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Adam Posen Says Backlash to Globalization Is US Financial Danger

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Adam Posen Says Backlash to Globalization Is US Financial Danger

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Terms like “globalization” and “globalists” have become dirty words to some politicians in recent years. But what is really at stake if the US attempts to further isolate itself from the rest of the world’s economy?

Adam Posen, president of the Peterson Institute for International Economics think tank in Washington, believes it means America will fall further behind the rest of the world in important economic categories. Posen joined the “What Goes Up” podcast to discuss the backlash to globalization, and how Russia’s invasion of Ukraine is further fracturing the global economy. Below are lightly edited and condensed highlights of the conversation. Click here to listen to the whole podcast, and subscribe on Apple Podcasts or wherever you listen.

Q: I was thinking back to the 1970s and ’80s and there was a major pushback to globalization back then. Japan was emerging as a major manufacturing powerhouse. There was a lot of resentment toward OPEC because of the oil embargoes of the 1970s. And there was very much this sort of nationalist “Made in America” push. And year after year, you’d hear politicians saying, “I’m gonna fix this. We’re going to bring back manufacturing. We’re going to bring back the steel mills and everything else, all these other good blue collar jobs.” But it all ended up being just talk, right? And through the years, it seemed like a further integration of the US and the global economy was almost inevitable. So is this episode we’re experiencing now, really which started under the Trump administration, is this a game changer? Or is it sort of the same idea that there’s this pushback, but the gravity of globalization will take over again and the world will bend toward that outcome eventually?

A. It’s actually a little worse than you portray it. It isn’t just since Trump. We published some research about two years ago where we decided to look at the facts. And the US has actually been de-globalizing, or closing itself off more accurately, roughly for 20 years. It accelerated under Trump, and it got more vocal, but actually we have been falling behind. And when I say falling behind, I mean quite literally the rest of the world, including high-income democracies like those in Europe and Japan. But also places that you would not think of as terribly liberal or open have been continuing to open up. The US is a very big outlier. And it’s not just trade. It’s foreign direct investment, it’s trade deals. It’s immigration. The whole host of dimensions on which the US has been closing itself off increasingly 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 that’s actually a false characterization. What has happened, and I do think 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 sense in the US that we have to protect the limited number of manufacturing jobs in the world, those things are accelerated and reinforced by what’s happening now in Ukraine, by the Russian invasion. And so I do think we’re at a turning point where the world is starting to break into economic blocs in a way we haven’t seen.

Q. In one of your recent pieces, you wrote that the world is splitting into two camps, one centered around China, one around the US So I wanted to ask you to talk about that and what that looks like and how that develops.

A. The splitting into two camps isn’t going to be absolute. So, Trump and his US trade representative Robert Lighthizer had this term decoupling from China, which they didn’t really do. But to the extent they tried it — as my colleague at Peterson, Chad Brown, and others documented — it failed. But what I do think is happening is what I call corrosion of globalization. That there were these linkages along multiple lines, including people going back and forth, ideas going back and forth, business norms as well as things like trading in hard goods, manufacturers. And that’s going to get increasingly separated.

Q. One of the things people like to say about this deterioration of globalization is that it will put an upward pressure on inflation going forward. But when we look at this red-hot inflation that we we’re seeing right now, there’s a lot of finger pointing going on. There’s some research from the Fed sort of pointing the finger at fiscal policy. A lot of people are pointing their finger at the Fed for keeping policy so loose perhaps for too long. And obviously the supply chain issues that we’ve seen around the world. I wonder if it’s possible to rank what the contributors have been to inflation? And with the benefit of hindsight, is there anything you think the Fed or Congress and the government did wrong to get us in this situation?

A. Yeah, I think that the story is a little more complicated in terms of the linkage between globalization and foreign policy. I think the reduction in openness does decrease the amount of downward price pressure you get from abroad and it decreases competition. And over time, that’s bad for both inflation and productivity. But I think in the short term, it’s actually kind of disinflationary because it lowers the return on capital because you’re investing in duplications and redundancies. It lowers the diversification of capital because you’re having to keep more money at home, either because of regulation or fear. And so in the first instance, it slows things down.

In terms of why we have such inflation in the US right now, I think a chunk of it is stuff that nobody foresaw. That people, myself included, lots of much smarter people in the central banking community, didn’t fully get just how big a deal it was going to be to reopen the economy after Covid shutdowns. And, in particular, how disruptive that would be to labor markets…

The other thing, and here people like my colleagues — Olivier Blanchard, Jason Furman and Larry Summers — I think are right is the American rescue package of early 2021, the big fiscal package that the Biden administration passed through Congress, really was too much in too short a time. I mean, we didn’t need as much as we spent then. And it was all spent in a pretty short order. And so you did get overheating. So then you turn to the Fed. I think the Fed took a reasonable gamble, which was that if we run the economy hot — which there are a lot of good reasons to want to do, especially since we kept undershooting inflation for years before this — there’s a chance the economy overheats but we can afford to see how low we can go. I think the Fed took the gamble — and I would’ve, sitting in their place, made the same gamble — but I think by the time the Biden administration announced the American rescue package, and so certainly by the middle of 2021, it was very clear the gamble turned out badly. And they should have been admitting they needed to change policy, meaning move toward tightening by then.

Q. There’s a lot of talk about how the US, European sanctions against Russia could potentially disrupt the dollar’s role as the most important international currency. There’s already been talk about Saudi Arabia perhaps selling oil to China priced in yuan. Russia demands rubles for its energy. So I wonder if you could talk a little bit about that.

A. Obviously this is what a lot of us are thinking about and I’m spending most of my thinking time on this. There’s no question that the first instinct of people seeing what the US alliance did to Russian oligarchs, to Russian companies, to Putin, to the Russian economy, is to say, “oh my God, I would be better off if I had some way of getting around the US financial system, had some way of having assets that either couldn’t be frozen or could be used no matter what the US did.” And this is particularly true for borderline criminal regimes, people who are politically deemed enemies of the US, people with kleptocratic regimes. But it’s also true, frankly, even for a lot of businesses, individuals, companies, even countries that might agree with the sanctions on Russia in the case of this invasion, but then are forced to think, “But you know, the US is not that politically reliable. What happens if they suddenly turn on me? This shows they’re willing to do that.” So there is that sense of people thinking, “Oh my God, I wish I had an alternative to the dollar.” But the fact is there’s a different problem that overrides that, which is you need an alternative. And if we’re in a world where it’s not just the US throwing its weight, but a world which as we said, I think is dividing along geopolitical lines, then you’re sort of stuck with, well, I can put my money in China or in Chinese assets, but then can I get it out from there? Will it be useful to me? And you look at things like the Chinese authorities deciding “no Jack Ma you can’t do an Ant IPO because you’ve annoyed us. Or, no, all of you who owned assets in private schools, teaching, those assets are now worthless.”

So you end up with a world where people are not thrilled about being under the dollar. But because of the security situation, the alternatives become even less attractive.

This was just the highlights. Click here to listen to the full podcast.

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