Economists at a Crossroads: The Ideology of National Policy Making Sovereignty vs. the Reality of a Global Economy

 SOURCE ITEMS

When Sweden’s Riksbank was founded in 1668, followed by the Bank of England in 1694, the motivation was that a single economy should have a single central bank. Over the next three centuries, as the benefits of instituting a monopoly over money creation became more widely recognized, a slew of central banks were established, one for each politically bounded economy.

What was not anticipated was that globalization would erode these boundaries. As a result, we have returned to a past from which we tried to escape – a single economy, in this case the world, with multiple money-creating authorities.

This is clearly maladaptive, and it explains why the massive injections of liquidity by advanced-country central banks are failing to jump-start economies and create more jobs.

Kaushik Basu (Senior Vice President and Chief Economist of the World Bank and Professor of Economics at Cornell University), Two Policy Prescriptions for the Global Crisis, Project Syndicate, April 23, 2013.

COMMENTS

Since the economic crisis of 2008, most economists have been telling political leaders and their constituents what they want to hear – that national policy making sovereignty is still viable.  (Implement the right policies and your nation will do well no matter what is happening in the rest of the world.)

The time is up for this kind of political expediency.  With more than four years of policy failure now weighing on the world’s political leaders and no promising economic corners in sight, economists can only lose the last of their credibility by continuing to tell policy makers that they are the sole masters of the destinies of their peoples.

The choice for the field of economics is clear: take a chance that some political leaders and some constituencies are ready to acknowledge that national policy making sovereignty is a thing of the past.  That’s the only approach that will save the field of economics from becoming an object of contempt.

See related source items and comments in earlier blog posts:

Accumulating Evidence Shows That the World’s Nation-Centered Economic Policy Making Paradigm is Obsolete, March 21, 2012.

The World Economy’s Demolition Derby of Competing and Overlapping Economic Policy Making Entities, January 22, 2012.

What Happens In Vegas Doesn’t Stay In Vegas: National Policies Have Global Consequences, November 30, 2011.

Fragmented and Weakened Global Governance Perpetuates the World’s Employment Crisis, September 9, 2011.

Accumulating Evidence Shows That the World’s Nation-Centered Economic Policy Making Paradigm is Obsolete

ITEMS FOR YOUR CONSIDERATION

Chart-Global GDP Growth 2007-13, IMF

World Economic Outlook Update: Global Recovery Stalls, Downside Risks Intensify, International Monetary Fund, January 2012.

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Chart-World Trade Volume 2000 - 2011

Trade and Development Report, 2011: Post-crisis Policy Challenges in the World Economy, United Nations Conference on Trade and Development (UNCTAD).

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“Last year alone the daily volume of currencies traded was 220 per cent higher than that in 2001, and 65 per cent of the transactions were cross-border ― up from 54 per cent in 1998. Since 1990 foreign direct investment increased more than six fold.”

Moisés Naím, The Dangerous Cocktail of Global Money and Local Politics, Financial Times, November 18, 2011, (published on Carnegie Endowment for International Peace website).

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“Assuming a cyclic dynamics of national economies and the interaction of different countries according to the import-export balances, we are able to investigate … the synchronization phenomenon of crises at the worldwide scale. … The results support the theory of a globalization process emerging in the decade 1970–1980, the synchronization phenomena after this period accelerates and the effect of a mesoscopic [intermediate in size] structure of communities of countries is almost dissolved in the global behavior.”

Pau Erola, Albert Diaz-Guilera, Sergio Gomez, Alex Arenas, Modeling international crisis synchronization in the World Trade Web, arXiv.org, January 10, 2012.

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“In today’s financial architecture, as with other supply chains, interdependent networks tend to concentrate in powerful hubs. For example, just two financial centers, London and New York, dominate international finance, and only 22 players conduct 90% of all global foreign-exchange trading.”

Andrew Sheng, Global Finance’s Supply-Chain Revolution, Project Syndicate, January 5, 2012.

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“So the degree of synchronisation has evolved fitfully. It is only in the most recent 1973-2006 period that we can speak meaningfully of anything resembling an international business cycle.”

Paul Ormerod, Random matrix theory and the evolution of business cycle synchronisation 1886-2006, arXiv, July 11, 2008. 

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“Globalization has made frontiers more porous. We see how one country’s policies, whether pertaining to work, the environment, public health, taxation, or myriad other issues, can have a direct impact on others. And we see such interdependence even more clearly in their economic performance: China’s annual GDP growth rate, for example, will slow by two percentage points this year, owing to sluggishness in the United States and the EU.”

Javier Solana, Whose Sovereignty?, Project Syndicate, March 12, 2012.

