Stephen Roach, Morgan Stanley's chief economist, has been on a globalization roll of late. He's published three columns in the last week alone at Morgan's invaluable Global Economic Forum. Taken together, the articles offer a lucid, if sobering introduction to the global economy Big Picture.
The first column points out some salient contradictions. "Here we are in the midst of the strongest four-year spurt of global growth since the early 1970s and there has been no meaningful acceleration of inflation. Unemployment rates are dropping and there has been no appreciable pickup in real wages in the developed world. In the United States, where productivity growth has been surging and the unemployment rate is nearing what many judge to be the full-employment threshold, real wage stagnation is all the more puzzling. Economics teaches us that workers ultimately are paid their just reward insofar as their marginal productivity contribution is concerned. That is no longer the case in America."
What explains this? Basically, "the low-cost, high-saving developing world" is acting as a deflationary counter-force to growth in the developing world. If you've ever wondered why the stock market historically gets the jitters when unemployment falls, it's because investors fear that full employment will lead to wage increases, which will in turn force companies to raise prices for their products. But that link now seems to be broken. In the global economy, neither labor, nor capital, is scarce -- it flows immediately to wherever there is demand.
Roach attributes the sharp acceleration of this process over the last 10 years not to the free trade "Washington Consensus" policies of U.S. neoliberals but to the astonishingly quick buildout of the Internet: "the most disruptive technology in modern history. Quite simply, the Internet changes the rules of engagement of globalization. In tradable goods, it revolutionizes the logistics of price discovery and supply-chain management, allowing global producers to keep squeezing costs and pricing -- irrespective of resource utilization rates in their home countries. Moreover, in once sheltered services industries, the Internet now connects knowledge workers around the world to desktops anywhere -- in effect, converting an increasingly large segment of nontradables into tradables."
Column No. 2 contemplates the consequent rise of protectionist sentiment, as manifested in the U.S. by political China-bashing and the more complicated case of the Dubai/port management controversy. But here, Roach refuses, again, to place the blame on free trade policies, but on the U.S.'s disastrous savings rate. "The net national saving rate -- the combined saving of individuals, businesses, and the government sector after adjusting for depreciation -- fell into negative territory to the tune of -1.3% of national income in late 2005. That means America doesnt save enough even to cover the replacement of its worn-out capital stock. This is a first for the U.S. in the modern post-World War II era -- and I believe a first for any hegemonic power over a much longer sweep of world history."
Slapping huge tariffs on China won't solve the trade deficit, argues Roach -- "Instead, due to Americas outsize external funding needs, the trade deficit would remain large and merely gravitate to a higher-cost producer -- imposing the functional equivalent of a tax on the American consumer." The U.S., he argues, needs to heal itself. "The Federal budget deficit, which has accounted for the bulk of the plunge in national saving over the past six years, is made in Washington -- not in Beijing. The negative personal saving rate is an outgrowth of pro-consumption tax policies -- again made in Washington. U.S. politicians are the source of resistance to tax reforms, such as a consumption tax, that might address the deficiencies of private saving."
Finally, in his third column, Roach homes in on the greatest contradiction of all -- the unsettling reality that even as globalization ties the world closer and closer together, that very process is threatening to tear us all apart. The Internet may have connected everyone, but that just makes it "the ultimate enabler of a new set of socio-economic tensions."
Tensions are rising. Roach mentions the role of the Internet in helping stir up Muslim hysteria over the Danish cartoons. Meanwhile, as noted here this morning, the Chinese are getting agitated over Western attempts to trademark "Not Made in China." And every single day, workers in advanced nations hear about how the future will be more competitive.
We could have hoped that closer linkages between peoples and economies would lead to a more peaceful world. But the opposite appears to be happening. "Perhaps the greatest irony of this strain of globalization is that cross-border integration has unmasked cross-cultural frictions. The closer knit the world becomes through trade flows, capital flows, and information flows, the greater the discomfort level that seems to arise within individual segments of the world."
Economics is often called the dismal science. A close reading of Stephen Roach's musings this past week explains why.
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