International Trade and the American Living Standard

CIAO DATE: 07/01

International Trade and the American Living Standard

Charles Schultze _*

October 24, 1997

I want to talk about international trade and the international economy. It is such a wide subject that I am going to leave a lot out. So please bear with me if I leave your favorite aspects out. I want to talk a little bit about what I think of as myths and realities, and there are a lot of myths about the effects of the internationalization of the world economy on the U.S. These days you can't pick up an article purporting to explain the American or the world economy without encountering the term globalization in the first two or three paragraphs. Because of globalization, the economy is said to operate now quite differently than it did a decade ago. Globalization, we're told, explains why the U.S. has recently been able to achieve an unparalleled combination of low unemployment and low inflation, because of all that competition from abroad. Increased competition is responsible for the fact, we are told, that the wages of low paid and low skilled workers in the U.S. have been steadily falling for almost twenty years. When the economy of Mexico or Thailand runs into a crisis, it makes front page headlines. And, now that the budget battle is over, the main economic issue before the congress is fast track legislation to authorize the president to engage in negotiations for further trade liberalization. The topic of the decade appears to be the overwhelming influence on the American economy coming from the growing internationalization of trade, commerce, and finance.

Paradoxically, however, in no area of national life is the gap between the views of the professional economists and those of virtually everybody else wider than it is in the case of international trade. And there are few concepts which have given rise to a greater volume of intellectual garbage than the term globalization. It ranks with much of the popular literature that we used to read not many years ago explaining how the Japanese were going to take over the economic universe or why the poor U.S. economy was losing its competitive edge. So, what I want to try to do tonight is two things. First, identify a number of major aspects of international trade and commerce where the counter-intuitive views of economists clash strongly with those of most other people and try to explain why the apparently arcane professional views, in fact, broadly capture the very complex ways in which modern economies operate. Second, I'm going to try to provide a more balanced perspective on the effects of international trade and finance–of globalization if you will–on the American economy. Those effects are real, important, and in the main beneficial. In at least the short run, however, they are far less dramatic for good or for ill than the protagonists in the public debate about trade would have you believe.

Over the past fifty years, trade has expanded much faster than economic growth generally, both at home and abroad. In the U.S., for example, exports and imports were about 5-1/2 percent of GDP [gross domestic product] in 1947. In 1996, they are twelve percent of GDP. That's a huge increase. But note carefully, we still produce and exchange domestically some 88 percent of our GDP. And despite the rapid expansion of trade, it accounts for only 12 to12-1/2 percent of our economy. Since 1947, trade barriers have been radically reduced around the world. Tariffs, taking an average from around the world, fell from about forty percent in 1947 to something like six or seven percent now. In 1964 some 1-1/2 percent of investment made by U.S. business firms was made abroad. Today ten percent of business investment is made abroad. Correspondingly, almost ten percent of investment in plants and facilities in the U.S. comes from foreign multinationals.

Let me start by asking what's the basic purpose of international trade? The reasons why the professionals believe that trade is good, and their views about the ways in which national economies and international trade interact, often seem highly counter-intuitive–even to people who are very intelligent and politically engaged. This appears to be true not just in the U.S. but throughout the world. As a consequence, even trade policies which produce what the professionals would agree are good results are usually promoted and sold for the wrong reasons. It's a testament to the underlying strength of democratic government around the world, (at least a lot of places) that despite this fact, the advanced countries have gradually put in place over the last fifty years trade policies which have succeeded in expanding the volume and scope of international trade, contributing substantially to post war growth and living standards.

