What is globalization?

“Globalization” has been going on for a very long time, but in the last quarter of a century the degree of globalization has increased dramatically.

The ancient “Silk Road” trade route connected East Asia, South Asia, the Middle East and Europe. Sailors, caravan drivers, missionaries, and the odd tourist carried word of one civilization to another. (Bits of Roman armor have been discovered in Vietnam.)

The “Voyages of Discovery” created European empires of Trade in Asia and of Settlement in the Americas. Europeans (willing) and Africans (unwilling) moved to the Americas; cotton, coffee, corn, tomatoes, tobacco, potatoes, and Aedes aegypti all crossed the oceans for the first time.

Industrialization in the 19th Century spread Western power, ideas, and patterns of economic development all over the globe in new ways and to a greater degree than before. European investment poured into American, Indian, and Chinese railroads, and into the Suez and Panama canals; the telegraph eliminated time in sending messages; millions of people migrated.

The rise of Communism between 1919 and 1989 sealed off much of the world from Western Capitalism. These places needed scientists, doctors, and engineers, so they built up an educated elite. Then the collapse of the Communist model led to the opening of Russia, Eastern Europe, and China to the world market. Countries like India, much of Africa, and Latin America had all copied parts of the Communist model. After 1989 they also opened up. Low-skill jobs flowed toward low-cost producers who had to employ and feed poor people as best they could. Making steel, sneakers, T-shirts; assembling computers; and processing chicken all migrated.

The collapse of Communism roughly coincided with the development of the Internet for commercial uses. This, too, wiped away barriers. Call centers in India sprang up, making my afternoons a living hell. At the same time, angry Russian techies who had lost their cushy jobs with NepoCom went in for cyber-crime against Western businesses.

The whole world suddenly became more like One World than ever before.

 

It always has been driven by economic forces, but it always has had huge effects in every other aspect of human life. Here are a few examples.

On the one hand, the world is organized into nation-states, but there aren’t any borders in the atmosphere. Green-house gases emitted by one country affect every country. On the other hand, hundreds of millions of people live in environmentally-fragile places, but they are driving for industry as the path to a better life. What happens when 1.3 billion Chinese decide that they all want a car, just like 300 million Americans? I suppose we could tell them to stick to bicycles, but that seems kind of racist. Maybe we should go back to bicycles to set a good example?

Millions of people in poverty-stricken “failed states” want to get to some place that is successful. Even if they don’t speak the language, can’t read or write beyond an elementary school level, belong to a traditional culture that devalues women, and have spent their working lives behind a water buffalo. It will get worse if their country is about to go under water.

You can get a kidney transplant done for $5,000 in India (plus airfare and hotel); you can get SRS done for $16,000 in Thailand (plus airfare and hotel).

Rihanna is from Barbados; Frankie Joe Rukundo is from Rwanda; “Narcocorrida” is popular on both sides of the Mexican-American border; some of the most interesting American students consider themselves “otaku”; three French brothers produced “Assassin’s Creed.”

Seismic Shift.

It’s probably hard for most people to accept this, but economic growth raised incomes all around the world by 28 percent between 2005 and 2013. All that growth required a rise in oil production of 19 percent. That rise in oil production never happened. In large part, it never happened because Saudi Arabia and other major producers never increased their production.[1] They preferred a stable target price of $100 a barrel. Instead, oil prices held steady. By June 2014, West Texas crude was selling for $107 a barrel. Revenues flowed in to oil-producers. But, as the Germans said about the Greeks, “they’ve had their fun.” Nemesis was at hand.[2]

It has been a long time coming. In October 1973 the Organization of Petroleum Exporting Countries (OPEC) launched the first “oil shock” against the industrial democracies. The target countries responded in a variety of ways. Some of the responses were ludicrous, but some had important long-run consequences. In the United States, Congress approved construction of a pipeline from Alaska’s Prudhoe Bay, tried to foster nuclear power generation, first imposed fuel-economy standards on car manufacturers, and created the Energy Research and Development Administration. All these were efforts to prepare a long-term strategy.

Eduardo Porter has argued that federal support for research and development paid big dividends.   In particular, Porter touts the role of government “industrial policy” in the developments that led to the recent shale revolution. The government helped pay for the development of “directionally deviated drilling,” the antecedent to the horizontal drilling that is used in “fracking.” The government pioneered large-scale hydraulic fracturing. The government subsidized the “polycrystalline diamond compact bits” that do the drilling. Micro-seismic imaging, originally developed in government labs to trace coal mine collapses, found application in identifying fracturing sites. The Reagan administration ended obstructive price regulations that had hindered investment.

