Globalization Effects Still Largely Controversial

During their most recent meeting, Federal Reserve Officials noted that foreign competition was helping to contain cost and price pressures. Greenspan noted that inflation and wages have stayed low even as unemployment has dipped below 5%. (Generally, given the inverse economic relationship between inflation and unemployment, one variable decreases as the other increases.)In a recent Wall Street Journal article, Greenspan explains that when the economy behaves in ways that defy his existing economic models, he searches for an unidentified factor to explain the discrepancy. The most recent explanation, for simultaneously low unemployment and inflation, is globalization. The integration of the former Soviet Union, China and India into world markets would “approximately double the overall supply of labor,” he told Congress, and prove a major contributor to “the dis-inflationary pressures that have been evident in the global economy.”He began this search for an explanation in 2003 when he tried to understand how U.S. trade deficits, which are financed by borrowing overseas, kept growing with no upward pressure on U.S. interest rates and little downward pressure on the dollar. His conclusion was that the U.S. can run large deficits with its trading partners because investors have become less sensitive to international borders when choosing investment locations.According to investment banks like UBS, the mere threat that production may move offshore is enough to trigger wage concessions. Academic researchers say this “threat effect” has depressed wages and increased inequality in numerous countries, both rich and poor. This inequality could eventually be the undoing of globalization’s dampening effects on interest rates and inflation. Mr. Greenspan has long cited protectionism as the greatest threat to globalization, which holds immense political implications. Greenspan’s estimations about the overriding effects of globalization are supported by data and help to provide quantitative and qualitative explanations for global trends within financial markets. But the implications of a globalized world are feared and rejected by many Americans. Recently, Massachusetts Democrat Barney Frank told Greenspan that “hard working” Americans have no chance to survive or excel “in the game of economic advance.” A potential limitation to economics, while also a simplifying reality, is that adaptation time (the time it takes for the economy to adjust to superseding trends such as increased unemployment or natural disasters) is largely discounted and unexplained. Politicians like Frank, who are sincerely looking out for constituents, might be more useful to the public if they attempted to learn and implement transitional programming and education for Americans rather than fighting against the inevitable. This would help our citizens understand the nature of global economics while enabling them to participate successfully.