On the other hand, it has been a precarious process. The political battles have always been divisive, the victories close won, and individual instances of backsliding and counter-productive trade practices have been many. If you only paid attention to press reports and campaign rhetoric, here and abroad, you would think the primary goal of national trade policy would be to maximize a country's exports. There is a grain of truth in that view but only a grain along with a whole bushel of errors. The essential goal of international trade is to improve national living standards by taking advantage of the productivity gains which come from specialization. At bottom, that is no different from the great importance of specialization in the domestic economies of the advanced countries as an explanation for their high living standards. For cities, for states, and for individuals, trying to be a jack of all trades is a sure way to have low living standards. Michael Jordan and Emmitt Smith are both far above average in strength and physical conditioning. They could be much more productive than most other people at any kind of manual labor like landscaping or yard work. But obviously they are much better off economically by concentrating on what they do really well, professional sports and selling Nikes, while buying their landscaping and yard work from someone else, even if the someone else is less efficient at it than they are. Not only will Jordan and Smith gain, so also will those who do the landscaping and gardening.

International trade is simply a way of extending the benefits of specialization across national borders. In effect, it allows the country to extend the high productivity of its best industries and firms to the acquisition of other goods it wants to consume but which it produces relatively inefficiently. It's thus a device to increase the average productivity and living standards of both advanced and less developed countries that engage in trade. Each country can expand its most productive industries and lines of activity to produce an excess of what it does relatively well and exchange that excess for goods in whose production it's relatively less efficient. As economist Paul Krugman put it, the only reason we need to export is because other countries are inconsiderate enough to demand payment for the goods we want from them. The fewer the exports we have to give up as a nation to secure a given amount of imports, the higher our standard of living is going to be. It's also true that if other countries put formal or informal barriers in the way of our exports, we'll end up getting a lower price for them, and that in turn will harm our living standards. That's the grain of truth and the popular view that the goal of international trade policy should be to expand export markets. But the grain of truth should not be taken as anything like the whole truth. Barriers to American exports are harmful to us not because they force us to produce too few exports, but because in effect they reduce the amount of imports we can buy with the resources we devote to our export industries. And of course, American policies that are like barriers to imports accomplish precisely the same harmful consequences. As a nation, we have to work harder to get less.

Unfortunately, when we engage in bilateral bargaining with another country in order to get that country to dismantle some of its trade barriers, the major bargaining weapon at our disposal is to threaten to penalize the imports of the offending country. In the case of international trade, shooting oneself in the foot can also cause harm to the country that you are negotiating with, and can therefore be used as a bargaining threat. The attraction and historical record of success in the post war years from virtually continuous rounds of multilateral trade negotiations is due to the fact that when many countries negotiate at the same time they are able to hold out the carrot of further market opening rather than the self-flagellating sticks of market closing as inducements for each other to undertake trade liberalization. Our prickly trade relationship with Japan over the past ten to fifteen years arises from our perceptions, sometimes accurate and sometimes not, that Japanese customs and trade practices (as opposed to governmental laws which can be more easily negotiated) make imported goods less salable in Japanese markets and thereby worsen the terms on which we trade with them.

In the long run the indirect benefits from the liberalization of international trade are probably equally or even more important than the expanded scope of specialization which is the fundamental purpose. First, an open world trading system vastly expands the degree of competition among industries and firms, and there is nothing like vigorous competition to promote efficiency and spur innovation, both of which bring major benefits to consumers. There is absolutely no doubt that American automobiles today are much better than they ever would have been without Japanese competition. We get other economic gains from removing the barriers to the free flow of investment across national borders. That helps raise living standards because it accelerates the speed with which new inventions, new technologies, and managerial techniques diffuse throughout the world. Living standards are again increased.

Let me turn to the subject of American competitiveness. My notes have the heading "A phrase in search of a meaning." Over the past ten years promoting American competitiveness has become a buzz word, and a wide range of policies, both good and bad, are pedaled as ways to improve it. The term competitiveness has real meaning when applied to Apple vs. IBM, or GM vs. Ford and Chrysler, or American Express vs. VISA or MasterCard. But the term makes little sense when applied to the economic relationships among countries. GM, Ford, and Chrysler are indeed struggling over market share and to an important extent the more one succeeds, the less the profits of the others. The successful development of an attractive new model by one company, for example, can seriously depress the income of the other two. But the auto companies are not engaged in trading, as countries are, a wide range of goods and services with each other. Indeed, the three companies don't buy and sell auto parts and components among themselves. They are almost purely competitors. But the whole point of international trade among nations is the purchase and sale of goods from and to each other. What's good for one country need not at all be bad for the others. Indeed, the opposite is more likely to be true. The U.S. almost always gains when the productivity, and therefore the real incomes, of its trading partners rises. The markets for American exports expand. We can sell them on better terms. In the long run, we are also likely to gain when one of our trading partners designs and successfully markets some new and improved product, even though that might sometimes come at the expense of the markets of an American firm.

