Wall Street History

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Wall Street History

01/30/2004

Greenspan on Globalization

Following are some comments Federal Reserve Chairman Alan
Greenspan made on globalization as part of a speech he gave in
London on 1/26/04.

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I do not doubt that the vast majority of us would prefer to work
in an environment that was less stressful and less competitive
than the one with which we currently engage. The cries of
distress amply demonstrate that flexibility and its consequence,
rigorous competition, are not universally embraced. Flexibility
in labor policies, for example, appears in some contexts to be the
antithesis of job security. Yet, in our roles as consumers, we
seem to insist on the low product prices and high quality that are
the most prominent features of our current frenetic economic
structure. If a producer can offer quality at a lower price than the
competition, retailers are pressed to respond because the
consumer will otherwise choose a shopkeeper who does.
Retailers are afforded little leeway in product sourcing and will
seek out low-cost producers, whether they are located in
Guangdong province in China or northern England.

If consumers are stern taskmasters of their marketplace, business
purchasers of capital equipment and production materials inputs
have taken the competitive paradigm a step further and applied it
on a global scale.

From an economic perspective, the globe has indeed shrunk. Not
only have the costs of transporting goods and service, relative to
the total value of trade, declined over most of the postwar period,
but international travel costs, relative to incomes, are down, and
cross-border communications capabilities have risen dramatically
with the introduction of the Internet and the use of satellites.
National boundaries are less and less a barrier to trade as
companies more and more manufacture in many countries and
move parts and components across national boundaries with the
same ease of movement exhibited a half century ago within
national economies. A consequence, in the eyes of many, if not
most, economists, world per capita real GDP over the past three
decades has risen almost 1 percent annually, and the
proportion of the developing world’s population that live on less
than one dollar per day has markedly declined.

Yet globalization is by no means universally admired. The
frenetic pace of the competition that has characterized markets’
extended global reach has engendered major churnings in labor
and product markets.

The sensitivity of the U.S. economy and many of our trading
partners to foreign competition appears to have intensified
recently as technological obsolescence has continued to
foreshorten the expected profitable life of each nation’s capital
stock. The more rapid turnover of our equipment and plant, as
one might expect, is mirrored in an increased turnover of jobs. A
million American workers, for example, currently leave their
jobs every week, two-fifths involuntarily, often in association
with facilities that have been displaced or abandoned. A million,
more or less, are also newly hired or returned from layoffs every
week, in part as new facilities come on stream.

Related to this process, jobs in the United States have been
perceived as migrating abroad over the years, to low-wage Japan
in the 1950s and 1960s, to low-wage Mexico in the 1990s, and
most recently to low-wage China. Japan, of course, is no longer
characterized by a low-wage workforce, and many in Mexico are
now complaining of job losses to low-wage China.

In developed countries, conceptual jobs, fostered by cutting-edge
technologies, are occupying an ever-increasing share of the
workforce and are gradually replacing work that requires manual
skills. Those industries in which labor costs are a significant part
of overall costs have been under greater competition from
foreign producers with lower labor costs, adjusted for
productivity.

This process is not new. For generations human ingenuity has
been creating industries and jobs that never before existed, from
vehicle assembling to computer software engineering. With
those jobs come new opportunities for workers with the
necessary skills. In recent years, competition from abroad has
risen to a point at which developed countries’ lowest skilled
workers are being priced out of the global labor market. This
diminishing of opportunities for such workers is why retraining
for new job skills that meet the evolving opportunities created by
our economies has become so urgent a priority. A major source
of such retraining in the United States has been our community
colleges, which have proliferated over the past two decades.

We can usually identify somewhat in advance which tasks are
most vulnerable to being displaced by foreign or domestic
competition. But in economies at the forefront of technology,
most new jobs are the consequence of innovation, which by its
nature is not easily predictable. What we in the United States do
know is that, over the years, more than 94 percent of our
workforce, on average, has been employed as markets matched
idled workers seeking employment to new jobs. We can thus be
confident that new jobs will displace old ones as they always
have, but not without a high degree of pain for those caught in
the job-losing segment of America’s massive job-turnover
process.

The onset of far greater flexibility in recent years in the labor and
product markets of the United States and the United Kingdom, to
name just two economies, raises the possibility of the
resurrection of confidence in the automatic rebalancing ability of
markets, so prevalent in the period before Keynes. In its modern
incarnation, the reliance on markets acknowledges limited roles
for both countercyclical macroeconomic policies and market-
sensitive regulatory frameworks. The central burden of
adjustment, however, is left to economic agents operating freely
and in their own self-interest in dynamic and interrelated
markets. The benefits of having moved in this direction over the
past couple of decades are increasingly apparent. The United
States has experienced quarterly declines in real GDP exceeding
1 percent at an annual rate on only three occasions over the past
twenty years. Britain has gone forty-six quarters without a
downturn.

Nonetheless, so long as markets are free and human beings
exhibit swings of euphoria and distress, the business cycle will
continue to plague us. But even granting human imperfections,
flexible economic institutions appear to significantly ameliorate
the amplitude and duration of the business cycle. The benefits
seem sufficiently large that special emphasis should be placed on
searching for policies that will foster still greater economic
flexibility while seeking opportunities to dismantle policies that
contribute to unnecessary rigidity.

Let me raise one final caution in this otherwise decidedly
promising scenario.

Disoriented by the quickened pace of today’s competition, some
in the United States look back with nostalgia to the seemingly
more tranquil years of the early post-World War II period, when
tariff walls were perceived as providing job security from
imports. Were we to yield to such selective nostalgia and shut
out a large part, or all, of imports of manufactured goods and
produce those goods ourselves, our overall standards of living
would fall. In today’s flexible markets, our large, but finite,
capital and labor resources are generally employed most
effectively. Any diversion of resources from the market-guided
activities would, of necessity, engender a less-productive mix.

For the most part, we in the United States have not engaged in
significant and widespread protectionism for more than five
decades. The consequences of moving in that direction in
today’s far more globalized financial world could be
unexpectedly destabilizing.

I remain optimistic that we and our global trading partners will
shun that path. The evidence is simply too compelling that our
mutual interests are best served by promoting the free flow of
goods and services among our increasingly flexible and dynamic
market economies.

[Source: Federal Reserve]

Wall Street History will return February 6.

Brian Trumbore

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