economic globalization sociology 2, class 5 copyright © 2014 by evan schofer do not copy or...
TRANSCRIPT
Economic Globalization
Sociology 2, Class 5
Copyright © 2014 by Evan Schofer
Do not copy or distribute without permission
Announcements• Announcements:
– Agenda• States, Markets, & Economic Globalization
States and Markets
• Question: How can states affect markets?– 1. Fiscal policy – taxes and spending– 2. Monetary (money) policy – printing & lending
money– 3. Laws and Regulations– 4. Direct ownership of production
Fiscal Policy: Basics
• Fiscal Policy: State policy regarding taxation, public revenue, or public debt– Revenue: Money the government takes in– Spending: Money the government spends
• Spending can “jump-start” the economy• Keynes: “Government should spent against the wind”
• But, consistent high government spending can harm economic growth
• High deficits, debt can lead to inflation (stagflation)• Extremely high debt can cause a “debt crisis”
– Costs of borrowing go up; countries can even go bankrupt!
Monetary Policy• The government acts as a bank:• The “Federal Reserve Bank” was set up by
the government to store a reserve of money-- But, operates somewhat independently from gov’t
• Called “The Fed”; general term: “central bank”– The Fed lends money to other banks
• Banks, in turn, lend to people and companies
Monetary Policy
• The “Fed” uses its pool of money to:– 1. Prevent financial disasters
• Example: The “run” on banks in the Great Depression– Banks collapsed and government didn’t help out
• Example: In 2008 banks collapsed and the government aggressively stepped in
– Including TARP
– 2. To adjust the economy• Prevent boom/bust cycles
– Keep inflation & unemployment low• It does this by setting interest rates
– And, recently, by intervening directly (buying or selling things).
Monetary Policy
• What are “interest rates”?• Interest rates are the cost of borrowing money
– Like rates on a credit card or student loan• If rates are high, you will buy or spend less
– Because you’ll have to pay a LOT of interest later…
• If rates are low, you can buy more now
• The Fed chooses the interest rate it will charge to lend money
• The Fed is so big that other banks follow its rates• So, the Fed effectively sets rates for the whole economy
Monetary Policy• Interest rates a “gas pedal” for the economy• Low rates stimulate the economy
• Also called “expansionary” or “loose” monetary policy• Encourages people to spend, companies to invest• Downside: higher inflation
• High rates slow the economy– And, can be used to reduce inflation
• “Tight”, contractionary, or conservative monetary policy• High interest payments mean that businesses and people
are less likely to borrow, spend, invest.
Effects of Interest Rates
US Interest Rates 2000-2014
Rates lowered during recession
after dotcom crash & 9/11
Rates drop to zero in current
recession
The “Lower Bound” Problem• What if you want to speed up the economy
more, but interest rates are already near zero?– Answer: You’re stuck in a “liquidity trap”
• Traditional monetary policy loses effectiveness in extreme economic conditions
» See Krugman book: “The Return of Depression Economics”
• Japan in the 1990s – the “lost decade”• But, the Fed tries ‘non-traditional’ strategies
– Ex: “Quantitative easing” (buy assets to put $ into economy)
– Implication: Fiscal stimulus is the main strategy to deal with the current recession.
States and Markets
• Question: How can states affect markets?– 1. Fiscal policy – taxes and spending– 2. Monetary (money) policy – printing & lending
money– 3. Laws and Regulations– 4. Direct ownership of production
Laws and Regulations
• States affect markets by imposing laws and regulations of many kinds– Competitiveness laws: prevent monopolies or
limit what monopolies can charge• Ex: prevent electric utility from jacking up rates
– Consumer protection laws• Ex: FDA prevents sale of spoiled meat
– Laws regulating markets• Protect against fraud
– Addressing various market failures• Ex: rules against polluting.
Laws and Regulations
• States affect markets by imposing laws and regulations of many kinds
• Example: Airlines– 1. States impose safety regulations on airlines
• Ex: Federal Aviation Administration (FAA) inspects planes, requires airlines to do regular maintenance
• Why bother? Companies have a market incentive to avoid crashes, which are costly…
– Planes destroyed, reputation damaged… which harms future sales
• Are market incentives enough to make you trust airlines?