Overwhelmingly, American living standards depend upon our own productivity. Higher productivity in the 88 percent of American output sold domestically benefits us directly by giving us more goods and services to enjoy per hour of labor we put in. Higher productivity in the 12 percent of our production that we export benefits us indirectly because for each hour of work we can buy more imported products. And expansion of the scope of international trade can help improve our overall productivity through the benefits of specialization. In theory, our living standards can also be affected by any developments that raise the prices that we get for our exports or lower those that we have to pay for our imports. In actual fact, over the long run, such price changes in America's terms of trade have historically proved to be a very minor factor in determining American living standards.

Now, for the next three or four minutes I am going to ask you to pay close attention because it's kind of hairy. The proposition I want to put to you I have tried for thirty years to explain simply. But I have not always been successful. The proposition is as follows: It is the macroeconomic developments in a country–its saving and investment patterns–not its trade policies that determine whether it has a trade deficit or surplus. It's our saving and investment policies, not our trade policies that determine our trade balance. Trade policies don't affect trade deficits. That's by far the most counter-intuitive proposition put forth by economists.

Let me start. By definition a country's output is equal to its income. You produce $10 billion worth of cars, you've created $10 billion worth of wages, salaries, profits, etc. So output and income are the same thing. The total saving of a country is simply that part of its output and income that it does not consume, publicly or privately. That part of our national production that we refrain from consuming–what we save–we can devote to two purposes. First, it can be invested domestically in the form of new housing or new business plant and equipment. If a country invests at home exactly what it saves, then the sum of its spending on consumption and domestic investment will exactly equal its output–end of story. But suppose, as has been true of Japan for many years, that a country refrains from consuming a large part of its income, that it saves more of its output and income than it wants to invest at home. It will, therefore, be producing more than it purchases at home for purposes of consumption or domestic investment. Necessarily, this means that the country will export more than it imports and it will run a trade surplus. In the process, it acquires foreign currency from other countries in excess of what it needs to pay them for its imports, since it is exporting more than it is importing. That excess will be invested in foreign stocks and bonds, or directly in the equities of the companies it owns abroad. In short, a country which saves more than it wants to invest at home will wind up running a trade surplus, thereby investing the excess saving in foreign assets. Foreign investment is thus the second use to which a nation's saving can be devoted.

By the same token, a country like the U.S. over the past fifteen years, which invests domestically more than it saves, will be spending more on the sum of consumption and domestic investment than it produces. Now, how can you spend more than you produce? You can do so only by importing the difference. So in the U.S. our imports exceed our exports. That country, the U.S., necessarily will run a trade deficit. In the process we finance the deficit by borrowing from abroad. America's $150 billion deficit in its current international account is a mirror image of the fact that our country's national savings are so low compared to our domestic investment opportunities. Trade policies do not trade deficits make. It is the balance between saving and domestic investment. So long as the Japanese insist on saving more than they want to invest at home, they are going to run a trade surplus. And they are going to furnish capital to the rest of the world, and the rest of the world including the U.S. is going to borrow it. So long as the U.S. wants to invest more than it saves, it is going to run a trade deficit. You can have new trade policies until you are blue in the face, and they won't change that fact.