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“At the news conference Monday, Mr. Zhou said China was especially worried about Europe and its chronic sovereign-debt crisis … The world economy is highly globalized with a very active flow of capital worldwide,” he said. “All of these factors will have an impact on our monetary policy.’”

Ian Johnson, China Talks of More Lending but Less Currency Growth, New York Times, March 12, 2012.

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“Undoubtedly politicians should do a much better job of explaining to their constituents’ that what happens beyond the borders of their country-or city has implications for what happens inside their homes.”

Moisés Naím, The Dangerous Cocktail of Global Money and Local Politics, Financial Times, November 18, 2011 ( published on Carnegie Endowment for International Peace website).

COMMENTS

It is becoming increasingly clear that merging the world’s 20th century national economies into our 21st century world economy has raced ahead of merging national economic policy making institutions into a global economic policy making system.  The consequences of this lag in the development of global policy making institutions for the people of the U.S. and other nations are enormous.

National employment and income growth efforts are often ineffectual or only effective for a short time because of the ongoing policy push and shove of nations competing for advantage in the world economy.  What one nation does to improve its position in the world economy and grow jobs and incomes, other nations work quickly to undo.

For the world economy as a whole, this push and shove of nation-centered economic policy making produces a high level of economic instability and a high level of policy incoherence.

One glaring and maddening consequence of this combination of reduced national policy effectiveness and global policy incoherence is that the recovery from the financial crisis of 2008-2009 has proceeded in fits and starts and seems too frequently to be on the verge of collapsing back into crisis.  Global job and income growth is being held back and governments are being denied the tax revenues they need to protect economically vulnerable people from the ravages of poverty.

Most U.S. economists and policy makers continue to hold out hope for a much more robust economic recovery than we have had.  But, one has to wonder whether a more robust recovery is possible while the world’s economic house is so geopolitically divided.

See my related comments in:  The World Economy’s Demolition Derby of Competing and Overlapping Economic Policy Making Entities, January 22, 2012

What Happens In Vegas Doesn’t Stay In Vegas: National Policies Have Global Consequences

“Thus, national policies affecting capital flows can transmit multilaterally. This transmission has not been fully appreciated by national policymakers. Further, they may not have incentives to take full account of the cross-border effects of their policies. Looking ahead, the upward trend in the volume of capital flows can be expected to continue, making it ever more important to address the associated cross-border risks.”

The Multilateral Aspects of Policies Affecting Capital Flows, International Monetary Fund, October 13, 2011.

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“These two-way capital flows created a complex web among markets and institutions, some regulated and some not. Against this background, case studies were prepared for European banks and U.S. money market mutual funds (MMMFs) and for German banks and U.S. mortgage-backed securities (MBSs). Another important case is that of the near failure of the American International Group (AIG), which turned out to have complex and systemically cross-border linkages with other global institutions and markets.”

The Multilateral Aspects of Policies Affecting Capital Flows – Background Paper, International Monetary Fund, October 24, 2011.

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“Why might we expect a rise in U.S. bond yields to raise bond yields in other countries? First, openness of financial markets and arbitrage opportunities may mean that interest rate shocks are transmitted across economies. Second, a closer real integration of two economies may imply that a monetary policy shock or an inflationary shock in one economy may lead investors to expect similar developments in another, thus inducing a significant transmission of shocks in bond markets and money markets.”

Vivian Z. Yue and Leslie Shen, International Spillovers on Government Bond Yields: Are We All in the Same Boat?, August 01, 2011, Blog at website of the Federal Reserve Bank of New York.

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“The trend toward greater diffusion of authority and power occurring for a couple decades is likely to accelerate because of the emergence of new global players, increasingly ineffective institutions, growth in regional blocs, advanced communications technologies, and enhanced strength of nonstate actors and networks.”

Global Trends 2025: A Transformed World, National Intelligence Council, PDF version, November 2008.

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The words in the quotes above are dispassionate, but the realities to which they refer get in our faces every day.  The mix of global economic processes and competitive and uncoordinated national policy making creates a bubbling soup of chaotic change.  (Go-it-alone economic policy making by sub-national and regional governments surely contribute to this soup of chaotic change as well.)

This environment makes decision making and planning very difficult and prone to error for the majority of the world’s investors and business owners and managers. It destabilizes the global world of work and damages the families and communities that depend on that world.  And it confounds policy experts because it is not possible to find logic in the illogical.

Moreover, this environment plays into the hands of the bad actors in the world economy, who promote and thrive on the high volumes of misunderstandings and errors that now plague economic and policy decision making at every level of organization in the world economy.

For more on this topic see my post, Fragmented and Weakened Global Governance Perpetuates the World’s Employment Crisis, September 9, 2011. Also see the topic Economics and Economic Policy (under U.S. Economic Policy heading at right).