Laws and Regulations
• Example: Airlines– 2. States regulated airline prices to reduce
competition• Created industry stability, at the cost of competition• But, those regulations were ended in the 1970s
– Note the trade-off: stability vs. efficiency• Ex: Regulation stabilized airlines, but reduced
competition; deregulation had the opposite effect.
Regulating Wages and Prices
• Example: The federal gov’t minimum wage– The Fair Labor Standards Act (FLSA) of
1938 established minimum wage, overtime pay, recordkeeping, and child labor standards affecting full-time and part-time workers in the private sector and in Federal, State, and local governments. • Covered workers are entitled to a minimum
wage of not less than $7.25 an hour.– Source: http://www.dol.gov/esa/whd/flsa/
• Note: California has another minimum wage law, raising the minimum to $8.00.
Regulating Wages and Prices
• The minimum wage also reflects a trade off• Minimum wage laws are a big benefit to workers• But, the US economy would be more “competitive” if
corporations could pay workers less• The fact that wages in China are under $1 / hour
means that US companies are less competitive
• Questions to ponder:• What might happen of wages were “deregulated”?• What if the minimum wage was increased to $20/hr?
Laws and Regulations
• States affect markets by imposing laws and regulations of many kinds
• Example: Subsidies to agriculture• US gives tens of billions a year to farmers
– Keeps industry stable – fewer bankruptcies• US farmers don’t have to be as efficient
– Issue for future discussion: This harms farmers in poor countries…
Laws and Regulations• Governments regulate banks to protect
consumers– Generally, limiting the risks banks can take with your money…
• Ex: FDIC – government guaranty that your money is safe in a savings account (up to 250K per bank)
– Banks are forced to pay money for such insurance; they’d rather not
• Ex: Reserve requirements – Banks must keep some money on hand, just in case of crisis
– They’d rather not do this… because they could make more $ otherwise
• Ex: Limits on “leverage” – risky investments– Banks can make more profits if they take more risks… but they
might go bankrupt!
Banking regulation
The Financial Crisis 2008-present• A story of banks evading state regulation…• Krugman: Rise of “shadow banking”
– Banks were heavily regulated since 1930s, but didn’t like it• Banks began to circumvent regulation: a “shadow”
banking system• Banks took greater and greater risks… and made $$$$
– Decline of real estate market in 2007-8 caused risky investments to lose HUGE losses
– Banks began to go bankrupt; bank runs began– Without government intervention, many major banks would
have gone out of business…» Since businesses need bank loans, the effect of banking
collapse would have been horrific.
The Financial Crisis 2008-present
Credit Crisis Video• The Credit Crisis Visualized
• Jonathan Jarvis• Direct video link: http://crisisofcredit.com/• Local link:
States and Markets
• Question: How can states affect markets?– 1. Fiscal policy – taxes and spending– 2. Monetary (money) policy – printing & lending
money– 3. Laws and Regulations– 4. Direct ownership of production
State vs. Private Ownership• Governments can own factories, railroads,
electric power plants, hospitals, etc.• Nationalized or “state-run” industry: a
business or industry that is run by the state– “Nationalization” is when the government takes
over formerly private companies or industries• Example: airport security screeners after 9/11
– Privatization: when a government-run business is sold to private owners• Examples: many prisons, even some schools• Heavy industries in Britain & Russia (historically).
State vs. Private Ownership• Advantages of state-run industries:
– Highly stable – no bankruptcies• Tax money can keep them afloat in hard times
– Works in collective interests (usually)• Not driven by greed; nicer to workers (usually)• Won’t try to co-opt the state: Bribes/lobbying…
– Greater accountability (sometimes)• Government organizations are often subject to
greater scrutiny and accountability, compared to private firms
– Ex: monitoring by government accounting offices; FOI Act• Private firms that do terrible things usually just go
bankrupt and leave others to clean up the mess– Ex: Mining companies that damaged the environment.
State vs. Private Ownership• Disadvantages of state ownership
– Little or no competition: • Less pressure to be efficient or innovate• Though in some cases, they can be very efficient
– Ex: Social security vs. private savings funds– Ex: State-run health systems vs US system of private insurers
– State firms can become corrupt or under influence of government elites…• Ex: Oil companies in Nigeria and Russia
– Some have stolen the oil wealth of entire nations.
