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.
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.
Intense competition has less welcome effects, however, when sharply rising costs hit companies with limited leeway to raise their prices. In America, the main culprits are health care and energy, whose costs to employers each have more than doubled in the past six years. As the intense competition engendered by globalization has made it harder for companies to pass along these higher costs in higher prices, they have cut other costs, particularly jobs and wages.
For decades now, presidents of both parties have done little to tame health care or energy inflation, although Jimmy Carter tried in energy and Bill Clinton in health care. Yet if the next President aims to preside over a period of upward mobility for most people, he will have to do better; and fortuitously, other developments will increase the political pressures to do so. Already, the public’s growing concerns about climate change and this year’s sharp increases in energy prices are ratcheting up concerns about making everything more energy efficient and expanding the use of alternative fuels. The first steps could be relatively easy–raise fuel-efficiency standards and provide additional tax breaks for more energy efficient technologies. These steps will raise some initial costs, since more fuel-efficient automobiles and appliances usually cost more; but over time, they also produce energy-cost savings and could make the households and businesses that adopt them less vulnerable to future oil price hikes.
The harder steps will involve changes targeted specifically to climate change, because a commitment to reduce greenhouse gas emissions necessarily will involve even higher energy prices for the carbon-intensive fuels used in electricity and transportation. Whether the next president adopts the cap-and-trade approach promoted by both Barack Obama and John McCain or the carbon-based tax that most economists favor, his final strategy almost certainly will involve cushioning the impact of those higher prices by recycling the revenues raised by a carbon tax or by auctioning emissions permits for tax relief.
The effort to slow fast-rising health care costs could also get a big political boost from the need to keep Medicare solvent over the next decade, as tens of millions of baby boomers become eligible. The ultimate sources of Medicare’s financing problem are beyond anyone’s control, as the historical anomaly of a baby boom followed by a baby bust leaves us (and every other advanced country) facing, year after year, rapid increases in the numbers of Medicare-eligible elderly people and much smaller increases in the workers who pay most of the taxes to finance it. And here as everywhere else in the world, the most expensive common medical problems, heart disease and cancers, are highly concentrated in people of the age covered by Medicare.
This historic demographic shift would be more manageable, but for one of globalization’s side-effects. By driving faster growth and rising incomes in much of the world, globalization has expanded the market for new medical treatments and technologies, which in turn has increased medical R&D and accelerated the pace of medical advances. The catch is that these advances are typically very expensive, especially in the United States, where health care prices are not government-controlled. Less than 10 years ago, for example, the two principal drugs for colon cancer cost about $500 per regimen and extended people’s life spans by an average of eight months. With recent advances in chemotherapy, colon cancer patients now receive new treatments that extend life for an average of 13 to 20 months, at a cost of $300,000 to $500,000. Similarly, deaths from heart attacks are down by half since the 1980s, mainly because surgery for heart attack patients and the real cost per-patient are both up by more than 50 percent. And after a decade of breakthroughs in genome sciences, a new industry of biologic treatments has produced some 300 candidates in second- or third-stage clinical trials, with biologic treatments priced on average 20 times as much as traditional pharmaceuticals.
The next President’s health-care agenda will likely start not with these cost issues, but with universal access to insurance coverage for non-elderly Americans. But while universal coverage is a social goal beyond debate, the roots of the problem lie in decades of fast-rising costs, and whatever politicians promise, achieving universal coverage will further raise national costs. If a new president wants to bring about changes that Americans will still believe in in a few years from now–in both health care and wages and jobs–he would be well-advised to use the occasion of phasing-in universal access to advance other measures to slow those rising costs.
And the costs are significant: 16 percent of national income to health care, compared with 11 percent to 12 percent in France and Germany, where quality and outcomes are comparable. Driving this disparity is the fact that virtually every government but the United States strictly controls most prices and wages across health care. While such an approach would be alien to American political and economic culture, Americans do respect efforts to control costs, and much stricter cost controls would be easier than some expect. The 2008 Dartmouth Atlas of Health Care study, sponsored by the Robert Wood Johnson Foundation, tracked the care and cost of Medicare patients with nine serious chronic conditions. Among five of the nation’s top medical centers, the Mayo Clinic and the Cleveland Clinic Foundation produced the same outcomes in comparable patients for at least one-third less than Johns Hopkins Hospital or the UCLA Medical Center. To realize similar savings, the next President should create a national institute to identify best-practice cost controls and persuade Congress to mandate that hospitals and clinics receiving federal funding adopt them.