The shale revolution took decades to develop. Recovering natural gas from shale formed the initial target. When natural gas produced by “fracking” entered energy markets in large quantities a few years ago, natural gas prices started dropping. The drillers’ effort shifted to releasing oil. By 2013 it began to pay off. That year American producers generated 3.5 million barrels of oil derived from shale. From June 2014 to January 2015 the price of oil fell from over $100 a barrel to $45 a barrel.

Why didn’t OPEC cut its own production to push the price back up? Probably because they could not cut back enough to off-set the rise in American production. Cutting production would just cede market-share to the Americans. They are hoping that prices will bounce back up in the future. A revival of world economic growth will increase the demand for energy. This will off-set the expansion of American production to a degree. Shale oil is expensive to produce in comparison to “regular” oil. The current low price will cause many American producers to shut down their operations until prices rise to a profitable level. However, no one now expects oil prices to rebound to anywhere near $100 a barrel. A ceiling of $70 a barrel is more likely.

Falling oil prices have dragged down prices for gasoline, diesel, heating oil, and natural gas. Consumers all around the world are enjoying the equivalent of a tax cut, which in the US amounts to $1,000 a year. That is a valuable prop to growth when strong growth tarries.

[1] Excluding a brief fun-up to counter the 2008 economic collapse.

[2] Eduardo Porter, “Behind Drop in Oil Prices, A Federal Role,” NYT, 21 January 2015.

 

Signals from the Depths.

Democratically-elected governments have been responding to the “Great Recession” by trying to cut public spending.[1] This is a throw-back to the initial—and disastrous—response to the “Great Depression” after 1929. It is a rejection of the subsequent Keynesian deficit-spending policies that eventually got countries out of the Depression. The “sequester” in place of more stimulus has dragged on American economic recovery since 2011; the Germans insist upon austerity in the European Union, and Japan’s parliament recently passed a higher consumption tax that short-circuited an attempt to stimulate growth there.

In the absence of spending programs, central banks have used, are using, or may be about to use purchases of long-term debt (called “quantitative easing”) to pump money into the economy. This is better than nothing.[2] The Federal Reserve Bank has just ended its buying of long-term bonds and has hinted at higher interest rates in 2015. Thus, it is signaling its belief that economic recovery is well underway in the United States.

Still, amidst all the talk about an improving American economy, there have been signs of new troubles ahead in the world economy.[3] By early October 2014, world prices for bonds, currency, and commodities were being read to suggest the possibility of a new global slowdown. It isn’t clear that there are any policy tools that could check this descent.

Economic growth should reduce un-employment. Over time, lower unemployment should lead to a rise in wages and to higher prices. However, all the major advanced economies seem headed toward low long-term interest rates. There appears to be a widely-shared belief among knowledgeable people that inflation is not going to fire up any time soon. Why would people believe this?

First, the value of the dollar has been rising against the currencies of Europe, Japan, South Korea, and Japan. You could read this as investors taking flight from those currencies to the security of currently stable dollars. This may reflect a belief that by investors that the world economy is headed downhill and that there aren’t any policy tools to control the descent.

Second, stocks and bonds usually move in opposite directions. In an expanding economy, money will flow toward stocks as investors try to share in profits and rising share prices. In a shrinking economy, money will flow to bonds as people try to avoid being stuck with stocks whose price is falling. Monetary policy usually seeks to keep interest rates low when the economy needs to be propped-up. Until that is shown to be working, investors will accept even low yields from bonds. The interest rate on 10-Year US bonds has fallen over the course of the year from 3.0 percent to 2.2 percent. Purchasers are bidding-down the interest on these bonds out of their eagerness to have them in their portfolio.

Third, the price of commodities has been falling. The price of crude oil is down 22 percent since the end of June. The price of corn futures has fallen by 31 percent since late April. Abundant production is forcing down prices. It comes at an awkward time for confidence in the world economy.

What do you do when unelected experts and private investors disagree with elected representatives on the best policy? What if the experts and investors are right?

[1] Neil Irwin, “What the Bank of Japan’s Surprise Move Means for the Global Economy,” NYT, 31 October 2014.

[2] Moreover, it pushes up the prices of assets, which are owned by upper income groups, better than it stimulates employment or raises wages. So, many voters find themselves preoccupied by inequality.

[3] Neil Irwin, “The Depressing Signals the Markets Are Sending About the Global Economy,” NYT, 15 October 2014.