Reading Review: Quiggin 2010 Zombie Economics Ch 5: Privatization
• Some economic ideas are zombies• No matter how much evidence refutes them,
they rise up again and stumble onward
• Example: Ideology of Privatization• P. 186: “the claim that an economy in which
all major decisions on investment, employment, and production are left to private firms will outperform an economy where governments play a significant role in such decisions.”
• “More simply, due to market competition, companies area always more efficient than governments”
Reading Review: Quiggin 2010 Zombie Economics Ch 5: Privatization• Quiggen reviews the evidence:
• P. 195 “Privatization has been a central component of market liberalism for more than thirty years. In that time there have been sufficiently many failures to give us a reasonable idea of when privatization is likely to work and when it is not.
– Examples where privatization often does badly:• Railroads, telecommunications• K-12 Education, health, police/prisons• Ex: Privatized prisons: No cost savings, but much less
accountability to the public.
Reading Review: Quiggin 2010 Zombie Economics Ch 5: Privatization• Examples where privatization often does well
• Electricity, retail• And, firms that have been “rescued from death”
– Example: General Motors was nationalized in 2008… and then privatized again.
– P. 197: Privatization works best when:• “Where a competitive market can be sustained, and
there is no special requirement for close regulation, privatization has usually been successful.”
• “… and when undertaken by governments that are competent, efficient, and accountable, but this is precisely the case when the benefits are smallest.”
Keynesianism vs. Free Markets
• The Keynesian state:– Fiscal Policies: Higher taxes, higher spending
• To support health care, welfare, keep full employment
– Monetary policy: Expansionary (low interest rates)• Low interest rates keeps unemployment low
– But, inflation & debt tends to be higher
– Regulation: Expanded, elaborate• Industries and markets are stabilized, controlled
– Ownership: Some industries may be nationalized• “Private sector” is smaller.
Keynesianism vs. Free Markets
• The Free Market state:– Fiscal Policies: Low taxes, low spending
• Corporations & international investors are attracted by low taxes
– Monetary policy: Conservative (high interest rates)• High interest rates keep inflation low
– As a consequence, unemployment is higher
– Regulation: Minimal• Companies are free to do as they please
– Ownership: Privatized• The state doesn’t own industries; it is all “private”.
Democrats, Republicans, Markets• Democrats have been historically more
“Keynesian”, republicans more “free market”• But, everyone has shifted more toward free markets
– Also, there are plenty of exceptions• Democrats supported many free-market policies
– Ex: Carter (D) oversaw the start of deregulation– Clinton pursued many free-market policies
» Signed NAFTA; worked to reduce gov’t debt & spending• Republicans don’t always follow “conservative” policy
– Ex: Nixon (R) instituted wage and price controls.– Despite goal of “low spending/low debt”, Reagan & Bush 1 & 2
created huge budget deficits and a huge amount of debt– Bush 2 created TARP: rescuing banks in 2008-9 rather than
“letting the market work”.
States, Markets, Globalization• Since around 1980 governments have shifted
• Keynesian / Welfare-state free markets
• Why?– Commanding Heights:
• Success of Hayek’s ideas• Elections of free-market politicians (Reagan/Thatcher)
– Reich (Supercapitalism)• New technologies
– Improved transportation & communication• Greater competition
– New/smaller companies could compete with the “giants”… challenged old regulations.
Supercapitalism• Reich describes our intensive “free market”
world as supercapitalism– Less regulation, more competition than 1950s/60s
• Chapter 3: “Of Two Minds”• We are simultaneously “winners” and “losers”
• Winners– As consumers, we benefit from market
competition• Cheaper stuff at target/walmart
– As investors, we get better returns• Ex: Parent’s retirement savings bigger profits
Supercapitalism• Losers
– As workers, we lose badly in supercapitalism• Intense global competition lower wages & benefits
– As citizens, we also lose• As state plays smaller role in economy, it becomes
harder to solve social problems– Ex: Inequality is growing tremendously– Ex: Harder for state to regulate pollution, other market failures– Ex: Powerful corporations increasingly influence government,
to their own benefit
– Reich’s conclusion: System is out of balance• We need to strengthen democracy and improve the
situation for workers…
Economic Globalization• Economic globalization:
• Simple definition: When economic activity that was formally local or national scale becomes organized on a global scale
– Spanning countries, rather than contained within them
• Examples: Globalization of…• Trade / exchange• Production• Corporations• Labor• “Direct” Investment• Capital
– I’ll define & discuss each.
