Tuesday, November 14, 2006

Can the Democrats Steer the Economy?

This week's cover story at Business Week argues that the Democrats have little power to affect incomes though policies like a minimum wage boost, which they have promised to pass. Indeed, according to the piece, the U.S. government on the whole is losing its ability to manage economic outcomes in an age of increasing global integration:

Sometime next year--perhaps around Christmas 2007, if current trends continue--the U.S. will hit a milestone. For the first time in recent memory, the cost of imported goods and services will exceed federal revenues. In other words, Americans will soon pay more to foreigners than they do to their national government.

We're almost there now. Imports cost us about $2.2 trillion a year; the federal government collects $2.4 trillion in revenues. Why is that important? Because for the past 70 years, Washington has been the 800-pound gorilla, more powerful by far than any other force in the U.S. economy. That's not true anymore. The federal government remains plenty influential, but the global economy is more so.This will come as a rude shock to Representative Nancy Pelosi (D-Calif.), the presumptive Speaker of the House, Charles B. Rangel (D-N.Y.), the likely chairman of the House Ways & Means Committee, and other newly enfranchised leaders in the Democratic Party. Sure, they're likely to have the power to pass legislation, including boosting the minimum wage. But such a measure, even if President George W. Bush signed it, would help only a small fraction of the workforce. It would do almost nothing to ameliorate the weak wage growth that has plagued most Americans, including college graduates, in recent years. The broad-based drop in incomes is being driven more by the rise of China and India and the intensification of global competition. And there is little Democrats can do to reverse these trends.

No matter which party you belong to, or which Big Idea or school of economic policy you subscribe to, one thing is clear: Globalization has overwhelmed Washington's ability to control the economy. Whether you're a Republican supply-side tax-cutter, a Wall Street deficit hawk of either party, or a Silicon Valley techie type, your preferred levers of economic policy just don't work as well as they once did.
This is an intriguing article. The piece reviews four big areas of economic policy -- Keynesian economics, supply-side theory, Rubinomics (deficit reduction), and innovation policy (R&D) -- and suggests how well each policy strand performs amid relentless globalization processes.

While interesting, I don't find the argument 100 percent compelling. Certainly international determinants are increasingly affecting major segments of economic life in the country. The piece mentions how incomes have declined across all socioeconomic strata, including those with a bachelor's degree, where wages have dropped 8 percent since 2003. Also, global capital mobility has kept U.S. interest rates low, despite 17 rate increases by the Fed since 2004.

Still, I think the author leans toward the extreme "hyperglobalist" interpretation of world economic dynamics. That perspective claims essentially that the state is dead (or close thereabouts) -- continued economic globalization is bringing about the denationalization of state economies. Such a borderless world would make state governments relatively helpless in the face of powerful transnational flows of global goods and capital. Yet, it's important to remember that this era of globalilzation is not unprecedented (the pre-WWI era of the classical Gold Standard is often held out as an even greater period of financial interdependence). States today remain powerful actors influencing the direction of world commerce, through regulation, infrastructure, international agreements, and technology.
Some have even argued that states' ability to tax, redistribute incomes, regulate economic activity, and monitor domestic populations have made them more powerful than ever.

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