten the future of our workers and our community colleges."

"In joining with Chairman Larson to sponsor this legislation, Senator Schumer has again shown that he understands the need to move aggressively to provide America's workers with the skills to succeed in the competitive U.S. and global economies, particularly during tough economic times," said Shapiro, a former Under Secretary of Commerce for Economic Affairs. "The Community College Technology Access Act presents the country with a vision for helping every worker who wants to get ahead. Tens of millions of Americans entered our workforce before computers and the Internet became ubiquitous. Many of them now are in what could be their most productive and highest- earning years. Without access to information technology skills, however, many of them will never fulfill their potential or may find themselves trapped in dead-end jobs.  As non-wired employment becomes increasingly rare, Americans without solid IT skills will find themselves economically marginalized. This program can help millions more American workers thrive in our idea-based economy."

For more on NDN's efforts on worker skills and facility with the global communications network, visit our 21st century skills page.

In his weekly address, President Obama discusses the impact of the Recovery Act on recent GDP numbers and the New Foundation. He sees innovation as a key piece of that New Foundation. Here's what the President had to say about employment, a lagging economic indicator:

But history shows that you need to have economic growth before you have job growth.  And the report yesterday on our economy is an important sign that we’re headed in the right direction.  Business investment, which had been plummeting in the past few months, is showing signs of stabilizing.  This means that eventually, businesses will start growing and hiring again.  And that’s when it will really feel like a recovery to the American people.

And innovation:

Innovation has been essential to our prosperity in the past, and it will be essential to our prosperity in the future. But it is only by building a new foundation that we will once again harness that incredible generative capacity of the American people. All it takes are the policies to tap that potential – to ignite that spark of creativity and ingenuity – which has always been at the heart of who we are and how we succeed. At a time when folks are experiencing real hardship, after years in which we have seen so many fail to take responsibility for our collective future, it’s important to keep our eyes fixed on that horizon.

Watch the whole thing for yourself:

The fault lines in this week's "strategic dialogue" between American and Chinese leaders remained largely unseen, like a low-grade infection that can flare up without warning. Those fault lines matter mightily, however, because the United States and China are the critical players in the globalization process shaping every economy in the world.And despite America's insecurities about China's rising power, the fact is, we retain most of the advantages in a complicated relationship best described by the Financial Times this week as "adversarial symbiosis."

The convergent interests of the United States and China are obvious and a cause for satisfaction at this week's talks. Most important, each is an enormous purchaser of the other's goods, so that domestic demand in one is a source of employment in the other. Nevertheless, the trade relationship will continue to have a sharp political edge so long as China sits on the other side of America's largest bilateral trade deficit. Yet, it really shouldn't be. We import more from China than from anywhere else, because China is both the world's largest producer of many cheap goods that Americans hardly make at all anymore - tee shirts and toys, for example - and a favored place for U.S. multinationals to assemble more complex products for the U.S. and other markets. In fact, nearly half of the high-tech products imported from China - computers, televisions, cell phones, and so on - are goods that U.S. producers merely finish or assemble there, sometimes using advanced parts made in America.And so long as the American economy is three to four times the size of China's, and much more weighted to consumption, no one should be surprised at our importing four to five times as much from China as China imports from us.

The economic truth is that America runs huge trade deficits with the world, because for years we have insisted on consuming much more than we produce, and imports are the only way to make up the difference. The flip side of this high consumption has been our low savings - at least until the current recession decimated so many people's savings and wealth - creating another fault line in the U.S.-Sino relationship. That low savings forces us to borrow abroad to finance some of our consumption, along with our budget deficits and business investment; and China with the largest surplus savings in the world has become our largest creditor. No one thinks of their creditors as their buddies - or the other way around - producing an unfamiliar and unpleasant dependency on an autocratic regime we don't trust. We cannot ignore that if China were to decide to abruptly reduce its lending to us, we would quickly find ourselves in deep economic trouble. But China needs us just as much economically, and not just to keep on buying Chinese goods.Just as important, China has to rely on the U.S. following economic and currency policies that will preserve the value of all the American assets - Treasury securities, stocks, real estate, and companies -- that China buys with the dollars we pay her for her goods.

China is dependent on the United States in other critical ways as well.American companies have been and remain a major source of Chinese modernization, through U.S. foreign direct investments (FDI) that transfer many of the world's most advanced technologies, equipment, and ways of doing business from here to there.China depends on these transfers as the ultimate source of much of its growth, and sustaining strong growth is a central factor for the legitimacy for its leaders' authoritarian regime.

