The Next Globalization

The biggest challenge of globalization isn’t trade. It’s reining in health care and energy costs—and preparing American workers and business to compete.

The “idea-based economy” has been a popular metaphor for decades, but globalization and its critical technologies are making it a hard reality. Federal Reserve data show that for the first time ever, American businesses since 1995 have invested less in new physical assets than in intangible things–principally patents and copyrights, databases, brands, organization, training, and so on. These intangibles now give the American economy most of its actual value. In 1984, the book value of the 150 largest U.S. companies–what their physical assets could be sold for on the open market–was equal to 75 percent of their market capitalization. By 2005, the book value of America’s 150 largest firms was equal to just 36 percent of their market value. In other words, roughly two-thirds of the value of large U.S. companies now lies in intangible assets.

In such a world, the only Americans who will get ahead in the coming decades will be those who can work effectively with the ideas that create value and wealth, in workplaces dense with the technologies that organize, transmit and communicate those ideas. Yet, by one recent estimate, nearly half of Americans cannot handle basic computer and Internet-based systems. The results are evident in patterns of growing inequality. Over the last five years, the American economy generated income increases totaling nearly $2 trillion (adjusted for inflation). Yet, real wages are lower today than five years ago for the 75 percent of Americans who work at what statisticians call “non-supervisory” jobs–basically, everybody but professionals and managers. The other 20 to 25 percent who have claimed all of the economy’s income increases–and especially the top 5 percent–have jobs organized around the use of those intangible assets or own the companies that develop and use those intangibles.

The next president has to make computer- and Internet-related skills universally available, because decent-paying jobs that do not require these capacities are becoming increasingly rare. The good news is that it won’t be hard to do. In 1996, I urged the White House to support a new initiative to give grants to community colleges to keep their computer labs open and staffed in the evenings and on weekends, for any adult to walk in and receive computer and Internet training for free. It wouldn’t even cost very much–perhaps $150 million a year today–because the facilities, equipment, and instructors are already in place. The Clinton Administration took a pass, though Tony Blair’s government in the UK adopted it on small scale a few years later. Senator Barack Obama recently endorsed this approach; if he’s elected, the challenge will be to make it a priority enacted on a national scale and expand its scope. The 2009 version could use the community college system to offer any worker advanced as well as basic computer and Internet training. And to close the IT gap between poor children and those from more affluent families, the next president could provide funding to purchase an inexpensive laptop for every sixth grader in America, an approach now promoted by two Washington-based organizations, One Economy and NDN. Finally, an idea-based economy demands universal access to high-speed Internet service, much as two generations ago the government created programs to provide universal telephone service.

Globalization and Stagnating Incomes

But these initiatives won’t get most Americans’ incomes moving up again unless the United States also faces up to the deeper, structural challenge posed by globalization. Essentially, globalization is interfering with two basic economic dynamics that have been a major source of progress and security for generations of Americans: the links between how fast the economy grows and how many jobs it creates, and the links between how much productivity increases and how much wages rise.

The first evidence that something important was happening with these connections came in the job numbers following the brief, mild downturn of 2001: Employment kept on falling, and it took 43 months to get back to pre-recession job levels. (In contrast, it took less than 12 months to do that after the recessions of the 1960s, 1970s and 1980s, and 24 months following the 1990-1991 downturn.) And when job creation finally kicked in again in 2005, it did so at half the rate of the 1970s, 1980s, and 1990s. The long-standing connection between productivity gains and wage increases is also breaking down. In the 1990s, productivity grew by on average 2.5 percent a year, and the median wage of American workers followed by increasing 2.2 percent a year. This time, labor productivity has risen 3 percent a year for five years, the best record since the 1960s, while the real median wage has actually declined.

These developments are distinct from the falling wages of those without the skills to work well in IT-dense work places. They come instead from a sharp intensification of competition that has accompanied globalization and affects the entire workforce, not just those in the export and import industries. According to the wage and jobs data, it also affects areas of the economy not directly involved in trade at all, such as business or food services, as they compete for the capital and expertise freed up from firms that can’t make it in globally competitive industries such as telecommunications or air travel.

The first effect is something most people welcome: More intense competition makes it harder for companies to raise their prices, what economists call a loss of “pricing leverage.” The result, according to the International Monetary Fund, is that inflation in the United States and most of the world for the last decade has been lower, relative to both growth rates and increases in money supplies, than any comparable period on record.

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