Adam Posen, president of the Peterson Institute for International Economics in Washington, recently opined that if the United States tried to isolate itself further from the rest of the global economy, it would still fall behind the rest of the world in economic categories. important.
Discussing the backlash of globalization on the “What Goes Up” podcast on Sunday, April 10, he made the remarks while highlighting how Russia’s invasion of Ukraine is further fracturing the global economy. Bloomberg’s detailed discussion is given below:
Q: I thought back to the 1970s and 1980s and then there was a major setback in globalization. Japan was emerging as a major manufacturing power. There was a lot of resentment towards OPEC because of the oil embargoes of the 1970s. And there was really this kind of “Made in America” nationalist push. And year after year, you heard politicians say, “I’ll fix this. We will bring manufacturing back. We’re going to bring back the steel mills and everything else, all those other good blue collar jobs. But it all ended up being just talk, right? And over the years, it seemed that further integration of the United States and the global economy was almost inevitable. we’re going through right now which really started under the trump administration is that a game changer or is it kind of the same idea that there’s this setback but the gravity of globalization will take over and the world will end up leaning towards this result?
A. It’s actually a little worse than what you’re describing. It’s not just since Trump. We published some research about two years ago where we decided to look at the facts. And the United States has been de-globalizing, or more accurately closing, for about 20 years. It accelerated under Trump, and it got more vocal, but we actually fell behind. And when I say falling behind, I literally mean the rest of the world, including high-income democracies like those in Europe and Japan. But also places that you don’t consider terribly liberal or open have continued to open. The United States is a very large outlier. And it’s not just trade. It’s foreign direct investment, trade agreements. It’s immigration. All of the dimensions on which the United States has been closing in more and more for 20 years.
So you’re right that the perception is that globalization was this juggernaut that wiped out everything in front of it. But this is actually a false characterization. What’s happened, and I think this is the turning point now, is that these longer-term worries about China not playing fair and taking advantage of us and this long-term political savvy in the United States that we have to protect the limited number of manufacturing jobs in the world, these things are accelerated and reinforced by what is happening now in Ukraine, by the Russian invasion. And so I think we’re at a turning point where the world is starting to divide into economic blocs in a way that we’ve never seen.
Q In one of your recent articles, you wrote that the world is splitting into two camps, one centered around China, the other around the United States. So I wanted to ask you to talk about that and what it looks like and how it develops.
A. The split into two camps will not be absolute. So Trump and his US Trade Representative, Robert Lighthizer, had this term of decoupling from China, which they didn’t really do. But to the extent they tried it – as my Peterson colleague Chad Brown and others have documented – it failed. But what I think is happening is what I call the corrosion of globalization. That there were these links on many lines, including people coming and going, ideas coming and going, trading standards as well as things like durable goods trading, manufacturers. And it’s going to be more and more separated.
Q One of the things people like to say about this deterioration in globalization is that it will put upward pressure on inflation going forward. But when you look at this searing inflation that we’re seeing right now, there’s a lot of finger pointing. There is Fed research pointing the finger at fiscal policy. Many people point the finger at the Fe for keeping the policy so loose perhaps too long. And obviously the supply chain issues that we’ve seen around the world. I wonder if it is possible to classify what contributors have been to inflation? And looking back, is there anything you think the Fed or Congress and the government did wrong to get us into this?
A. Yes, I think the story is a bit more complicated in terms of the link between globalization and foreign policy. I think reducing openness lessens the downward price pressure you face from overseas and lessens competition. And over time, it’s bad for inflation and productivity. But I think in the short term it’s actually a kind of disinflation because it reduces the return on capital because you’re investing in duplication and redundancy. This reduces capital diversification because you have to keep more money at home, either because of regulation or because of fear. And so initially, that slows things down.
As to why we have such inflation in the United States right now, I think part of it is something that no one anticipated. That people, myself included, a lot of much smarter people in the central banking community, didn’t fully understand how important it was going to be to reopen the economy after the Covid shutdowns. And, in particular, how disruptive it would be to labor markets…
The other thing, and here people like my colleagues – Olivier Blanchard, Jason Furman and Larry Summers – I think they’re right is that the early 2021 US bailout, the big tax package that the Biden administration passed Congress was really too much in too little time. I mean, we didn’t need all that we spent back then. And everything was spent in a fairly short order. And so you had overheating. So you turn to the Fed. I think the Fed took a reasonable bet, which was that if we could get the economy going — which there’s a lot of good reason to want to do, especially since we’ve continued to undervalue inflation for years before that — there’s a chance the economy will overheat, but we can afford to see how low we can go. I think the Fed took the bet – and I would have, sitting in their place, made the same bet – but I think the moment the Biden administration announced the US bailout, and therefore certainly by the middle of 2021, it was very clear that the bet had gone wrong. And they should have admitted that they had to change their policy, that is to say move towards a tightening by then.
Q Much is said about how US and European sanctions against Russia could potentially disrupt the role of the dollar as the most important international currency. There has already been talk that Saudi Arabia may be selling oil to China at the price of the yuan. Russia demands rubles for its energy. So I wonder if you could talk a bit about that.
A. Obviously that’s what a lot of us think about and I spend most of my time thinking about it. There is no doubt that the first instinct of people who see what the American alliance has done to Russian oligarchs, to Russian companies, to Putin, to the Russian economy, is to say: “oh my God, I would be better if I had a way around the US financial system, had a way to have assets that couldn’t be frozen or could be used no matter what the US did. And this is especially true for borderline criminal regimes, people politically considered enemies of the United States, people with kleptocratic regimes. But that’s also true, frankly, even for a lot of companies, individuals, companies, even countries that might be fine with sanctions against Russia in the event of this invasion, but then are forced to think: “But you know, the United States is not so reliable politically. What if they suddenly turn on me? It shows that they are ready to do so. So there’s this feeling of people thinking, “Oh my God, I wish I had an alternative to the dollar.” But the thing is, there’s a different problem that overrides it, and that’s that you need an alternative.
And if we’re in a world where it’s not just the United States that weighs its weight, but a world that, as we said, I think, divides along geopolitical lines, then you’re kind of stuck with, well, I can put my money in China or Chinese assets, but can I take it out of there? Will it be useful to me? And you look at things like Chinese authorities deciding “no Jack Ma, you can’t do an Ant IPO because you annoyed us. Or, no, all of you who owned private school assets, l education, these assets are no longer worth anything.” So you end up with a world where people are not happy to be under the dollar. But due to the security situation, the alternatives become even less attractive.