Trade policies will affect the composition of trade. They will affect the level of exports and imports. But they won't affect the difference between exports and import–i.e., the trade deficit or surplus. If we force the Japanese to liberalize their imports, it would end up that both their exports and imports would rise. Now it's a long complicated train by which this is happening, but it follows from what I said to you. As long as Japanese investment and saving stay the same, then any rise in their imports is going to be matched by a rise in their exports. That surplus will be unchanged. Greater trade liberalization with the Japanese means that they will import more, but they are also going to export more to us, and the trade surplus won't change. That is something that is very hard to get across. I would like to say take my word for it, but I can't really ask you to do that. But it's true.

Should we worry about the size of the trade deficit? Well, the U.S. trade deficit isn't so much a problem in itself as it is a symptom of a deeper problem. As I just explained, the U.S. trade deficit mirrors the shortfall of U.S. saving below what business firms and home buyers in the U.S. want to invest domestically. The large trade deficit that arose in the 1980s did not come about because business investment boomed, but because national saving fell. So the trade deficit that we were running in the 80s was a sign that we weren't saving enough to meet our own investment needs. In the 19^th century, the U. S. had a healthy trade deficit because we wanted to invest a lot and didn't save enough. But recently our trade deficit occurred not because investment boomed, but because saving fell. That's what generated our trade deficits. What we ought to worry about is not the trade deficit, it's the saving investment balance that led to the trade deficit.

I give you another counter-intuitive proposition. Trade policies do not create or destroy jobs, not in the aggregate. Proponents of liberalized trade often try to sell it with arguments that it will create jobs. Opponents counter with the charge that cheap foreign imports will destroy American jobs. The debate over the North American Free Trade Agreement was replete with studies and counter-studies about how many American jobs would be created or lost. But the essential fact about international trade in general and exports in particular is they change the composition, not the total number, of jobs in the economy. The specific provisions of trade policies can, of course, affect the fortunes and employment of individual industries and regions. And, as we just saw, trade liberalization will tend to increase both exports and imports by the same amount without changing the balance between them. Even more importantly, the Federal Reserve runs monetary policy in this country based on a set of objectives about unemployment and inflation. Developments that tend to raise unemployment above levels consistent with the Fed's objectives–whether those developments come from the twelve percent of the economy engaged in international trade or the 88 percent devoted to satisfying domestic demand–are going to be countered by changes in monetary policy seeking to bring the economy back to the overall employment and inflation goals sought by the Fed. So, even if, somehow, trade liberalization started to boost imports and unemployment started to rise and employment started to fall, the Fed would counter that development. Conversely, if we had a boom led by export promotion, it is just going to mean that the Fed is going to have to pull in its reins a little bit tighter to keep the economy from growing too fast and overheating.

The Fed's efforts won't be perfectly on target from quarter to quarter. It may either over or under shoot. But for all practical purposes the best answer to the question about how many overall jobs this or that trade initiative will create or destroy is none. Trade changes importantly the composition of our output. In general, our export industries almost by definition tend to be more productive on average. By changing trade policies you can increase the proportion of your economy engaged in more productive industry. But you won't create or destroy jobs in the aggregate even though you will affect an increase in jobs in some industries and a decrease in others. You will change the composition but not the total.

Well, even granted there is no overall loss of jobs from liberalized trade, some people argue that trade is responsible for the sharp rise in wage inequality in the United States over the past twenty years and the associated large decline in the wages of the bottom forty percent of the American workforce. Even though trade liberalization increased job opportunities in high wage exporting industries, the increased competition from low wage countries has pushed down the wages of lesser skilled, lesser educated U.S. workers at the bottom end of the ladder. So the argument runs. In the first place, there is no question that wage and income inequality in the United States has indeed increased sharply. For example, between 1979 and 1993 among male workers [at the bottom twenty percent of the ladder], average earnings adjusted for inflation fell absolutely by eighteen percent. If you go to the next twenty percent up the ladder, they fell fourteen percent but in the top twenty percent, they rose four percent. This doesn't include fringe benefits, pensions and health care. That makes the outcome even worse, because fundamentally there are a lot more health care and pensions at the upper end than at the bottom of the wage ladder. So that tilt of wage scale would be even greater if you took into account fringe benefits. If you look at the wages of women, exactly the same tilt has occurred. But because women have become more and more integrated into the workforce, it has occurred around a higher average. But the same tilt has occurred within the female labor force.

