Globalization holds tremendous promise toimprove human welfare but can also cause con-flicts and crises as witnessed during 2007–09.How will competition for resources, employment,and growth shape economic policies among devel-oped nations as they attempt to maintain produc-tivity growth, social protections, and extensivepolitical and cultural freedoms?

The processes associated with economic glob-alization—such as free trade, business outsourc-ing, capital mobility, and so on—generate con-siderable public apprehension because of theeconomic uncertainty they portend. But cross-national production supply chains have nowbecome so extensive that the recession-induceddecline in global trade is causing considerable eco-nomic distress in developed countries.

In contrast, emerging countries—especiallyBrazil, Russia, India, China, and South Korea—haveexperienced only modest declines in economicgrowth. As those nations continue to advance eco-nomically and output growth in developed nationsrecovers, the process of globalization will resume.But with the Doha round of multilateral trade

negotiations stalled, bilateral and regional tradeagreements may come to dominate that process.Regardless of how globalization progresses, policy-makers in developed nations remain concernedabout whether domestic output and employmentgrowth can recover as rapidly as after recessionspast. Those concerns are magnified by prospectivepopulation aging in developed countries.

Intensifying foreign competition and employ-ment uncertainty could provoke calls by industrylobbyists and displaced workers for additionalgovernment protections. And worker migrationtoward developed nations will continue, spurredby wage differentials between developed anddeveloping countries. Younger immigrants mayeventually help developed nations to ease the eco-nomic challenge posed by population aging, butimmigrants are often viewed as competing forjobs, adding to public welfare costs, and reducingsocial cohesion. This paper offers policy recom-mendations for developed nations to reduceglobalization’s negative effects and, indeed, har-ness it for solving aging-related economic chal-lenges.

Globalization: Curse or Cure?Policies to Harness Global Economic Integration to

Solve Our Economic Challengeby Jagadeesh Gokhale

_____________________________________________________________________________________________________

Jagadeesh Gokhale is senior fellow at the Cato Institute. His research focuses on entitlement reform, labor produc-tivity and compensation, U.S. fiscal policy, and the impact of fiscal policy on future generations. This paper is alonger version of his article “Globalization, Economic Crisis, and the New 21st Century World Economic Order,”in A New Conservative Agenda for the 21st Century (forthcoming).

Executive Summary

No. 659 February 1, 2010

Introduction

Cross-national economic integrationthrough trade has been ongoing for centuriesbut has accelerated significantly during thelast two decades. Many people cite the consis-tent support of free trade and financial flowsby the United States through its militaryumbrella and maintenance of dollar stabilityas key factors for promoting globalization.However, several other factors and events werealso important: the fall of the Iron Curtain,the introduction of the North American FreeTrade Agreement, the internal integrationand expansion of the European Union, theintroduction of the euro, the growth surgeand opening of Chinese and Indian econ-omies to world trade, and rapid advances ininformation technology during the 1980sand 1990s. These events successively led to areorganization of production operationsacross many industries to save costs byemploying cheaper offshore labor, utilizingeconomies of scale, and extending verticalintegration by including foreign-based pro-duction processes—practices known as “busi-ness process outsourcing.”

Apart from increased trade in goods andservices, globalization also involves migrationby both labor and capital to areas and coun-tries where wages and potential investmentreturns are higher. Workers in developingnations tend to seek better wages and livingconditions in developed ones, but immigrantsare often viewed by natives in developednations as “stealing jobs,” upsetting culturalnorms, and reducing social cohesion. In addi-tion, firms that elect to make use of cheaperforeign labor by relocating plants offshore arecriticized for out-migrating capital and out-sourcing jobs to developing countries. Thus,economic adjustments associated with global-ization are often decried as reducing workers’economic security in developed countries andsubjecting developing ones to “imperialistcapitalist” exploitation. These views motivateand support tight immigration restrictionsand capital controls, and increase political

pressure for social and trade protections inmany developed countries.

According to standard economic theory,however, globalization can improve citizens’welfare in both developed and developingcountries. In developing countries, expandingtrade and capital flows permit increased spe-cialization in production and expansion ofemployment among low-wage workers—theirmost abundant resource. Hence, at least theo-retically, structural adjustments to trade liber-alization policies should pose few problems fordeveloping nations because positive economicgrowth would generate expanding economicopportunities for most citizens. Moreover,greater openness to foreign capital inflowscould foster better financial, institutional, andcorporate governance and economic policy-making frameworks in developing countries—the so-called “collateral benefits” of globaliza-tion.

