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There is No Global Economy
The concept of the 'global economy' is largely exaggerated. The US can – and should – still set its own economic policies
"This is the day that the world came together, to fight back against the global recession. Not with words but a plan for global recovery and for reform and with a clear timetable," said Gordon Brown at the end of the G20 summit last week.
This was somewhat exaggerated. There was no plan for global recovery or even a commitment to increased fiscal stimulus. It remains to be seen what kinds of reforms will actually materialise.
But recovery and reform will not necessarily hinge on what the G20 agrees to do. Roll back to the last major economic crisis - that which began in Asia in 1997 and spread to Russia, Brazil, Argentina and other countries. In September 1998 Federal Reserve chair Alan Greenspan warned: "It is just not credible that the United States can remain an oasis of prosperity unaffected by a world that is experiencing greatly increased stress." But the US economy kept booming right through the crisis, as a result of consumption driven by the stock market bubble. This continued until the bubble burst, pushing the US economy into recession in 2001.
It should not be surprising that the US economy has the potential to grow even while many other economies are contracting. Eighty-seven percent of what is produced in the US is consumed here. To be sure, the other 13% percent can make a difference - but US recessions are not brought on by falling exports. It is not comparable to the 47% of GDP that Germany exported last year, or even the 28% for Mexico.
Of course the current world recession is much worse and more widespread than the crisis of the late 1990s. The high-income countries that comprise the majority of the world economy, including the US, EU and Japan are mostly in recession. There are some big imbalances, built up over many years, that are adjusting at a pace that is not easy to predict - including the US savings rate, which had fallen to zero by 2007. And there are major weaknesses in much of the world's financial system.
Nonetheless the US is capable of recovering on its own, with a sufficient domestic economic stimulus and a sensible resolution of the major insolvencies in the financial system - regardless of what other governments do. The US recovery will in turn help the rest of the world.
The fact that the dollar is the key reserve currency of the world gives the US even more leeway. There are loud complaints from conservatives about our recession-induced free-spending ways, but investors world-wide are willing to lend the US government money at the historically low (both real and nominal) rate of 2.9% on 10-year Treasury bonds. This is not the sign of an impending fiscal crisis.
It is good that the G20 leaders are at least talking about increased international co-operation in order to deal with the world recession, and there are some areas - eg regulation of the financial sector or preventing illegal international capital flows and international tax avoidance - where increased international co-operation can be especially helpful. But even in these areas, many of the most important reforms can be implemented by individual governments.
The global nature of the "global economy" has been grossly exaggerated, as have been its implications. The world today is still much more a collection of national economies, and national governments - especially in the larger economies - have the potential to choose most of their economic policies much as they did 30 or 40 years ago.
The government of China, for example, has for decades controlled capital flows into and out of the country, regulated foreign investment in accordance with national development needs and plans, fixed its exchange rate and owned most of the banking system. In this way it was able to take advantage of "globalisation" - both international trade and foreign direct investment - to achieve the fastest economic growth in world history.
The contemporary idea of the "global economy" is based on a misapplied analogy to the historical development of national economies. For example, the US economy was much less stable, with more frequent and much longer recessions, before the creation of regulatory institutions, including most importantly the Federal Reserve in 1913 and the New Deal reforms of the 1930s. (The current crisis, which has occurred after decades of deregulatory reforms, appears to be the exception that proves the rule).
Thus, it is reasoned, we now live in a "global economy", and this too must be regulated to iron out some of the irrationalities and instabilities inherent in a market economy.
Of course there is some truth to this argument. The idea of a world reserve currency to replace the dollar, for example, most recently floated by China, is a potential reform that could improve world macroeconomic stability.
But the concept of the "global economy" is very often an exaggerated one, generating confusion and negative political consequences. Reforms that are both necessary and feasible at the national level, such as appropriate exchange rate, fiscal and monetary policies (especially in normal times) or capital controls, are rejected as incompatible with the "global economy".
At the same time, reformers often mistakenly look to supra-national institutions that are mainly deregulatory, unaccountable and regressive - the International Monetary Fund, World Bank and World Trade Organisation are prime examples - to resolve the problems that these institutions have themselves helped to create.
Finance ministers (or Treasury secretaries) that are beholden to powerful interests at home are even less accountable to the public when making decisions in these bodies that are another step removed from the electorate of member countries. If they won't do the right thing at home, they are far less likely to do it at the IMF or the World Bank. For the present, at least, reform at the national or perhaps regional level is a much better bet.
Indeed, "globalisation" under inappropriate rules and policies has contributed significantly to the current crisis. Even the EU, a project that compares favourably to the "race-to-the-bottom" economic integration of the Nafta variety, is currently hampering the Eurozone's recovery. The restrictions on budget deficits and the ultra-conservative central bank set up by the Maastricht treaty are making it more difficult for Europe to counteract this recession.
