THE CORRECT APPROACH TO GLOBALIZATION
SPEECH OF
HON. BARNEY FRANK
OF MASSACHUSETTS
IN THE HOUSE OF REPRESENTATIVES
May 22, 2008
Mr. FRANK of Massachusetts. Madam Speaker, the overriding economic issue
confronting our country is the task of proceeding with the increased
globalization of the economy in a manner that promotes an equitable
distribution of the benefits. For too many years, until fairly recently,
there was a consensus supported by many in the academic and business
establishments that argued that concern about the distribution of the
benefits of globalization was unnecessary at best and disruptive at worst,
and that if we simply proceeded with greater openness, in trade, in the
freeing of capital from any restraints, and in other ways, we would all be
better off.
It is now indisputable that this is not the case, and that growth has
proceeded in the U.S.--and in some other parts of the world--in recent years
in a manner that has increased both wealth and inequality. Of course it is
the case that in a capitalist system, some inequality is necessary for the
economy to function. But we have seen inequality grow far beyond what is
either productive or, in the minds of many of us, morally justifiable. Many
of us have argued to people in the business community that the resentment
that is being generated--very legitimately--by this increased inequality has
become an obstacle to the adoption of policies that they think are in our
national interest. Many of us, including I believe the leadership on
economic issues of the Democratic Party here in the House, believe that we
should proceed with globalization in a reasonable and orderly way, but
accompanied by policies that offset its tendencies to increase inequality,
erode environmental standards, and promote reckless deregulation. Recently,
former Treasury Secretary Larry Summers wrote interesting articles in the
Financial Times strongly arguing that such a position is both necessary and
achievable. In the Financial Times of May 21, Martin Wolf, a very thoughtful
economic commentator, makes a further important contribution to this debate.
The movement from an unqualified cheer for globalization without any concern
for its negative consequences on substantial numbers of Americans to a
thoughtful discussion of how to go forward with the economic integration of
the world in a socially useful manner is a very welcome one. Martin Wolf's
contribution to that debate in the Financial Times is therefore very
important and I ask that it be printed here. [From the Financial Times, May
21, 2008]
HOW TO PRESERVE THE OPEN ECONOMY AT A TIME OF STRESS
(By Martin Wolf)
Is the spread of prosperity in the interests of citizens of today's
high-income countries? Is globalisation of their economies in their
interest?
These distinct questions are raised in my mind by two important columns
from Lawrence Summers (``America needs to make a new case for trade'' on
April 27 and ``A strategy to promote healthy globalisation'' on May 4). In
these, Mr. Summers argues that the international economic policies of the
U.S. need to be coupled more closely to the interests of its workers. Many
Europeans will concur.
This is not to argue that the interests of citizens of high-income
countries are more important than those of others. On the contrary, the view
that increases in incomes of the poor offset equivalent losses for the rich
is morally compelling. But politics is national. Unless or until a global
political community emerges, politics will respond only to perceptions of
national interest.
So is the rising prosperity of China, India and other emerging economies
in the interests of today's high-income countries? The correct answer to
this is: not necessarily. It would be absurd to pretend otherwise.
The big advantages of the spread of prosperity include a wider
distribution of innovation and bigger opportunities for profitable exchange.
The rise of the U.S. brought such benefits to the U.K. Also valuable (though
not certain) is greater political stability in previously impoverished
countries.
The big disadvantage is greater competition for scarce resources. Power
is a scarce resource: if country A has more, country B has less. Resources
are also limited. If commodity prices rise, the terms of trade (the relative
prices of exports and imports) of net importers will deteriorate: countries
have to sell more exports to obtain given imports.
Since the end of 2001, U.S. terms of trade have deteriorated by an
eighth, as commodity prices have soared and the currency devalued. This has
turned an 18 per cent increase in real gross domestic product between the
last quarter of 2001 and the fourth quarter of 2008 into a 16.4 per cent
increase in real national income. The difference is not huge. But it is
worth some $220bn in today's dollars. So countries may indeed be harmed by
the prosperity of others. (See charts).
The answer to this is: so what? As Willem Buiter has pointed out
(Economic Internationalism 101, Maverecon, May 5), nothing can be done to
halt the diffusion of ``knowledge, skills, technology, management systems''
and so forth. Or at least nothing rational or decent can be done. Of course,
the U.S. could launch an unprovoked blockade or even war against China or
India. To mention such ideas is to reveal their strategic and moral
bankruptcy.
The U.S. could, it is true, try to halt the flow of ideas. The U.K. tried
to halt the spread of technology to the U.S. in the early 19th century: it
failed. The Chinese empire once made it a capital crime to export silkworms:
that failed, too. Similarly, protectionism against the emerging countries
might slow their growth, but would not halt it. Yet it would guarantee a
breakdown in international relations that threatened hopes of a peaceful
future.
To repeat, nothing can be done about the rise of emerging countries, as
they follow the lead of the west. What cannot be helped must be accepted.
This takes us to my second question. Given the rise of the emerging world,
should the developed world limit the globalisation of its own economies? Of
course, so long as high-income countries depend on imports of commodities,
trade will be essential. Self-sufficiency is a mirage. It is a question
rather of how much openness to trade and movement of capital and labour
there should be.
One issue has been the huge current account deficits of the U.S. Yet
these are at last contracting, as export growth explodes (see chart).
On trade more narrowly, the basic point is well known: free trade is in
the interests of the country adopting the policy, unless it has monopoly
power. But--an important ``but''--the benefits and costs are likely to be
unevenly distributed. The latter is particularly likely for trade between
rich and poor countries. Free movement of capital or labour may also harm
important interest groups within a country even if it raises aggregate
incomes. The freer movement becomes, the harder it may also be to impose
taxes and regulations on those able to move.
As Mr. Summers argues, it is hard for a democracy to proceed with
policies that a large minority believes are against their interests. If the
fall-back position is not to be protectionism, itself no more than an
inefficient tax and subsidy programme, more creative options must be chosen.
The most obvious point, at least for the U.S. is the need to shift the
provision of security from employers to the state. Corporate welfare states
are unsustainable in a dynamic and open economy.
Yet if the U.S. is to have a more generous welfare state, including
universal health provision, as in every other high-income country, taxes
will have to be raised. Indeed, they will have to be raised even to meet
existing commitments. Mr. Summers argues, in response, for international
action against harmful tax competition, He argues, too, for greater
international agreement on regulation. In some areas, notably finance, the
latter makes sense. But the view that the U.S. must obtain such agreements
if it is to raise some of the lowest levels of taxation and weakest
regulation in the advanced world is unpersuasive. If Sweden's taxes can be
56 per cent of GDP, it is not tax competition that keeps the U.S. at just 34
percent. The mobility of capital and people is an excuse, not a
justification, for low U.S. tax levels.
What is desperately needed is an honest debate about these issues. Such a
debate would, I believe, reach four fundamental conclusions. First, whether
or not citizens of the U.S. (or other high-income countries) welcome it, the
global spread of economic development is ineluctable. Second, protection
against imports is a costly and ineffective way of dealing with the
consequences. Third, parties of the centre-left should argue for
redistributing the spoils of globalisation, not sacrificing them. Finally, a
necessary condition is higher taxation of the winners. But the chief
obstacle to that is a lack of domestic political will. Globalisation is not
a reason for low taxes, but an excuse. It should be discarded.
Everybody should remember, above all, that the opening of the world
economy is the west's greatest economic policy achievement. It would be a
tragedy if it were to turn its back on the world when the rest of humanity
is at last turning towards it.
END
|