How Credit-money Shapes the Economy: The United States in a Global System

The United States in a Global System

Robert Guttmann

• Publisher: Routledge
• Year: 2016
• ISBN:
  9781315485959
• Edition: 1
• Topic: Business
• Subtopic: Business General
• Index: Business

This text examines money, credit, and economic activity in the increasingly integrated global economy. It focuses on the problems afflicting the United States as it adapts to the transformation of the world economy.

Part I
The Theory of Money

1
The Economy in Transition

1.1. The Bitter Taste of Victory

The collapse of Communist rule in the former Soviet empire during 1989—91 is probably the most dramatic indication that we live in a period of great historic change. Four decades of confrontation between two superpowers, the United States and the Soviet Union, have suddenly come to an end. From our perspective, as the victors of the cold war, the disintegration of the Soviet command economy looks like the final triumph of capitalism over communism. These self-congratulory sentiments are quite understandable. After all, it is their system which is falling apart, not ours.

Central planning and government monopoly, although initially capable of redirecting resources toward rapid industrialization, lacked the technological dynamism and adjustment capacity of a system based on markets and free enterprise. Moreover, these pillars of Stalinism were prone to inefficiency and misallocation of resources. The lack of competition limited the range of available products and invited shoddy quality. The imposition of output targets from above prompted producing units to fudge their figures, hoard inventories, and focus on aggregate production quantities to the exclusion of other goals. Artificial price controls encouraged a combination of waste and shortages. These distortions ate up scarce resources while forcing brutal rationing on a discontented population. The absence of markets not only stifled entrepreneurial initiative but also deprived decision-makers of a crucial signaling device. In the end this repressive system could not maintain its social contract of providing its citizens with a great deal of economic security in exchange for forsaking political and commercial freedom.

While the failure of central planning illustrates the superiority of our own system, the liberalization now under way in hitherto mostly government-run economies also shows tellingly how brutal the logic of the market mechanism can be: a high degree of economic insecurity, the terrible divisiveness and social costs of mass unemployment, a more unequal distribution of income and wealth, the clash between private profit and social benefits. The crisis in Eastern Europe, the Soviet Union, and many one-party states of the developing world is certainly for the most part a reflection of the degree to which these economies have been mismanaged over decades. But its rapid deepening is also at least partly caused by the switch to market regulation. Poland, the former East Germany, Ukraine, and Russia are clear cases in point. Political turmoil in these countries forced policy-makers to introduce a market economy practically overnight, with traumatic results for large segments of the population. Although most economists regard this as a transitional problem which will be alleviated once the necessary restructuring has run its course, the drama unfolding there should make us think some more about the social costs and benefits of a market-based economy.

The transformation of a defunct economic system is an experiment with few precedents in history, and much will be learned from it. The lessons from this revolutionary process will have a profound impact on political discourse and economic policy throughout the world. It may well be that the principal concern of reformers here and there—how to construct a "mixed" economy which combines the virtues of the marketplace with the coordinating capacities of representative government carrying out a broadly shared social contract—will finally move to the forefront of public debate now that the recipes of the dogmatic Left appear to have become obsolete.

In the meantime, the monumental events of 1989-91 raise more immediate questions for the United States. These have already begun to catch up with us, cutting our euphoria short and leaving us in a state of growing anxiety. The cold war shaped the political organizations and economic structures of our country as profoundly as it shaped those of the former Soviet Union. What, for example, will happen to our military-industrial complex or bipartisan foreign policy consensus now that this period is finally coming to an end? How do we redefine national security in an era of reduced superpower tensions? Can we convert our bloated defense industry for civilian uses, or do we have to write off its excess capacity? Finally, how can we best use the "peace dividend" from reduced military spending to meet future challenges?

Correct answers to these questions require an understanding of the present as history. We no longer live in a world dominated by the political and military confrontation of two superpowers. The geopolitical era of the cold war has given way to a new epoch in which the strength of nations will be defined primarily by their industrial competitiveness, mastery of technology, financial position, and entrepreunerial talents. Moreover, in this emerging geoeconomic era the United States faces powerful challengers, most notably Japan and a reunited Germany. In the developing world several countries with large populations and important natural resources, such as Mexico, Brazil, Nigeria, South Africa, India, or China, have the potential of becoming important producers in key industries. The principal question then becomes whether we as a nation are prepared for this intense global competition and, if not, what to do about it.

