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By Root 490 0

measurements. This is, of course, changing not only trade and investment patterns but geopolitical patterns as well. China is looming ever larger in global diplomacy, as more and more countries in the world see China as their major trade and financial partner. It’s fair to say that more than two hundred years of North Atlantic dominance of global politics is coming to an end as power shifts from the Atlantic to the Pacific and Indian oceans. China is also looming ever larger as a voracious importer of the world’s natural resources, such as oil, coal, copper, and soybeans, and has also recently overtaken the United States as the largest emitter of climate-changing greenhouse gases.

The Tendency to Underestimate the New Globalization

Despite this economic drama, the greatest of our time, America’s politicians and even academics have consistently underestimated the effects of globalization, looking inward for explanations of events when the major drivers are global. America is so used to being the center of attention, the “number one country,” that it hasn’t been able to fathom the magnitude of global changes taking place around it.

The underestimation goes back to the 1970s, when the United States first started to slip from its post–World War II preeminence. The 1970s were a repeated international comeuppance to the United States. First, the U.S.-centered international monetary system collapsed in 1971 as the nation abandoned its pledge to convert foreign-owned dollars into gold at the fixed price of $35 per ounce. Two years later, oil prices began to soar, both because of the newly organized power of Middle East producers and because global economic growth began to hit up against the depletion of traditional petroleum supplies. Then, in 1975, the United States lost the war in Vietnam, putting into perspective the limits of U.S. conventional military power. Fourth, in the second half of the 1970s, Japan began to penetrate U.S. consumer markets in automobiles and electronic appliances, showing dramatically that America’s vaunted technological leadership could be rapidly overcome through technology transfers to Asian industries combined with Asian-based innovations.

These international realities should have become the focus of U.S. politics by the end of the 1970s. They did not. The U.S. debate turned almost entirely on domestic issues. Rather than focusing on the various new international dimensions of the U.S. economic crisis of the 1970s—monetary policy, resource scarcity, foreign competition—the Reagan “diagnosis” put all of the focus on cutting the size of the federal government, as if this were in the least responsive to the challenges of rising competition from abroad.

How Alan Greenspan Misjudged Globalization

As Federal Reserve chairman from 1987 to 2006, Alan Greenspan presided at the Fed during the rise of the new globalization. Yet, like Reagan, he basically misunderstood or neglected this crucial phenomenon on repeated occasions. By treating the United States as a closed economy, he continually overlooked the severe risks of his own policies and thereby helped stoke several financial crises, including the megameltdown of 2008.

Greenspan was fixated on a key point: that as much as he pushed down interest rates to spur consumer spending and housing purchases, U.S. inflation remained low. He considered this a miracle of U.S. productivity, that the economy had a new growth potential because of a surge of innovation in the “new economy” of information technology. His staff repeatedly demurred, saying that such a surge of productivity could not be found in the data. Greenspan persisted, however, insisting that low inflation could be explained only by the elusive productivity miracle.

He missed the real point, and with serious adverse consequences: inflation was being held down not by a productivity miracle but by the surge of consumer goods that were arriving from China. As U.S. consumers increased their demand for consumer goods, China scaled up its supply, setting up factories almost overnight to take advantage