Global Mythmaking

Its chic to talk about the "The Global Economy" As if it were something quite new, completely unfathomable and utterly threatening. There's an undeniable international commercial culture that, at times, seems overwhelming. Coon-Cola is now sold in 195 countries with 5.2 billion people. Intel sells about half of its computer chips abroad, Americans are especially prone to see the world economy as a sinister steamroller that would flatten us by lowering living standards and creating constant turmoil. One day, Mexico is in crisis; the next, the dollar is plunging.

The global economy may ultimately live up (or down) to sweeping superlatives. It is a work in progress, but so far, it is more friendly and less terrifying than advertised. Having once wrongly believed that we were economically self-sufficient, we now seem to believe, wrongly again, that we've been completely swamped by global forces. We haven't. Global chic inspires massive mythmaking. The world economy is not depressing Americans' incomes or driving U.S. industry into the abyss. It does not prevent us from influencing our economic future.

We are deceived by novelty and big numbers. Toshiba laptops somehow seem to indict our national competence, and everything "global" seems to come in oversize portions. Our imports exceed $600 billion, and foreigners own more than $350 billion worth of U.S. stocks. These are huge amounts, but they are not decisive in a $7 trillion economy, which is the present output (gross domestic product) of the United States. "We have not simply melted into the international economic crowd," as Federal Reserve vice chairman Alan Blinder puts it.

In a recent speech, Blinder supplied some statistics that provide perspective:

In 1993, the U.S. trade ratio--the sum of exports and imports, compared with GDP--was 21.8 percent, virtually the same as in 1980. Stated differently, our trade equals about a fifth of our production, (In Germany, this ratio is more than twice ours.) And the trade deficit equals only 1.5 percent of GDP.

Although foreign investment in U.S. stocks and bonds has risen dramatically, foreigners owned only about 6 percent of U.S. stocks and 14 percent of U. S. corporate bonds in 1993.

Despite a similar surge in overseas investing by Americans, more than 95 percent of the stocks and 97 percent of the bonds owned by Americans were still U.S. stocks and bonds in 1993.

The very size of our economy explains why global trade and investment rarely determine U.S. job, income or inflation trends. In the past year, the unemployment rate has been falling, while the trade deficit has been rising. Trade is important, but domestic spending has been much more important. (In fact, strong domestic spending and job creation explain the widening trade deficit, because they increase our imports.) As Blinder points out, about 90 percent of what Americans consume is produced in America. This means that raising our living standards depends on improving U.S. economic efficiency.

Foreign trade and investment help by pressuring U.S. firms todo better and allowing us to specialize in industries where we are relatively most efficient, In 1993, we exported 77 percent of our commercial aircraft and 37 percent of our electronic instruments; meanwhile, we imported 55 percent of our tableware (knives, forks) and 77 percent of our cameras. But trade doesn't set U.S. wage rates, because it's not large enough. It mainly affects manufacturing, which represents less than one sixth of U.S. jobs. And many of them are removed from trade. We produce about $15 billion worth of soaps and detergents a year. Little is exported, and imports are negligible.

Domestic competition is more pervasive than foreign. Yet, it somehow seems worse to us that Sony might hurt Zenith than Wal-Mart might hurt Kmart. Trade's largest adverse impact falls on unskilled workers, because imports from low-wage countries substitute for domestic assembly of low-value products (clothes, toys, some electronics). But here, too, the effect is modest, argues Harvard economist Robert Lawrence. Imports from low-wage countries account for perhaps a third of all U.S. imports. American multi-national companies do "outsource" some production abroad, but these imports represent only about 7 percent of their U.S. sales.

What seems most worrying about the global economy is the possibility that it's inherently unstable. The lesson of Mexico's crisis seemed to be that, although massive global money flows don't overwhelm our economy, they can stagger smaller nations. When Mexico abruptly lost large amounts of foreign money-used to finance imports--it was forced into a steep recession. Interest rates rose, the peso depreciated and imports dropped. Worse, Mexico's crisis threatened a chain reaction if investors withdrew funds from other poor countries.

There are other potential instabilities: the dollar, for instance. It remains the main international currency for trade and investment. Its exchange rate can be jolted (up or down) by shifts in investor sentiment, and sharp dollar movements can help or hurt dozens of countries. Growing cross-border commerce also requires more cooperation among nations, but the prospects for that seem to be slipping. After World War II, a few countries (the United States, Britain, France, Germany) dominated the world economy; culture and the cold war bound them together. Now, the great economic powers (including China and India) seem increasingly splintered by culture and politics.

But the worst hasn't happened. Mexico didn't trigger a chain reaction. "Things could have broken down, and they didn't," says Charles Taylor of the Group of 80, a think tank. Cooperation proceeds warily. The Bank for International Settlements in Switzerland has promoted rules to ensure adequate bank capital. "This stuff is dull, but we're making progress," says Taylor. And economies are growing. Economist Allen Sinai of Lehman Brothers finds 46 of 49 major countries advancing. The "expansion of so many countries in so many areas . . . has no precedent in modern economic history," he writes. As yet, the global economy's menace exists mainly in headlines.

Global Mythmaking | News