EPI Journal

EPI Journal

download pdf versionFall 1998


Unfettered global finance threatens prosperity at home and abroad

by Jeff Faux, EPI President

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The current global financial crisis has revealed the bankruptcy of the bipartisan rush to integrate the U.S. into the world economy. But Washington’s policy elite still does not seem to comprehend this. The administration and Republican congressional leaders continue planning for another effort next year to pass fast track trade legislation, to expand NAFTA to the rest of the Western hemisphere, and to press for more deregulation of the world’s markets. Somewhat more to the point, Secretary of the Treasury Robert Rubin has called for a new “architecture” for global finance – his proposal is that the International Monetary Fund require member countries to provide more honest accounting to the world’s investors.

Unfortunately, Rubin’s solution of better bookkeeping will not fix the deep structural flaws in the foundation of the global economy. The mobility of private capital has now outstripped the capacity of governments and international agencies to keep markets from self-destructing or to shield their people from the brutal consequences. One result of this turmoil is a rising hostility to globalization – from unemployed rioters in Jakarta to striking autoworkers in Flint, Mich., to the unpaid miners and teachers in Moscow. Until we build institutions and policies that serve the interests of the world’s workers as well as the world’s investors, further deregulation of finance and trade will lead to even more economic instability and political chaos.

When the United States was transformed around the turn of the century from a series of regional markets to a continental economy, it had to create a system of economic governance to balance the power of private capital. This system included a central bank to promote growth, securities laws to bring confidence to financial markets, and federal rules to prevent states from using sweat shop labor to compete for investment. As a result, national prosperity was broadly shared and the economy became more productive. Today, Wall Street is the world’s most efficient financial center, in large part because of government-imposed barriers between banks and businesses that inhibit crony capitalism.

The global marketplace has no such balance. Indeed, the most recent trade agreements – such as NAFTA and the establishment of the World Trade Organization – impose American-style protection of corporate interests while undermining the ability of national governments to enforce American-style labor, banking, and environmental standards.

Nor does the global economy have the mechanisms to promote stable growth. The International Monetary Fund, for example, is not the central bank for the world. It cannot create money, set interest rates, or regulate speculative excesses. The IMF is a shallow-pocketed, short-term lender of last resort, dependent on loans from its member countries and partnerships with private banks. As such, it conditions its loans to troubled nations with austerity policies aimed at giving debt repayment priority over domestic growth.
In the absence of any international mechanism to pump up global demand, deflated economies around the world must look for customers elsewhere, in a frantic effort to export their way out of depression. Since the competition is fierce, these economies are forced to devalue their currencies and further repress domestic wages in order to cut costs, causing their global purchasing power to shrink even further.

Today among the world’s large consumer markets, neither Europe nor Japan is willing to substantially expand its share of imports, especially when exports to stricken countries are declining. Reversing the downward spiral thus depends on the United States. But with the American personal savings rate plunging toward zero and the consumer debt/income ratio at a record high, Americans are spending at capacity. Buying more imports will mean buying fewer domestically produced goods. As it stands now, America will add at least $100 billion to its existing $200 billion trade deficit as a result of the Asia crisis. More than a million U.S. jobs will eventually be lost, largely in manufacturing.

Most of these workers will see a permanent drop in their living standards, even if they find new jobs. The United States lacks the domestic programs needed to support its own working people in this volatile and competitive global marketplace. In a global economy, job insecurity is a permanent condition. To make matters worse, U.S. workers face shrinking health care and pension coverage. Out of work, they find tightened eligibility for unemployment compensation and welfare. Current programs for retraining and adjustment are a fraction of what is needed to enable workers to adapt successfully to volatile global markets.

As a result, even in the current good times there is weak domestic support for America to shoulder the burden of being the world’s buyer or financier of last resort. The point is not totally lost on Congress, which refused for over a year to approve a funding request for the IMF.

It seems that both the economic and political supports for the new world economic order are crumbling. Today, the global depression is being kept at bay through ad hoc crisis management by IMF and U.S. treasury officials. It is policy making as high-wire acrobatic act -desperate late night phone calls to prime ministers and bankers, followed by hurried visits to a Third Word capital to announce another Band-Aid bailout designed to buy time for the latest “reform” politician to convince his people to lower their living standards even further in order to pay back foreign creditors. By day, America’s financial policy elites lecture the world’s workers on the bracing benefits of free market risk-taking. At night they fashion safety nets for the multimillionaires whose hedge-fund investments go sour.

At this point, the administration and Congress should stop trying to accelerate our integration into a world economy that is falling apart. They should instead turn their energies to designing the infrastructure needed to foster global prosperity. These building blocks should include:

• Stimulation of the global economy through coordinated lower interest rates and the encouragement of more, not less, domestic consumption in troubled nations.

• International taxation and regulation to discourage short-term capital movements and encourage stable longer-term investment.

• A central bank mechanism to maintain global purchasing power.

• Revised trade agreements to give labor and environmental standards parity with investor protection.

• Expanded U.S. domestic programs to cushion the insecurity that follows integration into the global economy.

This is an ambitious agenda. But for those who dream of a stable, prosperous world economy, there is no alternative. Working people, both home and abroad, will increasingly resist being pushed out into the stormy seas of global competition in economies where only the investors in first class get the life jackets.

The EPI Journal is published three times a year and includes information on Institute-related events, publications, and media appearances. For more information, contact the Journal’s editor at jprocopio@epinet.org.
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