Efforts to redraw the rules for global commerce in a more equitable and rational manner - such as those of the UN commission headed by Joseph Stiglitz - are a vital part of creating a better future for the generations to come. But the world cannot wait for the time when the governments of the rich countries are willing to cede decision-making power to institutions - such as the United Nations - that they cannot completely dominate. Nor does it have to wait.
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25 Comments so far
Show AllThe only commodity global economy trades in is Capital. So it makes sense to create Global economy currency other than national currency like dollar.
toophat for you!
"The fact that the dollar is the key reserve currency of the world gives the US even more leeway. There are loud complaints from conservatives about our recession-induced free-spending ways, but investors world-wide are willing to lend the US government money at the historically low (both real and nominal) rate of 2.9% on 10-year Treasury bonds. This is not the sign of an impending fiscal crisis." Isn't it strange that many comments on this site over the past few weeks have emphasized the impending need to have a wheelbarrow to take money to the store for bread in the near future, while people with actual cash are willing to accept such a pathetic return for 10 years? Are people with money that stupid or do some CDers tend towards apocalyptic doom? "...the US economy was much less stable, with more frequent and much longer recessions, before the creation of regulatory institutions, including most importantly the Federal Reserve in 1913..." Many call for an end to the Federal Reserve, but do we really think our congressmen could do a better job guiding the economy, especially in the year preceding elections? And of course for the House, that's a good share of the time.
I don't think there is a binary choice between having the Federal Reserve and having congress control monetary policy.
Lots of alternatives have been proposed since 1913, but since they don't offer the opportunity to make a handful of people immensely rich, they'll probably never be implemented.
I haven't heard any details on a good alternative arrangement. Please enlighten.
The alternative is to nationalize the Federal Reserve Bank and put it under the leadership of a council of governers who is largely independent.
The Federal Reserve Bank regardless of its deceptive name, "Federal" , is not Federal and it is a private bank owned by a group of private banks, notably among them are City Group and Morgan Stanely Chase!!!!!
The governmetn can issue its money without borrowing it from the Feds with interest as is happening right now.
Good arguments for direct democracy.
proposition 8, bad argument for direct democracy.
Only if you lost.
Mr. Weisbrot makes some good points, however his sweeping and simplistic claims about Eurozone currency(ECB) policy is mislplaced. Eurozone countries have a much higher per capita level of social spending to begin with. A quick look at OECD or IBRD data will show that Eurozone (remember not all EU countries use the Euro) countries have much much better distribution of wealth and income and a far lower poverty rate. The need for huge sums of "stimulus" money is not as necessary as it is here.
In addition, the Euro countries are bound by the Stability and Growth Pact that limits their yearly deficits to 3% of GNP and cumulative debts to 60%. Many countries are already near or at these levels. The Euro does not have the luxury (perhaps in future) of being the worlds reserve numeraire currency. The oil market is denominated in USD, for example. In order to limit inflation, they must limit their debts. The US has more leeway here, but cannot avoid inflation forever. I would argue that runaway inflation is more damaging than lower levels of "stimulus" money (which in many cases is questionable in its effectiveness). Inflation will harm the lower income groups much more than the upper ones. That is something to think about. Right now many EU countries are in better shape than the US. To simply bash them as conservative is baffling to me.
As far as social policies, Europe makes the US look like Dickensian England.
From my limited knowledge viewpoint, I believe it is quite possible that everything you say is true. However, I believe you far overstate with your "bash them as conservative" statement. I think most understand (and certainly Weisbrot) that Europe's social economic cushion makes the economic slump far less painful for the average European. Nontheless, the inability to have a concerted, even mild stimulus package makes for the likely possibility of a more prolonged recession. In Europe, if one country goes it alone and throws money at the problem, they will only recieve perhaps half the benefit, while their do-nothing neighbor countries will luckily accept the inevitable "bleed across the border" cash.
I agree that Weisbrot must know this, however did not mention it in context. This is important to understand the wider issue. Simply throwing money at the problem like the US has done has proven ineffective. I am not against Keynesian style fiscal policy, however one needs a deeper analysis of the type of "stimulus" deficit spending that would be helpful for the economy as a whole, not just the upper income groups.
I am not defending some of the neoliberals in the EU and ECB, but being wary of inflation in this case is not a bad thing. High inflation for the eurozone would put a strain on people much worse than restraining deficit spending. Many eurozone countries will need that deficit spending to cover the increased social spending due to rising unemployment etc.,
What needs to really happen is a candid discussion of the failings of unregulated financial markets and neoliberal/laissez faire economics in general. In short a longer-term view that includes the wider contexts.