Globalization: Trade• Trade: The exchange of goods & services
• Historically, trade was local• But, the word has become synonymous with
“international trade”, which is global by definition
• History:– Global trade was common in the late 19th century
• International trade amounted to 8% of GDP by 1913• But, trade collapsed during WWI, Depression, WWII
– Since World War II, trade has grown rapidly• Trade surpassed 17% of world GDP in the 1990s• NOTE: trade is concentrated among wealthy nations.
Global Trade 1950-2010
Globalization of Production• Production: Creating products and services• Example: Building a car
• Where do the raw materials come from? Where are parts made? Where is assembly done?
– In the past, auto production was primarily local– Now, it is common for auto production to span
dozens of nations• Parts made in various places, assembled in various
places…– Ex: Toyota’s globalized production system (on next slide).
Toyota’s Global Production System
Globalization of Production• Global supply chains
• A “supply chain” refers to the steps through which raw materials are transformed into components and finally into a final product
• Cotton cloth shirt• Because of decreased transportation costs, “The old
[mass] production system could now be fragmented and parceled out around the world to wherever pieces could be done best or most cheaply.”
– Reich, ch 3 p 62.
Globalization of Production• Reich, in the book “Supercapitalism”, makes
some important observations:– With globalization, America began to import much
of what it consumes• BUT: Aggregate trade statistics hide the fact that much
of the trade occurs WITHIN American companies– Part of supply chains…
– Implication: It is an oversimplification to say that foreign companies are ‘outcompeting’ US firms• “Rather than American companies ‘losing their
competitiveness’ … America started losing solely American companies.”
• The success of American companies no longer implies better wages & conditions for US workers.
Globalization of Production• The globalization of production has limitations• Issue: Economies of Agglomeration
• Geographical concentrations of knowledge, expertise, and production capacity create big benefits
– When you get lots of production concentrated in one place, companies can coordinate better• 1. Detroit, Michigan (auto industry), 1950s-1970s
– Parts suppliers/factories/skilled workers all plentiful
• 2. Silicon Valley (computer industry) – Stanford U (engineering expertise), venture capital, factories
• 3. Shenzen, China (electronics manufacturing)– Engineering expertise, cheap labor, factories
Economies of Agglomeration• Why are iphones made in China?
• NYT article: http://www.nytimes.com/2012/01/22/business/apple-america-and-a-squeezed-middle-class.html
• “In part, Asia was attractive because the semiskilled workers there were cheaper. But that wasn’t driving Apple. For technology companies, the cost of labor is minimal compared with the expense of buying parts and managing supply chains that bring together components and services from hundreds of companies. [It] “came down to two things,” said one former high-ranking Apple executive. Factories in Asia “can scale up and down faster” and “Asian supply chains have surpassed what’s in the U.S.”
• “The entire supply chain is in China now,” said another former high-ranking Apple executive. “You need a thousand rubber gaskets? That’s the factory next door. You need a million screws? That factory is a block away. You need that screw made a little bit different? It will take three hours.”
• “Another critical advantage for Apple was that China provided engineers at a scale the United States could not match. Apple’s executives had estimated that about 8,700 industrial engineers were needed to oversee and guide the 200,000 assembly-line workers eventually involved in manufacturing iPhones. The company’s analysts had forecast it would take as long as nine months to find that many qualified engineers in the United States.” In China, it took 15 days.
Foreign Direct Investment• Foreign Direct Investment (FDI):
• Definition: Investing assets (i.e., money) from one country into organizations, structures, and equipment in another
• Example: building (or buying) a factory in another country
• FDI does not include “intangible” investments, such as buying stock or currency in another country
• Note: Most FDI occurs between wealthy, industrialized countries.
