The Price of Civilization_ Reawakening American Virtue and Prosperity - Jeffrey D. Sachs [38]
Had Greenspan been correct that America was enjoying a productivity boom, the country would have been experiencing a surge of growth of GDP, wages, and employment. National output would have been running ahead of consumption spending. Savings rates would have been rising. Of course, the opposite was occurring: America’s GDP growth was sluggish; wages were stagnant; and employment was flagging. Although manufacturing employment was relatively stable from 1990 to 1998 at around 17.2 million workers, between 1998 and 2004 the floor fell through the labor market, with a loss of 3.2 million manufacturing jobs.7 All of these adverse outcomes suggest that it was imports from abroad, rather than a productivity surge, that was the main reason for low inflation. The Federal Reserve’s easy monetary policy succeeded in creating manufacturing jobs, but in China, not in the United States.
The Fed’s policies did create around 1 million U.S. jobs in construction between 2002 and 2006, but they proved to be evanescent.8 With the Fed’s foot to the monetary pedal, U.S. interest rates hit rock-bottom levels, causing the demand for mortgages to soar. Wall Street began to securitize mortgages and sell them off to other financial pools such as pension funds, foreign banks, and insurance companies. As everybody now knows, the lucrative fees earned by everybody involved in packaging securities led to the collapse of lending standards—and ethical standards—in the mortgage sector.
There are two lessons here. The first is that monetary policy cannot solve America’s employment problem. Greenspan tried again and again, through cheap credits, and Ben Bernanke is doing the same. This is a hopeless, self-defeating strategy. Temporary jobs in construction can be created through a Fed-led housing bubble, but when the bubble bursts we are left with the reality that America’s manufacturing employment has fallen further under the weight of foreign competition and America’s lack of global competitiveness. The second lesson is that ignorance or neglect of globalization repeatedly comes back to haunt us. Unless we focus on the reality that the United States is now tightly integrated into the global economy and connected with more than 6 billion other people in a worldwide production network, we’ll keep failing to restore prosperity in a meaningful and sustainable manner.
Long-Term Effects of the New Globalization
The new globalization played a role in the recent boom-bust cycle in America, but its effects go even deeper. The integration of China, India, and other emerging economies into the global economy is causing a fundamental shift in income distribution, employment, investment, and trade. Even our domestic politics are being massively affected. I will focus on three overarching effects of the new globalization, each of which is globally transformative. These may be called the convergence effect, the labor effect, and the mobility effect.
The convergence effect refers to the fact that the new globalization provides the conduit for today’s emerging economies to leapfrog technologies, and thereby to rapidly narrow the income gap with the rich countries, and notably with the United States. When production systems are globalized, the developing countries learn rapidly about cutting-edge technologies coming from Europe, Japan, and the United States. China has made massive efforts not only to upgrade its production systems based on the advanced technologies imported from abroad, but also to master the imported technologies through learning by doing. One key government strategy has been to insist that foreign investors desiring to enter the Chinese market do so in a joint-venture partnership with a Chinese counterpart. The Chinese partner quickly masters the imported technologies and then branches