The increased competition from low wage countries has clearly had an effect in this direction and has been part of the reason for this tilt in wages. But it is not a very large effect. First, imports from low wage countries, while they are growing, aren't really all that important in the U.S. Most imports, sixty percent, come from countries with wages equal to or higher than the U.S.–Japan, Europe, Canada, and, quite separately, from OPEC, where low wage is not the point, it's oil. Only four percent of our GDP comes from imports from low wage countries. Of that four percent, about one percent from the rapidly growing tigers of Taiwan, Singapore, Korea, and Hong Kong, and their wages are growing rapidly. So really only three percent of our GDP comes from really low wage countries where it could be a driving force. The magnitude of imports from low wage countries just isn't big enough to explain this huge change in the U.S. labor market.

Secondly, let's separate U.S. industries into three groups: those most affected by trade (they have a lot of exports and imports), those least affected by trade (construction, retail trade), and those in between. What you find is that earnings and inequality rose and wages of the unskilled workers fell by the same amounts in the least trade affected industries as they did in the most trade affected industries. So, while trade may bear a small share of responsibility, it can't be driving the growth of wage inequalities. Similarly, the pay of unskilled relative to skilled workers fell by roughly the same amount in all industries across the board regardless whether they had anything to do with trade or not.

The universality of growth in wage inequality in virtually every industry in the country and the universal decline of the wages of the unskilled suggest that there is something going on that's far beyond the impact of trade on the country, which is just too small. I believe virtually all the evidence points to a common factor working everywhere. The major cause of this rising inequality has been the particular nature of modern technological and economic change. In the early stages of industrial revolution, advances in technology "dumbed" down production. Take Adam Smith's famous pin factory: you had about eight classes of workers. One class put the head on the pin, another straightened the shank of the pin, and so forth. Within that eight classes of workers, individual quality did not make any difference. It was all the same. It was all simplified. The data tell us that just the opposite is happening right now. The modern economy increasingly requires the exercise of individual, differentiated skills. People are increasingly paid according to their particular abilities, skills, and competencies. Not just smarts, but personality, diligence, attitudes, judgment, even good looks...that's why I'm paid so much! Let's take 30-35 year-old males, college graduates, with 8-12 years of experience in a professional occupation. If you break the country into all different kinds of groups like that, within virtually all of them there has been a widening from top to bottom in the wage distribution. This suggests that employers are increasingly paying more at the top of the skill and ability ladder in any given category than before. There is more differentiation of skills within each educational, occupational, and experience category. That's what I'm almost sure is driving most of the rise in inequality in this country.

In the United States, the growing potential surplus of low-skill, lower paid workers drove wages down. Wages are flexible in the United States. The reduced demand for low-skill workers drove their wages down enough so that when they got low enough, they finally got hired. The same technological developments affected Europe where wages are rigid. The pressure of unions and egalitarian tradition kept wages rigid, and lo and behold the result was increased unemployment. The same thing is happening all around the world, except given the different institutional structures it hit us not in high unemployment, but in low wages at the bottom end of the scale. It hit the Europeans with high unemployment. In any event it is not trade.