It is fair to say that the United States enters the new geoeconomic era with several handicaps. Our economy, though still by far the largest, is no longer in the position of absolute dominance that it held since the end of World War II. In a growing number of industries the Japanese and Europeans have caught up with, if not already surpassed, us. The accelerating decline of competitiveness during the 1980s shows up in many ways, most dramatically in the loss of market shares by U.S. corporations both at home and abroad, huge trade deficits, and the rapid accumulation of debt owed to foreigners. Within a span of few years the United States has turned from being the world's leading creditor nation, a position occupied for nearly seventy years, into its largest debtor. It does not take much knowledge of economics, politics, or history to understand at least intuitively that it makes quite a difference whether a country is a creditor or debtor vis-à-vis the rest of the world. For one, our dependence on foreign capital restricts our economic policy options and puts at risk the future generations of Americans who will have to service that debt.

There are many reasons for this erosion in our position. Those causes are often rooted at home. U.S. productivity growth, a key determinant of competitiveness, has slowed to a crawl over the past two decades, Recent improvements in this regard by our manufacturing sector have come about largely as a result of radical streamlining and cost-cutting. Such a defensive posture of squeezing and retrenchment does not necessarily lay the foundations for sustainable increases in productivity over the long run. When it comes to those, we are not doing well at all in relation to other industrial nations. We invest much less, proportionally speaking, than does either Germany or Japan. Therefore, our income growth and saving rate are low by comparison. We also lag behind in research and development, while still directing a much larger portion of our research and development spending toward the military. The U.S. economy has consequently lost its once seemingly unassailable technological leadership in a relatively short period of time. This particular aspect is especially troubling in a period of very rapid technical progress, during which many growth industries of the future are passing through the early stages of their life cycle. Our dismal education system deprives young citizens of crucial skills just when job assignments are becoming increasingly knowledge-intensive. Other structural weaknesses include the nation's crumbling infrastructure (e.g., roads, railroads, airports, water and sewer systems), a history of adversarial labor-management relations, the short-term planning and investment horizon of our chief executives, and the high cost of capital for firms that are trying to raise funds.

These problems are structural in nature—that is they emanate from the amalgam of institutional characteristics, policy compromises, and cultural attitudes that gives every national economy its distinct societal features from deep within. As such, they often take a long time to develop before becoming a focus of national attention. The process of our declining competitiveness, for example, began more than two decades ago. But it only reached a critical stage in the mid-1980s, when other countries finally caught up with our productivity levels. Of course, governments have at their disposal short-term expedients that postpone the moment of truth. We shall see below how consecutive U.S. administrations have tried to mask the underlying deterioration of our world market position and to delay painful adjustments for as long as possible.

It may be difficult for many Americans to accept the new realities of a polycentric world economy which we no longer dominate. There is an age-old political tradition of isolationism in this country which in uncertain times tends to breed protectionism, xenophobia, and an insular outlook toward the rest of the world. Politicians are often tempted to stir and exploit these sentiments for their own agenda. This undercurrent in American politics, already showing troubling signs of revival, is quite dangerous. Instead of turning inward, the United States must maintain a leadership role in favor of free trade and multilateral solutions to global problems. Otherwise, industrial nations may regroup and divide into distinct power blocs. Europe's efforts at greater integration, the growing influence of Japan in the Pacific Basin, and the U.S. pursuit of free-trade agreements with Canada and Mexico all point in this direction. History, especially that of Europe during the nineteenth and early twentieth centuries, shows how easily the formation of hegemonic spheres of influences leads to conflict and how difficult it is to manage a triangular web of adversarial relations.

Americans cannot isolate themselves from the rest of the world without risking lower living standards and suffering a loss of influence in international affairs. As large as our domestic economy is, it is by no means self-sufficient. We need to import crucial products, such as oil, steel, machine tools, semiconductors, and consumer electronics. Shortages of skilled workers require the United States to tap foreign labor supplies. Our traditional reliance on the "brain drain" from the rest of the world is thus likely to continue. Many firms have production capacities that far exceed what they can sell at home. They must compete in the global marketplace. The pressure to export will, if anything, only increase in the near future. Enormous U.S. budget and trade deficits over the past decade have forced us to import capital from abroad, and our foreign debt in excess of $600 billion is best serviced out of export earnings.¹

1.2. Globalization of Economic Activity

These developments are only surface reflections of a much deeper historical process now under way—the globalization of economic activity. This trend is the single most important aspect of the transition referred to earlier. Our economic system has an inherent tendency to expand its activities beyond national frontiers. From its very inception in the sixteenth and seventeenth centuries, when European powers colonized resource-rich regions and organized a slave trade across the globe, capitalism has always contained a strongly international dimension. U.S. policy-makers realized the importance of this aspect after World War II. They used America's position of absolute dominance in the world to introduce a new international monetary system (Bretton Woods Conference, 1944), liberalize trade (General Agreement on Tariffs and Trade, 1947), and finance the rebuilding of Western Europe (Marshall Plan, 1948). These reforms paved the way for a rapid expansion of world trade and overseas investments, both of which played a crucial role in the worldwide economic boom of the 1950s and 1960s.

