On the Path Forward

This morning I reflected on the emerging economic debate.  In doing research over the past few days I was struck by this passage from a paper Dr. Rob Shapiro authored back in 2007, The New Landscape of Globalization: How America Can Reap Its Rewards and Reduce Its Costs, which I still feel is fresh and very pertinent: 

Where We Go from Here

We cannot entirely avoid these hidden costs of globalization, but we can outsmart and outrun them. There are many proposals to cushion their effects, through measures such as wage insurance. Those measures may help for a while, but by themselves they tacitly accept the underlying dynamics as inevitable and inalterable. A better approach focuses directly on affecting those dynamics. To begin, we will have to relieve some of the cost pressures on businesses, which in the more intensely-competitive environment of globalization hold down wages and job creation even as growth and productivity increase. Reforming our health care and energy practices, in short, is now the number one jobs and incomes issue, and one on which American workers and American businesses have real common cause. Both areas are already major public policy issues. Recognizing how the enormous increases in health care and energy costs of recent years directly and substantially affect wages and jobs should give greater sense of urgency to finally addressing both areas, in specific ways that will slow those increases.

In addition, we also should expand our public investments and other commitments in those areas in which American workers and businesses have advantages in the global economy. In an increasingly idea-based economy, the education of every American child should specifically include advanced skills in information technologies. Every child can and should have continuing access to a personal laptop computer in the school for 21st century instruction and at home for their homework. A recent proposal by Alec Ross of One Economy and NDN, "A Laptop in Every Backpack," is a sound and innovative start. Every worker in America also should have access to training in these technologies. Nearly half of our current workers cannot operate a basic computer, principally those workers with relatively few other skills. We can and should create a federal grant program for the country's 1,200 community colleges to use their existing computer labs and personnel to offer free computer training several nights a week to anyone who walks in and asks for it. Finally, Congress should look at ways to give workers more and better tools to prosper in this more competitive world, such as portable pensions and the passage of the Employee Free Choice Act.

As global competition increases, we also can and should expand public investments in the factors that foster innovation and help all industries grow and become more efficient. The federal government has long supported the nation's infrastructure, basic research and development, and education and training, all of which are essential to creating new business and spreading technological innovation. In recent years, however, our commitments in these areas have contracted sharply. For example, new commuter rail systems in the nation's larger metropolitan areas can not only bring more workers to more jobs, but also help reduce congestion and dependence on fossil fuels and consequent production of greenhouse gases. In addition, greater support for basic R&D in nanotechnologies for energy and health care, and the human genome for health care, can help to develop new business and over time address some of the long-term cost pressures in health care and energy.

Serious commitment to basic health care and energy policy reforms and meaningful new investments in education, training, infrastructure and basic R&D will be costly, especially at the outset. In the meantime, we can finance these necessary investments in many ways. Wasteful spending in other areas, including tax and spending subsidies for some well-connected companies and industries, can be pared back. Recent tax cuts for very high-income individuals, whose incomes have soared as those of average people have stalled, also can be pared back. Given the economy's basic strengths in this period, such steps will not slow down or hamper its growth in any meaningful way.

There are sound reasons to be wary of deficit spending, especially the prospect of sharply-rising federal expenditures for retirement and Medicare benefits as the baby boom begins to retire just a few years from now. These concerns, however, need not preclude our undertaking these commitments and investments. They will create substantial dividends for both the economy and government revenues over time, by bolstering those specific economic areas where the United States either has real advantages or needs real change. In so doing, they should help generate stronger growth and higher incomes, producing the revenues needed to sustain them. In this sense, these commitments and investments will operate like a sound investment that a good business makes, and often borrows to finance.

In addition, globalization itself can reduce some of the traditional costs associated with budget deficits, especially for the United States. As recently as the 1980s and early 1990s, when global capital markets were smaller and less efficient than today, large deficits in a growing economy claimed domestic savings that otherwise would have gone for business investments. As capital markets have gone truly global, the sheer volume and variety of financial assets flowing through the world's economies have blunted those effects because productive American businesses have direct access to the world's savings.

For some time, global capital has been growing faster than world GDP, faster than global trade, and faster than worldwide saving.17 A fair estimate of the global capital pool today is more than $150 trillion, more than three times world GDP and more than three its size less than 15 years ago.18 Moreover, the rate at which dollars, yen and euros move from one country to another (and often one currency to another) is accelerating even faster than their quantities, tripling in just the last 10 years and reaching more $5 trillion a year in 2006.

The fact that global financial assets today are growing faster than global GDP is meaningful. Since these assets are claims on the future, this rapid growth signals that overall, the world's rich people and rich businesses that hold them most of them are bullish about the future - certainly more so than in 1980, when the world's financial assets were growing much more slowly and totaled just 10 percent more than world GDP.

The unprecedented size of both the global capital pool and capital flows from country to country ultimately reflect the new prosperity of much of the developing world, along with the revolution in information technologies. After the last 15 years of massive transfers of Western investment, technologies and expertise to many countries that had stagnated for decade or centuries - China, India, Malaysia, and Mexico, for instance -their businesses and people are amassing large amounts of new saving and wealth. Modern finance exchanges much of this wealth for corporate bonds, bank deposits, stocks and other kinds of financial assets - economists call this process "securitization" - so that much of this new prosperity ends up in local or national capital pools.

Information technologies play a special role in moving these local and national pools of financial assets into the global capital system, because most of these financial assets now exist in the form of the bytes created, stored and transmitted by those technologies. And no sector has more thoroughly globalized itself than banking and finance. These technologies allow banking and financial institutions to not only link up and manage global operations, but turn physical wealth into securities and financial deposits that unlike paper or gold, can move from account to account and country to country in a nanosecond with no shipping costs. So, while there are relatively limited numbers of businesses in Chile or Indonesia - or even China - that can profitably use all the capital they create and save, firms and wealthy people in Santiago, Jakarta and Shanghai can easily and seamlessly invest their profits and savings in companies in Raleigh, North Carolina and San Jose, California, or lend it to the U.S. government.

There is a cost: Our trade and budget deficits require that we tap into global savings to maintain our business investments, and the result is that a growing share of the U.S. economy and its assets are owned by non-Americans. At last count, 12 percent of all U.S. equities, 25 percent of all U.S. corporate bonds, and 44 percent of U.S. government securities. And the large U.S. current account deficit, comprised mainly of our trade deficit, means that every year, we have to borrow hundreds of billions of dollars more from non-Americans. All that borrowing has depressed the value of the dollar, making it more expensive for American and U.S. businesses to invest abroad. It also raises the possibility of an eventual dollar crisis that would drive up U.S. interest rates.

These are all legitimate concerns, and we should take serious steps to increase our domestic savings. With global capital markets continuing to help finance business investment in the United States, these concerns need not delay the public investments and reforms required to better prepare Americans to live and prosper in an economy shaped by globalization and new technologies.