Let me say a couple of words about "fast track" legislation. President Clinton is now seeking so called fast track legislation, which is the authority to engage in trade liberalizing negotiations with other countries. Congress would have to vote the resulting trade agreements up or down but could not amend them. Without such authority other countries simply wouldn't make agreements with the U.S., on the well-founded fear that special interest groups would tear them apart on the floor of the Congress or in committee with special amendments and changes. The Democrats in the Congress, supported strongly by the AFL-CIO, argue that American workers are threatened by low labor standards, exploitation of child labor, sweatshop working conditions, and absence of minimum wage floors in developing countries. They want to attach provisions to the fast track legislation requiring the president to demand that the countries enact and enforce satisfactory labor standards as a pre-condition for liberalized access to our markets. You know, it is really hypocrisy of the first order. Of all the advanced countries in the world, the U.S. probably has the lowest relative wages at the bottom and the lowest ratio of minimum to average wages of anybody else. And we are going to go around the world and tell them what to do about minimum wages. In any event, sometimes this approach is promoted as a benign concern for human rights in developing countries and sometimes as a device to protect Americans from unfair competition from sweatshop labor.

What are the facts? Well, let's start with the fact that in underdeveloped and poor countries wages are low, working conditions are poor, and children go to work early not because workers are being exploited by greedy firms, but because their productivity is low. Poor education, little capital, non-existent infrastructure, shortage of managerial know-how, inefficient and often corrupt government, and state protected inefficient industries abound. The effect of low wages is, therefore, on average offset by low productivity. Even though they have low wages, they don't have low costs. That's why imports from those countries account for only about three percent of our GDP. They are not swamping us with low-cost imports.

Now, someone could say, even if it's true on average that low wages in developing countries can't seriously threaten U.S. workers, isn't it still possible that workers in a particular industry in such countries could be exploited and have their wages pushed down below the already poor level of average wages in that country? And even though they are not going to swamp the U.S. with low wage goods, isn't it possible that particular low wage firms in other countries (sometimes with U.S. owners) could be taking unfair advantage of these sweatshop conditions? Well, in theory, yes this could happen, and I'm sure that in some cases it does. But in fact, there is precious little evidence that any significant volume of U.S. imports comes out of such instances. To the contrary, typically it is by opening themselves up to international trade and beginning to export low wage goods that the successful less developed countries get started on the road up and get wages moving up. And, typically working in new export industries provides gains in wages and working conditions that make it particularly desirable for people to work in those export industries in low wage countries. The last thing that workers want in those industries is for the U.S. to cut off exports from the plants in which they work. Requiring the president to demand as a condition of trade agreements with underdeveloped countries that they enact or enforce a whole range of labor legislation would for all practical purposes close the door to successful trade negotiations. Trade liberalization with many of those developing countries would just be impossible. Indeed the pressure to place such conditions on further trade negotiations is often a thinly veiled device to achieve precisely that end. I hope the Congress will reject it.

Let me make a couple of final points. In one area of the world's economic life, there has been a major sea change over the past ten or twenty years. That's the ease or speed with which financial funds can flow from one country to another as investors and financial speculators seek higher returns and react to the presence or absence of risk. The events of several years ago in Mexico, the turmoil in Asian financial markets since July, and what's just happening in Hong Kong are dramatic examples of this. It would take a lecture in itself to get into this, but just let me say a few words. The mobility of financial flows is not a major problem for a large state or country, especially the United States. The dollar is a universally used currency. While its exchange rate with other currencies does fluctuate, those fluctuations tend to be slow and moderate. Indeed, on balance, the integration of world financial markets tends to help the Federal Reserve stabilize the U.S. economy. When the Fed, for example, wants to ease monetary policy to help prevent an incipient recession and lowers interest rates, that makes U.S. securities somewhat less attractive to foreign investors. They sell dollars. That drives down the exchange value of the dollar. It's now cheaper for foreign buyers to get U.S. exports. Exports rise, and lo and behold the Fed's reduction in interest rates helps stimulate the U.S. economy. The same thing works through imports as the exchange rate falls when the Fed lowers interest rates. Conversely, when the Fed tightens up, the process works in reverse, and that has a restraining affect on the economy. Higher interest rates make U.S. securities more attractive, the dollar is bid up, U.S. exports are more expensive, and sales of exports fall off. So, on balance, that has been quite good for the U.S.