In reality, however, globalization has pro-duced winners and losers among low-wageworkers in developing countries.1 Indeed, evi-dence from the 1980s and 1990s suggests thatglobalization in developing countries hasmainly benefitted more highly skilled and edu-cated workers rather than low-wage workers.2

This has created a mass perception that pro-globalization policies are intended to benefitparticular population segments rather thanthe nation as a whole. Another problem is thatfinancial liberalization (as distinct from tradeliberalization) has induced mal-investment ofcapital inflows because of risk-mispricing bylending institutions, creating economic insta-bility and crises.

For developed economies, competitionfrom foreign producers is not a new phenome-non. The abandonment of the Bretton Woodsfixed exchange rate regime during the early1970s exposed both producers and consumersto currency fluctuations. For example, thereduction of U.S. inflation by Reagan-Volkermonetary policies during the early 1980scaused a steep increase in the dollar’s interna-tional value, making foreign goods cheaper forAmericans and American goods costlier forforeigners. Imports of Japanese cars, electron-

2

For developedeconomies,

competition fromforeign producers

is not a new phenomenon.

ics, and other goods generated large U.S. tradedeficits and forced structural adjustments inthe U.S. economy, which continued to moveaway from manufacturing and toward servicesduring the 1980s and 1990s.

But the increased pace of globalizationsince then is feared for its potential to causehigher unemployment and wage stagnationor declines in developed economies. Thiscould happen for three reasons: the out-migration of capital, in-migration of labor,and competition from low-wage foreignworkers via their exports of cheaper consumergoods and services to developed nations. Toavoid unemployment or significant incomelosses, workers in developed nations mustfurther improve their skills and move to sec-tors with higher-value-added jobs. If dis-placed workers are not rapidly absorbed byother sectors, social unrest, demands for larg-er welfare payments, and demands for in-creased protectionism will emerge, which mayslow the globalization process and preventfull realization of its potential economic ben-efits.

This has already happened in the wake ofthe deep recession of 2007–09. Lawmakers indeveloped nations are narrowly focused onachieving a quick economic recovery throughinterventions in goods, services, and labor mar-kets. The short-term policy response to therecession has been to adopt large deficit-financed stimulus programs and targeted pro-tectionist measures to spur an economicrevival.3 These include bailouts of domesticmanufacturers, “short-time” employment pro-grams, and expenditure-switching “trade reme-dies” to boost domestic output and employ-ment. The latter policies will slow the recoveryof trade and capital flows and will slow global-ization. Robust and sustainable economicgrowth can only be restored with the resump-tion of trade and capital flows—that is, byrestoring the globalization process that hasbeen temporarily stalled.

Although globalization increases the abili-ty of nations and market participants toreduce their overall risk exposures—via firmsdiversifying their input sources and investors

diversifying their investment portfolios—italso exposes them to the effects of othernations’ economic policies and offshore eco-nomic shocks, as the global financial and eco-nomic crisis of 2007–09 revealed in abun-dance. Besides managing the domestic effects,globalization also raises questions about inter-national economic policy coordination, crisismanagement, and cross-national re-regula-tion of “systemically important” sectors suchas financial services.

In addition, appropriate policy responsesto globalization by developed countries musttake into account the formidable demo-graphic challenges that they already face.Their aging populations imply much largerfuture shares of unproductive citizens whomust be supported. Can the benefits of glob-alization be harnessed to help meet thosechallenges? Which policies will help to maxi-mize those benefits and promote both fastereconomic growth and income security? Nowthat the 2007–09 economic crisis appears tobe ebbing, which policies are likely to emergefor regulating risks in financial markets andcreating an appropriate “world economicorder” for the 21st century?

This paper provides an overview of thecurrent state of knowledge and thinking onthese issues—mainly, but not exclusively,from the perspective of developed nations. Itbegins by looking at the basics of globaliza-tion and what it means for developed anddeveloping nations and their populations. Itthen explores public concerns about howwages, employment, immigration, and com-munities are affected by globalization andconsiders the merits of alternative policyapproaches. The paper then looks at the rolesplayed by capital flows, trade imbalances,and financial liberalization. The penultimatesection discusses the issue of aging popula-tions and how globalization can be har-nessed to mitigate the looming fiscal chal-lenge it presents for developed nations.Finally, the paper considers the implicationsof the new world economic order that someanalysts believe will emerge once the currentglobal economic crisis has abated.

