Samuelson: Globalization to The Rescue?

It's our versatile villain. Globalization has served as a whipping boy for politicians of both parties—particularly Democrats—and legions of pundits. We blame it for all manner of grievances: lost jobs, greater inequality, shoddy goods. But take this quiz as a reality check. What explains the resilience of the U.S. economy in the face of the deepening housing collapse? (a) Ben Bernanke's deft management of the Federal Reserve; (b) the tireless spending of consumers; (c) improving inflation, and (d) foreign trade.

The best answer is (d).

The trade deficit has been rising for so long and has reached such gigantic dimensions that people forget that it can also fall. Well, it can and it has—to good effect. Through August, the deficit in 2007 was $472 billion, down $46 billion (9 percent) from the same period in 2006. In the second quarter, the U.S. economy expanded at an annual rate of 3.8 percent, even though housing subtracted 0.6 percentage points from growth. But the improved trade balance added 1.3 percentage points, notes economist Edward Yardeni. That was double the loss from housing and also the largest contributor to growth.

Caterpillar, a mega-exporter, exemplifies the turnaround. From 2004 to 2006, its exports rose 44 percent to $10.5 billion. Since the start of 2006, Caterpillar says it has hired more than 11,000 new U.S. production workers. None of this guarantees that a U.S. export boom will prevent an American recession. But the mere possibility suggests that we need to be smarter about globalization—and not simply to parrot popular stereotypes. On the job front, for example, much of today's vitriolic anti-trade rhetoric is misleading and ill-timed.

Contrary to popular opinion, the trade balance (deficit or surplus) barely affects total U.S. employment over long periods. Domestic job creation and destruction ultimately overwhelm trade's effects. From 1991 to 2006, the trade deficit rose from $31 billion to $759 billion. In the same period, payroll jobs increased by 28 million and the unemployment rate fell from 6.8 percent to 4.6 percent. The domestic economy still dominates. Big job losses today relate to housing: construction workers, real-estate agents, mortgage bankers. In 2001, unemployment came from busted dotcoms and telecoms.

But trade—like any form of competition—does affect specific workers. Those vulnerable to imports naturally want to save their jobs, even if open trade is good for the country as a whole (it broadens choices, reduces prices). Although protectionism is a logical response, it's too late. The right time would have been 30 years ago before the trade deficit exploded. Those jobs are now gone, and most aren't coming back. Perversely, being anti-trade today will weaken the employment prospects of trade sensitive industries. A case in point: the Bush administration has proposed "free-trade agreements" with Peru, Panama, Colombia and South Korea. Together, they would bolster U.S. exports, though modestly. In today's anti-trade climate, none has yet passed Congress.

The shrinking trade deficit reflects two realities. First, the dollar has depreciated. Since 2002, it's down 21 percent against a basket of 26 currencies. That makes U.S. exports cheaper abroad and foreign imports more expensive here. Complementing this is what economist Jim O'Neill of Goldman Sachs calls the "decoupling" of the U.S. and world economies.

For years, the U.S. economy was an engine of global economic growth. Americans were truly the shoppers of last resort. Other countries boosted production and jobs by exporting to us. No more. In the second quarter, U.S. consumer spending grew at a meager 1.4 percent annual rate. O'Neill asserts that the added spending of consumers in the so-called BRIC countries (Brazil, Russia, India, China) now contribute more to global economic growth than American consumers.

"At a time of subdued U.S. consumption," he writes, "the world is helping the U.S. economy." In a report last week, the International Monetary Fund reinforced the point. It expects the world economy to grow 4.8 percent in 2008, more than double the projected U.S. growth of 1.9 percent.

There is a larger lesson. We have wrongly made globalization a scapegoat for much that ails us. It's easier and more satisfying to blame faceless forces beyond our borders. But globalization is not, as another IMF study shows, the chief culprit in explaining greater economic inequality. New technologies probably deserve that distinction by widening pay gaps between skilled and unskilled workers. Similarly, China has sold us shoddy goods, but so have domestic U.S. firms.

Globalization is not a worry-free zone, but we should focus on the right worries. China's currency remains undervalued; that's a problem. The swelling U.S. trade deficits have long been a legitimate anxiety. Could the world prosper without them? Would the flood of dollars overseas trigger a currency crisis, as global investors dumped the dollar, causing a sharp depreciation and disrupting well-established trade and investment patterns? Against these doomsday possibilities, a gradual dollar depreciation and decline of the U.S. trade deficit would be reassuring. But the crucial word here is gradual. Abrupt changes could reap enormous economic damage.

All the ritualistic denunciations of globalization by politicians and pundits are not harmless. Psychology matters. If global investors fear that the United States might make its economy less open to foreign trade and investment, the result might be the very dollar panic that everyone fears. The dollar's status as the world's central international currency depends on its usefulness in buying and selling. The more we restrict, the less useful it becomes. Globalization's casual bashers should remember that. They think they're playing only to a domestic audience, but the world is listening, and it may not like what it hears.