On the other hand, for developing countries the ease with which capital now flows across borders is a mixed blessing. In the first place, those countries want an inflow of foreign capital and investment. We have learned more and more over the past fifty years that an important route towards the developing of underdeveloped countries is to get an inflow of foreign capital and know how. So countries want to attract foreign capital. But to attract it they also have to make it easy for investors to get their money out. Who's going to invest in a country where you can't get it out? Countries have to forego regulating the inflow and outflow of currencies and leave it to the market. But that means that the price of their currency is likely to fluctuate if they don't do something about it. These countries, as was the case with Thailand, Singapore, Hong Kong, and some others, are also tempted to peg themselves, to peg those currencies to the dollar. So foreign investors not only know they can get it out, they think they can get it out at a known rate, and that helps to attract foreign investment. Governments can peg their currency in two ways. First, they build up reserves of dollars in good times so that they can go out and buy their currency to raise its price when it weakens. Secondly, when too many investors start selling their currency and driving its price down, they raise interest rates in order to make holding their securities more attractive to foreign investors.

But if you stop to think about it, they can easily run out of currency, out of dollars. It's a huge foreign exchange market, and it's very hard. Hong Kong now has huge foreign exchange reserves, and everybody is taking bets whether they can have enough reserves to keep on buying up their currency and getting rid of their dollars, whether the speculators will outlast them or not. Secondly, to raise interest rates very high can kill the domestic economy. I'm not going to solve this problem tonight––I'll do that tomorrow! But it is a serious set of difficulties for smaller, developing countries as to how to handle this dilemma. I painted it in its darkest terms, but you can see it with Mexico and you can see it with the Asian countries. It is a very difficult thing to do. It helps if you run a good economic policy, and the Thais didn't. Hong Kong may get out of it, in part because they have a budget surplus. They don't have any deficits anyway, and their banks are in good condition. So Hong Kong may slide through this more easily.

To conclude let me try to summarize very quickly the major advantages and disadvantages and the role of international trade in the U.S. economy. The increased flow of trade has been an important contributor to the rise in American living standards. Directly, because it increases specialization, as I said. Indirectly, because it increases competition and spreads innovation around the world more quickly. Since World War II, the living standards of Americans measured simply by the value of per capita income and inflation adjusted dollars have gone up by 2-1/2 times. I literally don't know how much freer international trade contributed to this gain. I don't know how much, but I will make an educated guess that probably five to ten percent of that improvement was due to international trade. You make up your mind whether that is a lot or a little. It's probably not as much as the debaters of international trade would claim on the one hand, but five to ten percent of a 150 percent increase means that something like seven to eight to nine percent of today's income is attributable to that. Anyone who wants to give up nine percent of your income raise your hand! So, it hasn't been revolutionary, but it's been important.

On the other hand, consider the term globalization. The extent to which the world operates differently than it used to because of trade is often highly exaggerated. It comes closest to being true in that area of currency transactions that I talked about. But in general the U.S. economy operates much as it always did. There is a whole new set of nonsense coming out of the business commentators on Wall Street called the "New Era." In a new era, among other things, international trade and competition allegedly make it impossible to have inflation. I exaggerate, but there is that view. We are living now in this world in which competition abroad makes it impossible. That's just not true. The reason we have a good economic performance is the Federal Reserve. Good, savvy, pragmatic, understanding by the Federal Reserve has done it. In 1989 we had a classical overheating of the American economy by a small amount, and lo and behold inflation started to rise. It's only been eight or nine years since then. During that period imports into the United States have gone from 11 percent to 12-1/2 percent of our GDP. Not enough to produce a new era. On balance then, the growth and freedom of the flow of international goods and currency and investment has been a good thing for the world and a good thing for the United States, but it has not wrought a revolution.

Endnotes

Note *: Charles Schultze was Director of the Bureau of the Budget, now the Office of Management and Budget, during the Johnson administration. He was the Chairman of the Council of Economic Advisors in the Carter Administration, and has also served as the President of the American Economics Association. Back.