Read Online The Price of Civilization: Reawakening American Virtue and Prosperity by Jeffrey D. Sachs - Free Book Online Page B
Authors: Jeffrey D. Sachs
Tags: United States, Social Science, History, Business & Economics, 21st Century, Economic Conditions, Poverty & Homelessness
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rise of the new globalization. Yet, like Reagan, he basically misunderstood or neglected this crucial phenomenon on repeated occasions. By treating the United States as a closed economy, he continually overlooked the severe risks of his own policies and thereby helped stoke several financial crises, including the megameltdown of 2008.
Greenspan was fixated on a key point: that as much as he pushed down interest rates to spur consumer spending and housing purchases, U.S. inflation remained low. He considered this a miracle of U.S. productivity, that the economy had a new growth potential because of a surge of innovation in the “new economy” of information technology. His staff repeatedly demurred, saying that such a surge of productivity could not be found in the data. Greenspan persisted, however, insisting that low inflation could be explained only by the elusive productivity miracle.
He missed the real point, and with serious adverse consequences: inflation was being held down not by a productivity miracle but by the surge of consumer goods that were arriving from China. As U.S. consumers increased their demand for consumer goods, China scaled up its supply, setting up factories almost overnight to take advantage of the voracious U.S. appetite. The more Greenspan put his foot on the monetary accelerator, the more he stoked a runaway consumption and housing binge. His policies were therefore a core part of America’s excess spending, which led up to the financial crash of 2008.
Had Greenspan been correct that America was enjoying a productivity boom, the country would have been experiencing a surge ofgrowth of GDP, wages, and employment. National output would have been running ahead of consumption spending. Savings rates would have been rising. Of course, the opposite was occurring: America’s GDP growth was sluggish; wages were stagnant; and employment was flagging. Although manufacturing employment was relatively stable from 1990 to 1998 at around 17.2 million workers, between 1998 and 2004 the floor fell through the labor market, with a loss of 3.2 million manufacturing jobs. 7 All of these adverse outcomes suggest that it was imports from abroad, rather than a productivity surge, that was the main reason for low inflation. The Federal Reserve’s easy monetary policy succeeded in creating manufacturing jobs, but in China, not in the United States.
The Fed’s policies did create around 1 million U.S. jobs in construction between 2002 and 2006, but they proved to be evanescent. 8 With the Fed’s foot to the monetary pedal, U.S. interest rates hit rock-bottom levels, causing the demand for mortgages to soar. Wall Street began to securitize mortgages and sell them off to other financial pools such as pension funds, foreign banks, and insurance companies. As everybody now knows, the lucrative fees earned by everybody involved in packaging securities led to the collapse of lending standards—and ethical standards—in the mortgage sector.
There are two lessons here. The first is that monetary policy cannot solve America’s employment problem. Greenspan tried again and again, through cheap credits, and Ben Bernanke is doing the same. This is a hopeless, self-defeating strategy. Temporary jobs in construction can be created through a Fed-led housing bubble, but when the bubble bursts we are left with the reality that America’s manufacturing employment has fallen further under the weight of foreign competition and America’s lack of global competitiveness. The second lesson is that ignorance or neglect of globalization repeatedly comes back to haunt us. Unless we focus on the reality that the United States is now tightly integrated into the global economy and connected with more than 6 billion other people in a worldwideproduction network, we’ll keep failing to restore prosperity in a meaningful and sustainable manner.
Long-Term Effects of the New Globalization
The new globalization played a role in the
Greenspan was fixated on a key point: that as much as he pushed down interest rates to spur consumer spending and housing purchases, U.S. inflation remained low. He considered this a miracle of U.S. productivity, that the economy had a new growth potential because of a surge of innovation in the “new economy” of information technology. His staff repeatedly demurred, saying that such a surge of productivity could not be found in the data. Greenspan persisted, however, insisting that low inflation could be explained only by the elusive productivity miracle.
He missed the real point, and with serious adverse consequences: inflation was being held down not by a productivity miracle but by the surge of consumer goods that were arriving from China. As U.S. consumers increased their demand for consumer goods, China scaled up its supply, setting up factories almost overnight to take advantage of the voracious U.S. appetite. The more Greenspan put his foot on the monetary accelerator, the more he stoked a runaway consumption and housing binge. His policies were therefore a core part of America’s excess spending, which led up to the financial crash of 2008.
Had Greenspan been correct that America was enjoying a productivity boom, the country would have been experiencing a surge ofgrowth of GDP, wages, and employment. National output would have been running ahead of consumption spending. Savings rates would have been rising. Of course, the opposite was occurring: America’s GDP growth was sluggish; wages were stagnant; and employment was flagging. Although manufacturing employment was relatively stable from 1990 to 1998 at around 17.2 million workers, between 1998 and 2004 the floor fell through the labor market, with a loss of 3.2 million manufacturing jobs. 7 All of these adverse outcomes suggest that it was imports from abroad, rather than a productivity surge, that was the main reason for low inflation. The Federal Reserve’s easy monetary policy succeeded in creating manufacturing jobs, but in China, not in the United States.
The Fed’s policies did create around 1 million U.S. jobs in construction between 2002 and 2006, but they proved to be evanescent. 8 With the Fed’s foot to the monetary pedal, U.S. interest rates hit rock-bottom levels, causing the demand for mortgages to soar. Wall Street began to securitize mortgages and sell them off to other financial pools such as pension funds, foreign banks, and insurance companies. As everybody now knows, the lucrative fees earned by everybody involved in packaging securities led to the collapse of lending standards—and ethical standards—in the mortgage sector.
There are two lessons here. The first is that monetary policy cannot solve America’s employment problem. Greenspan tried again and again, through cheap credits, and Ben Bernanke is doing the same. This is a hopeless, self-defeating strategy. Temporary jobs in construction can be created through a Fed-led housing bubble, but when the bubble bursts we are left with the reality that America’s manufacturing employment has fallen further under the weight of foreign competition and America’s lack of global competitiveness. The second lesson is that ignorance or neglect of globalization repeatedly comes back to haunt us. Unless we focus on the reality that the United States is now tightly integrated into the global economy and connected with more than 6 billion other people in a worldwideproduction network, we’ll keep failing to restore prosperity in a meaningful and sustainable manner.
Long-Term Effects of the New Globalization
The new globalization played a role in the
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