Its time to face the facts, were not in an Economic Downturn but a Global Economic Realignment

By: Khalil Tian Shahyd kshahyd@gmail.com April 2012 Introduction The US economy grew at only 1.7% last year, and now Britain is teetering on the brink of a douple-dip recession. Yet, listening to much of conversation about the state of the economy in the popular media youll find no shortage of suggestions for how to get the economy moving again provided we implement the right mix of policies. The 2012 presidential race is shaping up in much the same way with Pres. Obama promising an active federal government in helping to steer the economy through the crisis with targeted investments in infrastructure, job training and increased support for new tech and information industries. The Republican side continues to offer the political rights typical fare of tax cuts, loosened regulation and a promise that making the most business friendly regulatory and financial environment possible will attract investment, (both foreign and national) spurring a new round of job growth. But something important is missing. Neither side seems willing to confront publicly, globalization nor the changing structure of the world economy and the impact it is having on our nations growth prospects. Even further from the political discourse are considerations of the structural adjustments that will be necessary for the US to remain economically afloat in this new reality. All sides, perhaps attempting to placate the fragile psyches of the American consumer seem determined to trumpet the nations past fortune as evidence of its inherent and immortal superiority in all things economic. Politically this is a way of garnering public support for their particular brand of leadership, but does little to address the reality staring down at us. Given the signs of renewed trouble in Britain and the continued sluggishness of the US economy, we must begin to wonder aloud whether we are in fact in an economic downturn as it is most commonly understood or something much deeper and structural as an economic realignment. Economic realignment describes a shift in the balance of global economic growth from industrialized (developed) countries to emergent and developing countries. If indeed we are experiencing a global realignment then despite the many promises to the contrary from all sides of the political spectrum; we can't simply "recover" from this type of global reorganization. We have to adjust. Our political battles today and the decisions to be made are over who will bear the greater burden of the realignment, but most importantly what the future domestic economy that emerges will actually look like. Progressives essentially have two options; first of fighting for some version of a nationally scaled community benefits agreement, whereby we bear "less" of a burden of realignment but dont really alter its path. Or second, with proper planning and effort we can fundamentally alter the nations economic structure altogether and plot a very different development course. Its more likely that the American left (such as it is) will take the first option since both labor and Civil Rights groups have long

ago tied their economic fortunes to the perpetual growth of corporations. Should we choose the second option toward creating more sustainable and resilient communities; environmental and environmental justice frames will have to become more central to our political values and narratives. The nature of the realignment Americans for a host of reasons; such as our particular political history, poor formal education about the world, a hardly disguised sense of cultural superiority and our past economic dominance all contribute to the fact that we know very little about the global economy or how it influences events within the nation. The recent discussion over gas prices quickly makes that point, as many had to learn (many more still dont quite get it) that increasing US production alone would do little to alter prices at the pump. So it is understandable that as a society, we dont often discuss or reflect on the impact of economic globalization on our society, but its effects are and will be tremendous. This isnt the space to go into the entire history of globalization what matters however is recognition that what is occurring is not a recent phenomenon but something that has been underway for more than 30 years now. Globalization played a large role (along with the Civil Rights bill and the top down Federal integration of minorities into the industrial workforce, followed by white working class backlash); of enabling the dissolution of the New Deal era Capital-Labor accord, whereby workers would support the expansion and growth of corporations in exchange for higher wages, social protections and rising levels of consumption (i.e. social mobility into the middle class). As of 1983, US consumer spending has consistently accounted for about 70% of the nations economic output, levels not seen since 1930s, before falling to less than 50% during WWII. In the 1980s and 90s, the financial sector of the economy quickly realized that the physical constraints of the real economy could be circumvented through complex trading schemes based on the loosening of credit regulations. This would allow the financial economy to grow exponentially compared to the real economy. Rapid growth of the financial sector gave the appearance and justified the arguments that the economy could be freed from adherence to any physical limits to growth. The boom years of the 90s enabled both right wing economist and many social justice advocates to continue ignoring the environmental implications continued economic growth. But this story is about our relationship in the global economy, not just our internal economy. From roughly 1990-2004 US consumers accounted for about half the increase in world demand, even while the workforce produced less than 1/3 of the worlds economic output. Growth in demand was made possible due to the continued use of deficit spending to stimulate domestic demand and the attractiveness of the economy as a destination for investment from abroad as the US dollar still acted as the worlds reserve currency. The influx of foreign capital fueled the financialization of the economy and the deepening of household debt to sustain consumer spending. During roughly the same period the US was the worlds primary destination for Foreign Direct Investment with 40% of the worlds total but by 2010 that number had fallen to a mere 17%. In their 2009 World Development Report on Reshaping Economic Geography, the World Bank estimates that an increasing share of the worlds economic growth will occur, not in the US and the other western industrialized nations, but in the emerging economies of Eastern Asia, Brazil, India and South Africa.

