Raymond J. Ahearn Adjunct Professor, Political Economy Maxwell-in-Washington July 20, 2015 Lakeside, Ohio
Agenda How the U.S. Is Integrated with the Global Economy: The Basics Benefits & Costs of Economic Integration Historical Shifts of the U.S. in the Global Economy Key Drivers of Globalization Policies to Make Globalization Work for More Americans Questions
Trade flows Capital flows Technology flows Labor flows
U.S. Trade in Goods & Services Trade has a growing impact on the economic futures of American workers, companies, and families U.S. is third largest exporter and largest importer of goods Largest exporter and importer of commercial services The role of exports and imports in the U.S. economy has increased substantially Trade openness goes from 9% in 1960 to 28% today U.S. exports account for around 11.3 million mostly high paying jobs and increases in exports have accounted for one-third of economic growth over past five years Variety of imports tripled since 1970 U.S. MNC s derive over 50% of sales from foreign markets and over 50% of their work force are foreign nationals
U.S. Capital Flows Foreign currency trading swamps value of trade flows $4 trillion per day versus $20 trillion per year Capital inflows affect value of dollar, U.S. interest rates Foreign holdings of U.S. public debt have increased from 16% in 1986 to over 50% today The dollar as the world s reserve currency provides the United States with many advantages $$$
U.S. Technology Flows Technology flows across borders via Foreign Direct Investment (FDI) U.S. is largest provider & recipient of FDI creating millions of jobs Outward FDI increases productivity of LDCs, often intensifying import competition Forced technology policies of some big problem
U.S. Labor Flows Labor Flows Most controversial and least liberalized Legal immigration to the U.S. not much changed since 1900s as % of labor force Virtual immigration via outsourcing is big change
Benefits U.S. economy gains an est. $1 trillion per year in economic welfare due to more efficient use of economic resources Exports allow firms to take advantage of larger markets 75% of the world s purchasing power and 95% of the world s consumers live outside the United States From 2011-2014, U.S. exports hit record levels, topping $2.3 billion and contributing one-third to economic growth Imports give U.S. consumers wider selection of goods and services at lower costs, reduce inflation, and help expand U.S. exports by keeping costs of domestic factories down Foreign portfolio investment lowers U.S. interest rates and direct investment creates jobs
Costs Not everyone wins; losses are tangible, heavy, and enduring for many U.S. workers, firms, and communities Workers losing jobs from import competition and outsourcing seldom find new jobs that pay as much as the old jobs Community impacts on housing, tax revenue, and crime can be devastating World poverty down, but could be at the expense of U.S. middle-class jobs
Era of U.S. Dominance (1948-1973) First Taste of Globalization (1973-1990) Globalization Goes Hyper (1991-today)
Era of U.S. Dominance (1948-1973) Post-war industrial giant 50% of world s industrial production with 5% of world s population Provided scope for U.S. leadership Marshall Plan and GATT The General Agreement on Tariffs and Trade (GATT 1947)
Era of U.S. Dominance (1948-1973) At home, Reuther s Treaty of Detroit symbolizes era of strong unions, high taxes, and high minimum wage Union Agreement with U.S. Automakers (1950)
Era of U.S. Dominance (1948-1973) Lion s share of productivity captured by labor during this period providing foundation for the American dream
Era of U.S. Dominance (1948-1973) China, India other LDC s dubbed the Third World are an afterthought
First taste of globalization (1973-1990) (1) East Asian Economic Miracle Asian Tigers and Japan adopt export-oriented industrial strategies Their industries benefit from low wages, lower standards, and government support Asian production workers in 1975 making $0.75 versus $6.35 for a U.S. production worker
First taste of globalization (1973-1990) (2) Import Competition Begins to Bite steel, autos, textiles, furniture, and electronics and calls for protection rise
First taste of globalization (1973-1990) (3) Congress takes charge of U.S. trade policy Confronts Reagan and Regan and the high dollar Calls for reciprocity in U.S. trade relations escalate Fraying of U.S. trade consensus begins Congresswoman Helen Bentley uses sledgehammer to smash a Toshiba radio outside the Capitol and describes Japan s economic policies toward America as an invasion.
Globalization Goes Hyper (1991- today) (1) Job losses in manufacturing intensify 1.2 million textile and apparel jobs vanish from 1991-2012 China trade explodes and accounts for ¼ drop in manufacturing jobs Job insecurity spreads from blue to white collar workers Lawyers, radiologists, accountants and software developers see their jobs outsourced to China and India Alan Blinder argues that more than 30 million jobs are capable of being outsourced Rise of Global Supply Chains Firms break up the production process into discrete steps and conduct each step in the geographical location that allows them to minimize costs. Examples are Boeing s Dreamliner and Ipod.
Globalization Goes Hyper (1991- today) (2) Rising income inequality Top 1% doing just fine between 1993 and 2010, they get over half the increase in national income CEOs doing just fine 20:1 ratio of CEO pay to typical worker in 1965; ratio balloons to 300:1 by 2015 with average pay of $16 million Superstars doing fine Stagnant wages As of 2013 typical production worker earned 13% less (adjusted for inflation) than in 1973 During this same period productivity rose by 107% and the costs of education, health care, and housing soared College grads see wages continue to fall
Labor Share of National Income, 1947-2014
Corporate Profits After Tax, 1950-2010
Technology and Transportation Revolution Growth in World Labor Supply Government Policy
Technology and transportation revolution (1) Advances in information and technology enable faster communication to more places at lower costs Internet shrinks time & distance & facilitates trade in wide range of legal, accounting, financial and engineering services Computers & robots automate jobs and combine with outsourcing to raise questions of whose job is safe?
Technology and transportation revolution (2) Advances in volume, capacity, speed and efficiency of transportation systems Innovations in intermodal containerized shipping drive down costs of international trade
World labor supply grows by 50% Fall of Berlin Wall and China and India s opening to the world helps create 3 billion new workers or capitalists, both skilled and unskilled, willing to work for much less
World labor supply grows by 50% Top 5% in brain power from China & India = 130 million versus 15 million smart people in the U.S. Increases fear of job loss but also fear that lower wages and benefits are necessary to compete
Government Policy Trade liberalization has made the world economy pretty open to trade and investment Think multilateral trade negotiations under the GATT and now WTO Think regional agreements such as NAFTA and bilateral FTA s with South Korea and Australia Think unilateral policy actions in developing countries
Deregulation and magic of the marketplace Industries deregulated, top marginal tax rates slashed, and unions hammered
Policies to Make Globalization Work for More Americans Taxation higher or lower? GOP says tax cuts for the rich will spur investment Dems say higher taxes on owners of capital, the rich, and corporations are needed to pay for restoring competitiveness Deregulation & freer markets GOP says freer markets will spur economic growth Dems are skeptical of the magic of freer markets Unions GOP says they are part of the problem Dems say they are part of the solution More Spending on education, infrastructure, and R&D GOP worried about budget deficits and public debt Dems in favor of more spending but not sure what works Trade Agreements? Find out more this afternoon!
Questions?