China's reliance on the U.S. is also geopolitical. Chinese leaders desperately want and need peace, especially in Asia and the Middle East, so they can continue to direct most of the country's resources to their gargantuan modernization project. These leaders have long recognized - and said so - that American superpower has become the only force in the world capable of projecting the military and economic might required to contain local conflicts and terrorist threats that could threaten regional or global stability. That's why the last U.S.-Sino military confrontation occurred 13 years ago, when President Clinton sent the Independence carrier battle group into the Taiwan Straits and the Nimitz to the South China Sea, and why we rarely hear Chinese criticism anymore about "American imperialism" or "U.S. warmongering."

In no area is China's dependence on American superpower more important to China than the U.S. Navy's guarantee of the world's sea lanes. These are the routes not only for most of China's exports to the rest of the world, but also for the oil shipments from the Middle East, Africa and Latin America that fuel much of China's economy. Yet, energy also is an increasingly important fault line in the U.S.-Sino relationship. For the last decade, China has aggressively pursued long-term supply relationships with state oil companies across much of the world, including joint ventures, extended leases, and other arrangements. In some cases, China develops another country's oil fields in exchange for sole or heavily-favored access to whatever is found. (In Iran's case, China also sweetened the development deal by building a new Tehran subway system.) China's emerging global network of oil-supply relationships could become a point of conflict in the next global oil crisis.Beyond such a crisis, China's rising economic influence in countries that the United States sees as vital to its own geopolitical plans and interests will almost certainly create new fault lines in future U.S.-Sino relations. But it also could foreshadow a time when China will constructively engage in a number of serious global matters, from climate change and terrorism to intellectual property rights and currency adjustments, where the United States and most of the rest of the world would welcome their contribution.

NDN Globalization Initiative Chair Dr. Robert Shapiro's important book Futurecast: How Superpowers, Populations, and Globalization Will Change Your World by the Year 2020 has been released in paperback. It's a great book, but don't take my word for it, read it for yourself. Some other strong references:

"[Shapiro’s book] is a storm warning at a time when food shortages, higher energy prices and a credit crunch are forcing our heads out of the sand: if readers turn to Futurecast, they will find an argument that gives us a measure of what we should expect from our political leaders - and from ourselves - if we are to continue our civilization on the high plateau we have managed to reach." --The Financial Times

"Rob Shapiro's prescient and insightful book probes the confluence of challenges that society will face in the coming years. He argues that our world has become increasingly interdependent, and we must foster global cooperation to achieve a sustainable existence with equal opportunity for all. Futurecast is a vital resource for anyone seeking to understand the world our children will inherit." -- President Bill Clinton

Recently, President Obama announced a strong committment to America's community colleges in the form of the American Graduation Initiative. NDN, a long-time proponent of harnessing the resources of community colleges to upgrade worker skills, has been collaborating with House Democratic Caucus Chairman John Larson on H.R. 2060, the Community College Technology Access Act of 2009. Here's what Larson had to say about the President's new program and H.R. 2060:

President Obama once again displayed his gift for transformational leadership when he announced this morning an innovative initiative to strengthen community colleges across the country so they can build the American workforce of the future.  I am a strong believer that community colleges can be a hub for technology and job training in our communities if they are given the resources that our schools and students need.

I've introduced The Community College Technology Access Act, developed with the support of the NDN, which will open the doors of community college technology labs and training opportunities to the public in order to provide workers who are lacking key computer skills the opportunity to attain them.  By broadening their mission, community colleges have the potential to be a hub to train our workforce for the jobs of the future. My legislation helps them fulfill their potential and boosts local economies around the country.  I commend the President’s leadership on this issue and look forward to working with him on it.

H.R. 2060 continues to gain support in the House of Representatives, and now has 46 cosponsors:

Rep Miller, Brad [NC-13] - 4/23/2009
Rep Hare, Phil [IL-17] - 4/23/2009
Rep Wu, David [OR-1] - 4/23/2009
Rep Edwards, Donna F. [MD-4] - 4/23/2009
Rep Honda, Michael M. [CA-15] - 4/23/2009
Rep Himes, James A. [CT-4] - 4/23/2009
Rep Murphy, Patrick J. [PA-8] - 4/23/2009
Rep Ehlers, Vernon J. [MI-3] - 4/23/2009
Rep Sestak, Joe [PA-7] - 4/23/2009
Rep Kilpatrick, Carolyn C. [MI-13] - 4/23/2009
Rep Sablan, Gregorio [MP] - 4/23/2009
Rep Napolitano, Grace F. [CA-38] - 4/23/2009
Rep Markey, Betsy [CO-4] - 4/23/2009
Rep Ross, Mike [AR-4] - 4/23/2009
Rep Matsui, Doris O. [CA-5] - 4/23/2009
Rep Bordallo, Madeleine Z. [GU] - 4/23/2009
Rep McGovern, James P. [MA-3] - 4/23/2009
Rep Smith, Adam [WA-9] - 4/23/2009
Rep Grayson, Alan [FL-8] - 4/27/2009
Rep Castle, Michael N. [DE] - 4/27/2009
Rep Costello, Jerry F. [IL-12] - 4/27/2009
Rep Kennedy, Patrick J. [RI-1] - 4/28/2009
Rep Reyes, Silvestre [TX-16] - 5/4/2009
Rep Polis, Jared [CO-2] - 5/6/2009
Rep Ros-Lehtinen, Ileana [FL-18] - 5/18/2009
Rep Grijalva, Raul M. [AZ-7] - 6/2/2009
Rep Pierluisi, Pedro R. [PR] - 6/2/2009
Rep Langevin, James R. [RI-2] - 6/2/2009
Rep Sires, Albio [NJ-13] - 6/3/2009
Rep Schwartz, Allyson Y. [PA-13] - 6/4/2009
Rep McIntyre, Mike [NC-7] - 6/8/2009
Rep Blumenauer, Earl [OR-3] - 6/9/2009
Rep Gutierrez, Luis V. [IL-4] - 6/11/2009
Rep Roybal-Allard, Lucille [CA-34] - 6/11/2009
Rep Lofgren, Zoe [CA-16] - 6/24/2009
Rep Courtney, Joe [CT-2] - 6/25/2009
Rep Ryan, Tim [OH-17] - 7/8/2009
Rep Filner, Bob [CA-51] - 7/8/2009
Rep Conyers, John, Jr. [MI-14] - 7/8/2009
Rep Price, David E. [NC-4] - 7/9/2009
Rep Olver, John W. [MA-1] - 7/10/2009
Rep Tonko, Paul D. [NY-21] - 7/13/2009
Rep Eshoo, Anna G. [CA-14] - 7/15/2009
Rep Cohen, Steve [TN-9] - 7/21/2009
Rep Schauer, Mark H. [MI-7] - 7/21/2009
Rep Wexler, Robert [FL-19] - 7/24/2009

Federal Reserve Chairman Ben Bernanke testified before the House Financial Services Committee yesterday and Senate Banking today. There are varying takes on his testimony, but there seem to be three important themes that many have picked out for policy going forward:

1) The Fed has an exit strategy – Bernanke chose to not only testify about this, but also to write a reassuringly worded op-ed in the Wall Street Journal:

My colleagues and I believe that accommodative policies will likely be warranted for an extended period. At some point, however, as economic recovery takes hold, we will need to tighten monetary policy to prevent the emergence of an inflation problem down the road. The Federal Open Market Committee, which is responsible for setting U.S. monetary policy, has devoted considerable time to issues relating to an exit strategy. We are confident we have the necessary tools to withdraw policy accommodation, when that becomes appropriate, in a smooth and timely manner.

As the New York Times' Catherine Rampell writes, the question, more then just the how, is the when. James Kwak at the Baseline Scenario agrees that the "when" is important and has a solid take on the Fed's actions and Bernanke's words to this point.

2) The Fed should retain it’s independence – amidst Ron Paul led efforts to audit the Fed, Bernanke defended the Fed’s actions to this point and pointed out a number of concerns about Paul's proposal noting that:

The Congress, however, purposefully--and for good reason--excluded from the scope of potential GAO reviews some highly sensitive areas, notably monetary policy deliberations and operations, including open market and discount window operations.

With the profile of the Fed's activities at a high level of public attention, it’s not particularly surprising that the Fed's independence is being challenged. The creation of independent commissions is always politically difficult – who likes to give up their power? (Part of the reason the IMAC development on healthcare is fairly impressive.)

In Mark Thoma's view, the Fed's independence should not be diminished, but the district banks' presidents should be selected differently. He also brings in some good history on the topic.

3) Lawmakers should reign in long-run deficits – Not too much to expound on this point (Bernanke didn't go into too much detail, aside from touching healthcare costs), but the point is that fiscal policy gone awry in the long-run can create tremendous problems in the conduct of sound monetary policy – not something a Fed chair is particularly interested in seeing. Noam Scheiber writes that Republicans either don't know or don't care about the difference between the long-run and the short-run.

Of course, this testimony comes amidst the beginnings of the discussion about whether Bernanke is to remain Fed Chair (his term ends in January). The coming months will tell how the head of the nation's independent central bank plays his politics. Apparently he's got solid instincts on the retail side.