From the reports summary; the location of economic activity in the world is rapidly changing. During the last fifty years, the share of global GDP of todays rich countries has been about 80 percent. Over the next few decades, projections indicate that this could fall to 40 percent. In other words, a substantial portion of the worlds GDP will, spatially, be in play, shifting from developed towards developing countries. Over the same period we see; the US share of global GDP, around 25% in 1980, declined to 19% in 2011, and is expected to slip to 18% in 2017, by which point the IMF expects that China will have overtaken the US economy in absolute size (adjusted for purchasing power)1. The question then is what impact will the global shift in GDP from the western developed countries to emerging developing economies have on our economic prospects and our politics? Further, what does a downgrade in our ability to consume mean for our quality of life if it remains so directly tied to personal and household consumption rates? We are seeing evidence of the impacts of the realignment in the rising levels of inequality in the US and other western nations. The US in particular, according recent research by John Schmitt of the DC based Center for Economic Policy Research, shows that the US is unique among high-income countries for having the largest share of its population in low wage work. These trends, coupled with data on falling education standards perhaps indicate that as a nation we are specializing in the production of low wage work and low wage workers at a time when globalization makes economic outcomes much more zero sum. However, it may be the case that an economy producing low wage jobs is the best we can hope for; as some predict that the job market will remain weak, incapable of absorbing the countrys workforce. Responding to Global Economic Realignment In a 2005 lecture to the India Policy Forum titled, What Follows the USA as the Worlds Growth Engine?, economist John Williamson, senior fellow at the Peterson Institute for International Economics who is also credited with drafting the principles that would become the Washington Consensus remarked; At some time in the next few years the United States is going to have to start reducing its current account deficit. A delay only increases the likelihood that the adjustment will involve a crisis. He goes on; A crisis is indeed likely to bring with it a fall in demand in the United States, and that will reduce US output. But offsetting that will be the increase in foreign demandgenerated by the collapse of the dollar in exchange markets.
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More to the point, Nobel laureate Michael Spences recent book, The Next Convergence: The Future of Economic Growth in a Multispeed World argues that; To finance the growth supporting longer term investments, domestic private consumption has to shrink, meaning higher taxes, and government consumption probably has to shrink too in order to add further capacity for expanded public investment. What Spence and others are implying, (without addressing the actual social cost) is that on average, American workers will have to lower their expectations for achievable living standards while relying less on government services as these expenditures will be shifted towards more productive investments in the competitive sectors of the economy. It is largely understood now (internationally if still not domestically) that high-income countries will need to specialize in the creation of new products, new production processes, and new organizational techniques focused on high end information services, technology and finance in order to sustain economic growth. These services and products can then be packaged, sold, exported and adopted by both middle and low-income emerging market countries. To enable this, increasingly scarce government resources (due to austerity, not lack) will need to concentrate on building the competitive advantages of tech firms geared toward the emerging markets where the largest growth in global demand will occur. President Obamas recent jobs bill confirms this point, as the entire bill targets the loosening of investment regulations on information services and tech sectors rather than stimulative efforts to boost domestic job creation. This is the only way to recoup manufacturing jobs in the long term without resorting to more protectionist industrial policies. With consumer demand in the US essentially saturated and the greater share of future consumer demand taking place in emerging markets, American businesses and entrepreneurs have every incentive if they are to survive to push for access to those markets. They will not support the US taking on protectionist measures to maintain living standards for low wage workers, if it means they are potentially cut off from lucrative markets abroad. The economy it is argued in every introductory economics courses must grow in the tradable sector of the economy rather than rely on the less productive non-tradable sectors. This is why President Obama created an Export Council, before doing anything serious about jobs. Neoclassical orthodoxy has spoken and there is largely a consensus on the way forward even if the ultimate distribution of the burdens of adjustment is still being decided. Michael Spence is even more blunt when he writes; The social contract in America appears to be breaking down. An important part of that contract was a pact that on the one side had an open, flexible and dynamic system and the other the promise of employment opportunities and rising incomes for the motivated and diligent. Its the second part of that contract is unraveling. What Spence misses is that the social contract (or capital-labor accord as it should be understood) hes referring to was really abandoned in the late 70s and 80s with the election of Ronald Reagan, and when the white working class majority bought into a meritocratic free-market policy framework as a