If there really were a global economy, whitey would be starving right along with the folks in Mali and Darfur.
do we not understand that industrialization destroys the planet, and that this hard and at times hazardous work is usually carried out by poor, local, manual-laboring folks where the raw materials are, with the higher-paying 'processing' jobs and profits and products going to ever richer and richer folks, frequently in other countries, and that this activity is supported by murderous force if and when necessary? since the whole globe is implicitly involved in these globe-killing industries, it is a global economy...
dubet, Your problem is that you tend to look at things from a reality point of view... seriously, I think you overstate a bit with the murderous force stuff. Sure, it's been done many times and still is and when not used, often the threat persists. The internet, bloggers and discussions, are the best way to keep this threat tamped down. In many ways, but not all, things are better now.
it is important to confront the fact that murderous force is in play right now, and has been throughout history, forging the industrialized, stratified world we now see before us...the reason this is important is that change is needed, and to bring that change about will require dealing with these same violent, armed forces...as much as the notion of 'starving the money out of the system' appeals to me, I don't think we can realistically expect much to change unless we are willing and prepared to engage physically, especially as the opposition will be, and they will be much better weaponed and organized, were this all to start today or tomorrow...blogging and discussing, while interesting from a sounding-board point of view, don't frighten the powerful (or the hired mercenary) as much as one might wish to think...frankly, even on this single site, there are such a wide range of opinions on any given topic among people who participate from thousands of physical miles apart that there isn't much of a consensus power base from which to negotiate, much less retaliate, anyway, so what's to be afraid of? it will eventually reach the arena of property rights...
I hope you're right, but...
There may not be a "global economy" since many countries will remain poor if there is a collapse or if there is a miraculous upturn.
There is, however, a global monetary system that is the vehicle of trade between nations, right now linked closely to monetary aspects of "super-nations", those countries whose currency value determines the value of currency elsewhere. The more natural assets it holds or manufactured goods a country can produce, the more stable is its monetary system and the more likely it will be able to control the monetary systems of other countries.
Mr. Weisbrot says, "Eighty-seven percent of what is produced in the US is consumed here."
What he does NOT reveal is the percentage of US consumption that is produced elsewhere in the world. It continues to inflate as more and more corporations are moving jobs to other countries because the labor is cheap. Even customer service jobs are being farmed out and corporations are paying citizens in foreign countries to do what Americans have done. If I call my telephone company to ask a question about my bill, I talk to somebody in India.
While production increases in other countries, America's buying power, education, productivity, and R&D steadily decrease. All of these factors filter UP into decreasing the value of America's monetary system and eventually ripple outward to other nations.
In the end, "an economy" cannot be separated from a country's monetary system and its effects.
Main Street is not a global economy; Wall Street is a global economy. The concept of “globalization” holds Main Street hostage to the demands of Wall Street. These demands are verbalized through the US government, but most especially through the Federal Reserve, the Treasury Department, and the White House.
Obama was chosen because of the disapproval of the Democratic rank and file of the Clinton allegiance to Wall Street. Too late the people find out that any candidate considered “serious” has already sworn allegiance to Wall Street through the hidden primary.
Oh for Christ's sake, just let the faux "global economy" crash and die already ! We can have our own local economies, decentralize, and learn to share and nurture one another for a change with truly fair trade instead of "free" trade. I am so sick and tired of small towns all across the heartland further dying out as it is !
the dollar as global reserve currency has enormous advantages and hidden enormous disadvantages. if pricing for oil is no longer done in dollars the impact will be enormous. every energy importer must use dollars for purchasing oil. the impact on the u.s. economy would be unbelieveable should opec move off the dollar standard. energy importerss would dump their dollars and the value of the dollar would crash.
one does not believe that we should stay on fossil fuels. infact one believes taht we need to get off of them asafp. that being said there are always uninteneded consequences to our actions and we must be aware that things we do not think of could happen. further we must also look at other issues regarding the high technology, hyper-suburbanization deathstyle. it is highly dependent upon rare minerals and engineering materials. much of the specialty elements comes from africa. as long as we must do business with despots in africa then the nations of africa will remain the "not allowed to develope" world as opposed to developing world.
was interrupted.
there most certainly is a global economy. we have a multi-thousand mile long supply chain from china, vietnam, indonesia and japan to the shelves of mao-mart. that supply chain is affected by the credit lockup in the u.s. as well as political and social unrest in china due to wage depression.
further chindia has bought into the high energy draining deathstyle. this has led to potential flash points such as the south china seas where china, taiwan, japan, malaysia, singapore and vietnam have been building arms over the rights to access to oil and gas under the southh china sea. the u.s. has pledged to keep the sea lanes open thus putting us squarely in the middle of that potential mess.
there is so much more going on that we cannot track it all. one suggests richard klares' "rising powers, shrinking planet" and "resource wars" as well as david rothkopf's "superclass", bacevich's "the limits of power", kevin phillips' "american theocracy" and "bad money" and morris' "the trillion dollar meltdown" and george cooper's "the origin of financial crises" for starters.
