It’s the global economy (stupid) - or is it?

Mark WEISBROT

“This is the day that the world came together, to fight back against the global recession. Not with words but a plan for global recovery and for reform and with a clear timetable,” said U.K. Prime Minister Gordon Brown at the end of the G-20 Summit.

This was somewhat exaggerated. There was no plan for global recovery or even a commitment to increased fiscal stimulus. It remains to be seen what kinds of reforms will actually materialize.

But recovery and reform will not necessarily hinge on what the G20 agrees to do. Roll back to the last major economic crisis - that which began in Asia in 1997 and spread to Russia, Brazil, Argentina and other countries.

Stress

In September 1998 Fed Chair Alan Greenspan warned that “It is just not credible that the United States can remain an oasis of prosperity unaffected by a world that is experiencing greatly increased stress.” But the U.S. economy kept booming right through the crisis, as a result of consumption driven by the stock market bubble. This continued until the bubble burst, pushing the U.S. economy into recession in 2001.

It should not be surprising that the United States economy has the potential to grow even while many other economies are contracting. Eighty-seven percent of what is produced in the United States is consumed here.

To be sure, the other thirteen percent can make a difference - but U.S. recessions are not brought on by falling exports. It is not comparable to the 47 percent of GDP that Germany exported last year, or even the 28 percent for Mexico.

Of course the current world recession is much worse and more widespread than the crisis of the late 1990s. The high-income countries that comprise the majority of the world economy, including the U.S., European Union and Japan are mostly in recession.

There are some big imbalances, built up over many years, that are adjusting at a pace that is not easy to predict - including the U.S. savings rate, which had fallen to zero by 2007. And there are major weaknesses in much of the world’s financial system.

Economy

Nonetheless the United States is capable of recovering on its own, with a sufficient domestic economic stimulus and a sensible resolution of the major insolvencies in the financial system - regardless of what other governments do. The U.S. recovery will in turn help the rest of the world.

Money

The fact that the dollar is the key reserve currency of the world gives the U.S. even more leeway. There are loud complaints from conservatives about our recession-induced free-spending ways, but investors worldwide are willing to lend the U.S. government money at the historically low (both real and nominal) rate of 2.9 percent on ten year Treasury bonds.

This is not the sign of an impending fiscal crisis. It is good that the G-20 leaders are at least talking about increased international co-operation in order to deal with the world recession, and there are some areas - e.g. regulation of the financial sector or preventing illegal international capital flows and international tax avoidance - where increased international co-operation can be especially helpful.

But even in these areas, many of the most important reforms can be implemented by individual governments. The global nature of the ‘global economy’ has been grossly exaggerated, as have been its implications. The world today is still much more a collection of national economies, and national governments - especially in the larger economies - have the potential to choose most of their economic policies much as they did thirty or forty years ago.

The Government of China, for example, has for decades controlled capital flows into and out of the country, regulated foreign investment in accordance with national development needs and plans, fixed its exchange rate and owned most of the banking system.

Trade

In this way it was able to take advantage of ‘globalization’ - both international trade and foreign direct investment - to achieve the fastest economic growth in world history. The contemporary idea of the ‘global economy’ is based on a misapplied analogy to the historical development of national economies.

For example, the United States economy was much less stable, with more frequent and much longer recessions, before the creation of regulatory institutions, including most importantly the Federal Reserve (1913) and the New Deal reforms of the 1930s.

Courtesy:cepr.net

(The writer is co-director of the Center for Economic and Policy Research, in Washington, D.C.)