Capital and Crises
Beyond health care and energy, the other critical part of the economy redefined by globalization has been finance. For some time, the global capital pool has been growing much faster than global production or trade, with a fair estimate of that pool today reaching $165 trillion, or three times its estimated size 15 years ago. This enormous growth of global capital and its international flows ultimately reflect the rapid increases in the value of savings and assets in China, India, Malaysia, and other developing countries that cast their lots with globalization. Moreover, the globalization of advanced financial services has exchanged much of this new wealth for corporate paper, bank deposits, stocks, and other financial assets that flow into national capital pools where, under the rules of the WTO, they can make their way into the larger, global capital pool. This process ends up bringing much of the real wealth created through globalization into the world’s monetary base, where it gives rise to yet more credit or money.
The good news is that these vast increases in available capital have kept interest rates historically low, even in countries with dismal saving rates such as the United States. The bad news is that when capital and credit grow more quickly than the goods and services they’re ultimately used to purchase, fast-rising inflation usually follows. On the other hand, globalization is also intensifying competition in ways which dampen inflation nearly everywhere in the world. In economic life, all costs come out in the end, and as a result most of the normal inflationary pressures coming from all the new liquidity sloshing around the world have gone instead into new global asset bubbles, notably housing. From 1997 to 2007, housing prices marched up 92 percent in Italy and 103 percent in the United States (175 percent by another measure), 137 percent in France and 126 percent in Sweden, 184 percent in Spain, 205 percent in Britain, and 251 percent in Ireland. By 2006, the bubbles in the most overheated housing markets–such as Britain and Ireland–were beginning to burst, and last year housing prices in the United States began falling, too. Japan, where housing prices soared in the 1980s, provides a glimpse of what homeowners in other countries may expect: When the bubble finally burst there in the 1990s, prices fell 40 percent.
Current asset bubbles are not limited to housing. From 1997 to 2004, stock markets around the world rose and fell at roughly twice the rate of any comparable period since World War II–by an average of 20 percent a year in the United States, for example, and 24 to 27 percent a year in France, Italy, and Germany. All the global liquidity looking for outlets is also a factor in the recent run-ups in the prices of oil, food and other commodities. Already, the fallout from the housing bust has sharply slowed the economy, particularly from homeowners whose incomes were already stagnating and highly leveraged financial institutions who had speculated in risky mortgage-backed securities.
The next president will likely find that this time the usual approaches cannot deliver a strong recovery. The United States normally pulls itself out of recessions by cutting interest rates; the leading interest-sensitive sectors, housing and business investment, then recharge growth. But housing cannot drive an expansion as long as housing prices are falling, a process likely to continue for another one to two years. As for business investment, the severe financial strains triggered by the mortgage-backed-security fiasco have done real damage to the balance sheets of hundreds of financial institutions, forcing them to limit lending for the near future to the most gold-plated, credit-worthy borrowers.
Even if housing and finance were in better shape, the globalization of capital limits the Federal Reserve’s ability to use its power over certain short-term interest rates to move the long-term rates that drive most borrowing. From June 2004 to June 2006, for example, the Fed raised its short-term rate by four percentage points in 17 steps; yet, the rate for AAA corporate bonds was 6 percent in June 2004 and 6 percent in June 2006, and the rate for a conventional mortgage rose just four-tenths of 1 percent. With the principal means of hot-wiring a recovery out of reach, we face real prospects of an extended downturn.
Stimulus and Responses
Given the hand globalization has dealt the next President, the best advice to get the economy moving involves large doses of stimulus targeted to the particular needs of businesses and people. That should start with a big new commitment to public investments in twenty-first-century infrastructure, especially energy-efficient light rail systems for all metropolitan areas and, if he’s serious about increasing the use of climate-friendly public transit, large grants to drastically cut the fares and make them as near as possible to free. The combination could produce thousands of new jobs directly–and many more indirectly, by increasing the disposable incomes of millions of people willing to get from place to place in a climate-friendly way.
A similar model could be applied to broadband: Create new jobs and get a jump on the next-generation Internet by freeing up spectrum and providing tax incentives to promote the further rapid deployment of fiber and wireless systems on the scale that a more advanced Internet will require. Here, if the next President is also serious about opening America’s idea-based economy to everyone, he will take additional steps to promote universal broadband service, develop inexpensive laptops for all public school students, and provide free training in computer and Internet-based applications for any adult. Each of these reforms could help boost demand and create jobs in an extended downturn. And for the longer haul, their combination should help raise productivity and incomes by enabling millions of more workers to be IT-efficient, and help create new jobs and wealth by expanding Internet-based markets and strengthening the foundations for new, next-generation Internet-based businesses.
Globalization is here to stay. It cannot be rolled back. But that does not mean that we must allow it to roll over American businesses and workers. The forces that have shaped and unleashed this phenomenon can be harnessed to create even more opportunities and a better life for all Americans. It’s up to the next President to do just that.
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