But the globalization we face today is not merely a quantitative extension of those trends. It is a qualitative leap forward. During the last decade a variety of forces have coalesced to foster a much higher degree of global integration. The world is rapidly becoming a single economy. This new entity is more than just the sum of its parts, the nation-states.

• All countries have become dependent on trade for their prosperity, whether to import goods and services produced more cheaply elsewhere or to pursue export-led growth strategies. Even the United States, until recently a relatively closed economy, has turned into a much more open economy, in which exports and imports absorb nearly a quarter of its gross national product (GNP). Trade has many benefits. It allows producers to sell more, gives consumers greater choice at lower prices, encourages competition, and facilitates specialization. Countries must export in order to pay for their imports or service their foreign debts.

• Large corporations, turning multinational in the postwar period, have now reached the next stage in their development. They are rapidly becoming global corporations that operate integrated production networks stretching over several countries and compete with each other across the globe. The most dramatic expression of this trend has been the amazing wave of cross-country mergers and joint ventures during the last few years, often spurred by the need to share the otherwise prohibitive costs of product development and to gain access to new market opportunities. These giants are no longer bound to any particular nation-state. Their ability to avoid regulations and taxes considered too burdensome poses a major challenge to governments. Threats of relocation to cheap-labor areas give them an upper hand against nationally organized unions. More than a third of world trade consists today of intracompany transactions between subsidiaries, making traditional means of correcting trade imbalances between countries much less effective.

• Electronics has turned the world into a "global village." Spaces and people in every corner of the world have become connected through computer networks, fax machines, fiber-optics cables, and satellite dishes. Information abounds and is now shared everywhere. The emergence of global communication technologies has vastly increased the tradability of once local services (e.g., television, education, accounting) and has made it possible to move huge sums of money across the globe with the push of a button. In their wake, financial markets have become globally linked. The "information age" also transforms skill requirements and job specifications while creating new forms of poverty for those who are deprived of access to the data. Long-run effects of this technological revolution on politics and culture will be profound as well.

• Large migrations of people across national borders are likely in the future. Even though the world has always experienced major waves of migration, human capital has traditionally been much less mobile than physical or financial capital. This too is changing fast. Population movements are no longer confined to economic crisis or war, the traditional reasons for relocation. Uneven development, the increasingly precarious state of food supplies in many parts of the world, and a major demographic imbalance (i.e., explosive population growth in developing countries, coupled with stagnant and aging populations in the industrial world) will prompt many to seek their fortunes elsewhere. Global communication reduces language and cultural barriers, making it easier for people to move. Managerial careers will increasingly require foreign work experience or education abroad. Cross-cultural interaction can and should be a truly enriching experience for all involved. Immigrant communities contribute everywhere to the wealth of nations. Despite these facts, we see a frightening intensification of anti-immigrant sentiment and racist incidents in the United States and Europe. The pathological need for scapegoats, against whom to direct one's feelings of economic insecurity and social despair, has once again created an opening for reckless demagogues with political ambitions.

• Since the early 1970s the business cycles of industrial nations have become a great deal more synchronized. When the economies of the United States, Western Europe, and Japan all slow down at the same time, any downturn becomes that much stronger. The deep recessions of 1974—75 and 1979-82 bear dramatic witness to this danger. The synchronization of cyclical fluctuations has had many causes, the most important of which was the emergence of floating exchange rates following the disintegration of Bretton Woods in 1971-73. As we shall see (in chapter 7), that deregulation of currency prices encouraged destabilizing movements of capital and procyclical economic policies emanating from the United States, which triggered recessionary adjustments on a global scale. The oil-price hikes of 1973 and 1979, the most obvious trigger events, must in this context be understood as direct consequences of a flawed international monetary system, rather than be reduced to "external shocks," as most mainstream economists are prone to do. Since 1982 the industrial nations have become locked into an even more tightly interdependent growth pattern, with surplus countries recycling their excess savings to the United States so as to maintain large U.S. budget and trade deficits as the principal stimulant of global recovery (see chapter 8). Policy-makers have begun to realize that this situation requires international po...

Table of contents

• Cover
• Half Title
• Title
• Copyright
• Dedication
• Contents
• Tables and Figures
• Preface
• Acknowledgments
• PART I The Theory of Money
• PART II The Historic Evolution of Money Management
• PART III The End of the New Deal
• PART IV The Monetary Regime in Transition
• PART V The International Dimension of Money
• PART VI Restructuring the American Economy
• Notes
• Acronyms and Abbreviations
• Bibliography
• Index
• About the Author