means to maintain their social and spatial distance from workers of color whod just won passage of Civil Rights legislation. While the restructuring of global economic relationships ushered in by dissolution of the capital-labor accord proceeds, the non-degreed workforce of the United States will have to slowly reduce its expected standard of living as the economy reorients toward tradable exports in technology and financial services. These industries are far less labor intensive than the traditional manufacturing or service sectors that preceded it despite the promises being made about green jobs, replacing brown industries. Meaning, as we transition to an export oriented and renewable energy economy, there will be more economic cast offs, creating greater downward pressure on wages and consumption related living standards. Another recent World Bank report; A Global Economy with Multiple Growth Poles, further reinforces the point; Many high-income countries need to rebalance their growth path toward greater exports, higher domestic savings and less domestic consumption. Pre-crisis growth (in high-income countries) was supported mainly by consumption growth (70% in the US remember), which was the result of wealth effects from capital gains in real estate and housing markets. But over the medium term, the developed countries need to rely on developing- country growth to stimulate their exports. This interdependence will become even more important as more developing countries expand their role as growth poles. Today, we are witnessing the political fight over the nature and distribution of reduced domestic consumption and the resulting falling living standards that are required to enable U.S. firms to export products and services to the middle classes of the emerging economies. Last summers debt ceiling deal, the deficit debate, mortgage write downs, are all really about how to reorient the national economy and who will absorb the cost of adjustment. Republican politicians and their economic advisors are well aware that Federal investments in infrastructure and services help to sustain domestic consumer demand. Their mission however, is not to revive a middle class workforce that has declined in its productivity ultimately raising the cost of labor across the board for the first time in more than 30 years. No, their agenda is quite transparent, and their support for wealth accumulation above all else drives them to force the reorienting of the economy towards the new growth sectors by further eroding the power of organized labor eventually increasing the desperation of the private sector workforce to accept the continuing reduction of wages and living standards over time. The only conundrum faced by the political Right is that the type of adjustments they would hope to see will never be possible under a Republican presidential administration as the political response on the left would be more severe. The presence of a Democrat, a Black Democrat precisely in the White House leaves the progressive left at odds over how to be critical, to vent its frustrations without ultimately doing harm to Democrats chances of holding the Executive chair. So then, the Republican strategy must be to maintain the current balance, (while trying to gain control over the Senate) where they can force

the Obama administration to negotiate on their terms, further to the right, shifting the balance of adjustments burdens on workers and the working poor. Now that the population/wage ratio is shifting and as the global economy becomes more integrated, the perpetual growth of U.S. wages is unlikely and in fact such growth would hamper the ability of the national economy to reorient itself towards the worlds new growth poles as the World Bank report suggest. In a follow up report titled, Multipolarity: The New Global Economy, the World Bank estimates that by 2025 more than half of the worlds economic growth will take place in six emerging economies, coupled with a shift in the distribution of the worlds wealth and asset holdings. Wages for American workers, as trends over the last 40 years have shown, are stagnating or in outright decline when considering relative purchasing power, and the recent financial shock saw home values and asset holdings plummet. As the economy is reoriented toward external demand, it will be less dependent on American consumers. We are already seeing signs in the current recession, where despite massive job losses and reductions in aggregate consumer spending, corporate profits as a share of GDP are at a higher level today than they were prior to the crisis because consumer demand (and related job growth) is increasingly being met abroad rather than internally. While the technology, information and financial services industries will be the primary sectors to drive the new economic mode of accumulation, they simply will not be able to absorb a workforce that by 2050 will be majority of color, and is systematically cut off from the education and training opportunities necessary to survive in the new polarized labor market. The crowding of the growing Black and Latino/a workforce into low wage services will apply greater downward pressure on wages increasing social vulnerability and likely increasing calls for more punitive state responses to the resulting social conflicts. Weve seen the net worth of Latino households fell by a staggering 66 percent, and that of African-Americans by 53 percent with little targeted relief to those communities who stand as early harbingers of greater wealth rebalancing to come at the global scale. To address these concerns, many progressive economist are advocating a return to a more protectionist industrial policy (at levels not seen since before WWII), that would enable wages and living standards to continue to grow based on subsidizing exports and capturing domestic consumer demand for domestic production behind trade barriers and tariffs on foreign commodities. Again, these arguments have merit, but if done unilaterally, the ripple effects for the global economy and the most vulnerable groups throughout could be severe. It requires a much more coordinated global action that is both unlikely and difficult to organize. Certainly a political commitment to mass unionization of low wage service workers must be a part of any long term settlement of the economic crisis, and still none of this does anything to address the looming environmental implications of our response. The question remains as to the likelihood that labor unions, racial and social justice groups in the industrialized nations will be willing to sever their dependence to economic growth regimes, educate themselves on the long term ecological dangers of perpetually expanding capitalist production and shift to a strategy of planned degrowth as a means of securing sustainable livelihoods and addressing social inequities.

Economic activities necessarily imply chemical and physical transformations to nature and ecosystems. The natural environment functions as the source of the raw materials required by production, and as a waste sink for our consumption. Issues such as resource scarcity, climate change and environmental injustice create new areas of vulnerability but can also point to new directions for society. The left must begin thinking strategically and seriously about how to decouple its concept of justice and quality of life from personal income growth and consumer expenditure. Human quality of life needs to be removed from a strict dependency on material consumption. This would require the traditional left taking more seriously positions advocated by environmental and environmental justice movements around the world. But that is for another conversation.

Khalil Tian Shahyd is a PhD candidate in the Center for Energy and Environmental Policy. His research interest are in Political Ecology, Economic Geography and the Materialization of Justice in the Age of Green Economic Transitions.