Prestowitz

Losing faith in globalization

Losing faith in globalization

In the 1990s, the doctrine of globalization was wholeheartedly and unquestioningly embraced by the vast majority of the American elite. Globalization was seen as a kind of Americanization that would make the rest of the world rich, democratic, and peaceful while further enriching and empowering the United States. And this faith became the guiding force both of domestic economic policy and of geo-political strategy.

Now, however, in a shift of seismic proportions, the faith is beginning to flag. As the off-shoring of first low tech and then high-tech American manufacturing production and jobs accelerated in the 1980s and 1990s, the concerns of trade negotiators and producers were dismissed by the economics/foreign policy elite and the majority of media commentators. Not to worry, they said, because America was moving into a post-industrial age in which its future wealth and high standard of living would be based on services and ultra high tech R&D. Americans, they said, would do the skill and knowledge intensive work while leaving the dirty, sweaty stuff to developing countries like China, India, and Brazil. All would produce what could do best and trade for the rest and everyone would become richer and happier.

Over the past few months, several statements by leading economists and commentators have brought a dark cloud over this rosy picture. In June, the McKinsey Global Institute (long an enthusiastic promoter of globalization and off-shoring) issued a report demonstrating that over the past twenty years the U.S. economy has had ever increasing difficulty in reaching previous employment levels during recovery from recessions, let alone generating additional jobs. In the July/August edition of the establishment journal Foreign Affairs, Nobel prize winning economist Michael Spence pointed out that since 1990, U.S. job creation in the tradable sectors, be they goods or services, has been virtually nil. Rather, 40 percent of the new jobs during that period were in the government and health care sectors and there was also substantial job creation in the construction industries. So apparently, what Americans do best is anything that is not tradable. In other words, Americans can’t compete in global markets. Worse, however, is the fact that it is now obvious that because of fiscal constraints the government and health care sectors simply can’t continue growing as in the past. Indeed, they will have to shrink relative to the rest of the economy. Spence, thus, concludes that America’s only hope for generating future jobs and wealth is to somehow again become competitive in the tradable sectors.

In a similar vein, Columbia University economist Jeffrey Sachs argues in today’s Financial Times that Europe and the United States are being "whipsawed" by globalization. Says he, "new investments in large swaths of industry have been lost to international competition." He further notes that employment in the past ten years was only maintained in the United States and much of Europe by a construction bubble stoked by abnormally low interest rates and reckless deregulation. Thus, as presently structured and operated, globalization is not working at all as predicted. Like Spence, Sachs calls for less consumption oriented stimulus and more emphasis on export oriented strategies.

Finally, in today’s Washington Post, long time apostle of globalization and columnist Fareed Zakaria, who has long argued that free trade and globalization are win-win propositions and good for America, now argues that while globalization has been good for American companies, the way it has been operating has not been so good for American workers and job creation. Astoundingly, Zakaria says this is because the U.S. work force is not well enough educated. He quotes Pimco bond fund founder Bill Gross as saying that: "Our labor force is too expensive and poorly educated for today’s market place."

It’s not at all clear that this is the case. After all, of the world’s major countries, the United States, on average, still has the best educated work force with more college graduates per capita than anywhere else. But if the U.S. educational level has declined, it is not something that happened just in the past few years. Surely it was in process while our leading economists and commentators were endlessly repeating the mantra of the U.S. moving to a services and high tech economy on "higher ground."  Be that as it may, Zakaria, like the others, calls for more exports. In this case, he specifically focuses on tourism as a key to America’s economic future. Beyond that, however, he rightly argues that every U.S. policy must now be crafted with an eye on the jobs impact.

These conclusions and recommendations are all things that writers like Pat Choate, James Fallows, Chalmers Johnson, Michael Lind, and myself have been saying for years. So it is gratifying to see the establishment finally recognizing the reality we have been describing.

Yet, there is still one major hurdle to be cleared. As President Obama works on a new jobs policy, a focus on exports would certainly be a good thing. But he and the economics elite and the commentators must face the fact that the biggest immediate potential market for U.S. based producers and service providers is not the foreign market. It is the U.S. market. Bringing some of the off-shored production and provision of services back and discouraging further off-shoring as new industries expand is where the big opportunity for renewed job and wealth creation lies.

This discussion always gives rise to the dread cry of the danger of protectionism. It should not for two reasons. First, much of the off-shoring that has taken place has not been due to lower labor or other production costs abroad. Rather it has been due to investment subsidies, policies that make transfer of production a condition of market access, currency manipulation, formal and informal buy national policies, and U.S. tax and regulatory disincentives. In other words, mercantilism combined with inappropriate U.S. trade and tax policies are often the cause and not poorly educated U.S. workers or high U.S. labor costs. Responding to offset the impact of mercantilism and to change stupid U.S. policies is not protectionism. Second, matching overseas investment and tax incentives and otherwise encouraging production in the United States does not mean in any way reducing truly market forces based trade.

Our economists, foreign policy experts, business leaders, politicians, and commentators must begin to face these issues squarely if the United States is to achieve the economic renewal it needs both to keep the American promise at home and American commitments abroad.