Econ Globalization: Capital• Capital Flows: Movement of assets (money)
across national borders to purchase intangible investments
• Also called: Financial flows, globalization of capital markets, capital market integration
• Example: Buying stocks & bonds in another country• Example: Buying other currencies for purposes of
speculation (i.e., profit)– Unlike FDI, capital investments can move
quickly… flowing in and out of countries• Elwood reading: “Pinball capital”• Can precipitate or worsen economic crises• We’ll discuss this later…
Econ Globalization: Labor• Labor: people who work in the economy
• Like capital or goods, people can move across national borders: Immigration
– Historical perspective:• Like trade, immigration was common in the late 19th
century, but dropped in the mid 20th century• Due to immigration laws, migration remains constrained
– Migrants represent a small fraction of the global population– Moreover, labor flows tend to be regional.
Econ Globalization: Corporations• Corporations can span national nations…
• Called: Multi-national corporations (MNCs); Multi-national Enterprises (MNEs); Trans-national corporations (TNCs)
– Firms can vary in extent they are global• Sometimes only 1 or 2 factories overseas• Or, they can be spread literally across the globe
– The vast majority of companies are still local– And many multinationals are concentrated in a few countries
• But, multinationals have grow in number and size– Some dwarf the economic capacity of entire countries…
What is most globalized?• Some things are more globalized than others…
How Global?
Extremely Capital flows
Very Trade
Moderately Corporations, FDI, Production
Not so much Labor (workers)
Video: Commanding Heights• Episode 3, chapters 3-6
• Time: 3:30 (or 6:15) to 28:00• Basic issues regarding trade, capital flows• Global link:
http://www.pbs.org/wgbh/commandingheights/lo/story/ch_menu_03.html
• Local link: Video\PBS.Commanding.Heights.Ep3.The.New.Rules.of.the.Game.DivX6.avi
Economic Globalization: Origins• Question: What are some basic things that
are absolutely required in order to have a global economy?– 1. Inexpensive transportation & communication– 2. International financial (money) system– 3. Countries that are willing to participate
• Absence of legal or regulatory “barriers”– For a related discussion, see Greico and Ikenberry
“Economic Globalization and Political Backlash.” pp. 220-223.• Emphasizes role of technology, as well as political
changes that permitted globalization.
Transportation• Historically, people only traded lightweight,
valuable items… spices, silk, ivory, etc…• Things that could be easily carried long distances
• Global economic activity requires cost-effective transportation systems
• Otherwise most business activity remains localized• Most changes are pretty obvious: increase in cars,
trucks, planes, trains, ships… • But, one change matters more than others:
containerized shipping
Transportation• Containerized shipping = a huge revolution
in global transportation• Started in the 1970’s
• Shipping containers: a standard 40ft long box
• Easy to load and unload onto ships, trains, trucks• Drastically reduced cost of shipping
• Huge ships can hold thousands of containers!
Containerized Shipping: Pics• Ships can hold hundreds of containers!
Containerized Shipping: Pics• Containers allow mechanical loading
Pics: from Maersk Sealand Website
Containerized Shipping: Pics• Containers can be transferred to trains, trucks
Containerized Shipping• Question: Guess how much it costs to send a
40 foot shipping container with 10,000 pounds of cargo from Shanghai, China to the port at Long Beach?
• Answer: Less than $3,500• Taxes, tariffs, etc. make it cost a bit more…
• Question: How many pairs of Nike shoes fit in a container?
• Answer: over 10,000!
Containerized Shipping• Consequence: Containerized shipping
resulted in a dramatic increase in global trade• Example: Container holds 10,000 pairs of shoes• Container costs $3,500 to ship (including taxes)• Total cost of shipping per pair: 35 cents!
• If cost of making a shoe in China is 36 cents less than in US, then there is an incentive to ship…
• Higher costs might come from: more expensive labor, costs of adhering to environmental laws, etc.
Containerized Shipping• Containerized shipping has indirect
consequences for the environment… – Some examples:– Companies can dump garbage in other countries
• Anything that is costly to dispose of in the US• Hazardous waste; Old computers
– Mass shipping leads to spread of “invasive” non-native species• Examples: Asian Tiger mosquito, Zebra mussel arrived
in cargo ships.