Greenspan on Globalization
Brian Trumbore
President/Editor, StocksandNews.com

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]

Brian Trumbore