Yea, I'm thinking that re-regulation of the financial sector is actually the key to any lasting recovery. That is, get the all-absorbing money-capital markets back into a somewhat proportional relation to actual productivity and spread "rising standards of living" out to more than the top 5% income bracket. Raise social spending to a level that is commensurate with the the countyries of the EU instead of saddling America workers with insupportable health care costs, minimal social security, short-term and inadequate unemployment insurance benefits, declining workplace and environmental safety and health regulations.
In other words, start engineering a turn-around "on the road to serfdom' which the neo-liberal policies of Hyak, Friedman, Reagan, Clinton, Bush and Obama(?) have been pushing us down for the last thirty years and get back to American exceptionalism!
Well this is what the Europeans are suggesting that the U.S. do: regulation of the financial sector, preventing illegal international capital flows and international tax avoidance and exactly what the U.S. has so far refused to do and mainly because it would require the kind of transparency which would expose the blatant fraud which precipated the whole "credit-crunch", which is simply the collapse of the money-capital markets which have artificially sustained an illusion of prosperity in a period of declining productivity, slow real GDP growth and reduced standards of living for all but the top 5% income groups for the last thirty years.
Its one thing to talk about "recovery" from the standpoint of a bunch of greedy bankers and wall street tycoons and entirely another"recoverY for Americans who actually work for a living.
In other words, time for a turn-around on "the road to serfdom" which big-shot neo-liberal economists, rapacious insurance companies, real estate brokers and "financial-managers in both commercial and industrial sectors along with their buddies in congress have been pushing us down for the last thirty years.
Time for guys like Weisbrot- who certainly knows better- to start talking TURKEY.
There never was a "Global Economy" any more than there is a "Global Government" There are just countruies doing wjhat is best for their citizens and their government, depending on what type of government they have.
Europhiles if they look close will find that Europe does not have all the answers nor are they in such good shape. The surpising thing is that those that challange any thing the American government might say will accept the most absurd claims from the Europeans.
But gringoflamenco is certainly right about throwing money at the problem as we are doing here. Germany and France were right to reject that idea.
Dafoe
Good heavens, the voices talking of the global economy and globalization were American from Wall Street down and the silence from the experts on this has been deafening until now. Isolationism is frought with danger, as far I can see all your trade agreements were for your benefit and when they turned sour the vested interests went to court. Canada is embroiled in a soft wood timber dispute and its sleazy, if i was them I would be tightening down the valves on oil and gas and claim they are protecting there own interest first..
As for the suggestion of a global economy standard hell you are talking of another Gold Standard no matter how it comes off the tongue and that didn't work to well. The trouble is all these standards are built on trade and are false when it comes to a nations economy.
Close enough. If there were no 'global economy' how would 'Nike' have absolutely no manufacturing being done here in Portland, Oregon, or in the entire U.S. or North America? Thats right , it is a 'global economy.' The founders, most investors, the lawyers and customer service and other flunkies are here. Everything else has been rebuilt in China etc. That is what makes it 'Global.' Remember M. Moore's attempt to get the CEO to commit to hiring locally? He could not do it and they both knew it. He pays at most a dollar a day in China for labor to manufacture, which if he were to do it here would not only cost him at minimum close to, or over, 50 times that. Then the stock would plummet because the cost of the product to consumers would also be at least 50 times what they are paying now with Chinese labor. Personally, I believe brand name loyalty is nothing but marketing brainwashing. Yet, this is the essence of the 'global economy' people don't want to admit to. Read "No Logo" by Naomi Klein and her newest "The Shock Doctrine." And, for that matter, anything that is an antidote to the propaganda rampant otherwise.
Otherwise, I would read Dean Baker for info before this person. There is a definite difference in perception and thinking.
Also, this writer's assertion that our economy was less stable, etc. prior to 1913 is a misapplication of interpretive history. The researchable facts are that whenever there has been a private central bank in this country there has been instability and especially directly after those banks were shut down. This incarnation has survived for a few reasons, all of which are related to the 'Fed' manipulating the government and the economy for its own profit. Congress knows it doesn't have to put up with this and the Europeans are sending them the message. The 'Fed' is nothing more than an extension of the Rothschild's European central banks from the 1500s.'
I imagine few will read this. I also imagine they might want to in 8-10 months when this false optimism has become ashes. Throwing good money after bad gets nothing.