3

The increasedpace of globalization isfeared for itspotential to cause higherunemploymentand wage stagnation ordeclines in developedeconomies.

A Brief Tour of the Issues

The process of globalization has beenongoing for centuries, occurring in distinctwaves. The first modern wave occurred after1870 but ended as World War I began in1914, followed by the Great Depression thatprompted sharp increases in protectionism.During the first globalization phase, growthin world trade averaged 4 percent per year.Today, however, we are witnessing globaliza-tion at an unprecedented pace: world tradehas grown at 11 percent per year since 1973,increasing from about 22 percent of worldgross domestic product to 42 percent today.During the same period, annual capital flowshave surged even faster, from 5 percent ofworld GDP to 21 percent today.4

These two modern phases of globalizationwould probably have occurred more slowlywithout explicit promotion and protectionunder an “economic order.” Protection fortrade routes, charters for private companies toengage in global trade, rules of law and prop-erty rights in colonies, and so on, were provid-ed by Great Britain during the pre-1914 phase.In today’s phase, the United States provides asecurity umbrella, the dollar as a stable reservecurrency, a strong pro-free-trade ideology, anda significant pro-globalization influence onthe policies of international bodies for conflictresolution, trade rules, economic assistance,and so on.5

After the 1980s, several developing econo-mies dollarized or pegged their domestic cur-rencies to the U.S. dollar or took other steps tostabilize their currencies. These measures pro-moted global financial integration by increas-ing investor confidence in the safety of theirfunds and in their ability to repatriate profitsfrom abroad. A stable and strong dollar pro-moted non-U.S. countries to export moregoods and services, which motivated them tosupport pro-globalization policies. Althoughthe dollar’s strength created correspondinglylarge U.S. trade deficits, a strong U.S. economyand low unemployment after 1982 kept the lidon protests by U.S. exporters who were hurt by

the dollar’s strength. The fact that foreignexporters and governments deposited theirdollar earnings in U.S. securities—effectivelyinvesting the funds back in American compa-nies or U.S. government debt—helped to sus-tain U.S. domestic investment, to increasedemand for U.S. goods and services, and tomaintain worker productivity despite a seculardecline of U.S. national saving after the early1980s.

Views about how globalization affects eco-nomic development have undergone a dra-matic change. Four decades ago, globalizationwas blamed for uneven development acrossnations, benefitting already-rich nations at theexpense of poor ones through industrialagglomeration—the concentration of produc-tive enterprises in “North” (developed) coun-tries, where they reaped the benefits of beingnear markets for intermediate and final goods.With the reduction of transport costs andinnovations in information and communica-tion technologies, the uneven developmentappears to be reversing itself. To the detrimentof low-skilled workers in developed nations,more companies and industries find it prof-itable to relocate operations in “South” (devel-oping) countries, which now have sizable mar-kets and cheap labor and other inputs.6

This worries policymakers in developedcountries, even though the evidence of itspotential harm is mixed: major developedeconomies such as the United States haveexperienced sizable capital inflows, and immi-gration into developed nations has not beenrestricted to low-skilled workers. Indeed, therecent spurt in globalization is associated withan increased divergence in labor productivitygrowth across nations, leading some analyststo believe that the earlier hypothesis of uneveninternational gains from globalization retainsrelevance.7

Standard economic theory favors special-ization in production and free trade. Givenworld prices of factors and goods, nations(especially small ones) benefit from movingaway from their existing production configu-ration toward producing more of those goodsthat are cheaper to produce domestically rela-

4

The relocation oflow-skill jobs to developing

nations worriespolicymakers in developed

nations, but theevidence for itspotential harm

is mixed.

tive to their world prices; that is, to reap the“gains from specialization.” If they simultane-ously open their economies to world trade—exchanging goods produced at lower cost forones that are cheaper to produce abroad—theycan benefit from the “gains from trade.”Permitting both types of gains maximizes citi-zens’ welfare given the nation’s endowment ofproductive factors. Furthermore, opening theeconomy to foreign investment provides addi-tional resources and technology, acceleratingthe development of natural and human re-sources, which eventually accelerates overalleconomic growth.

Thus, economic theory posits that opentrade would benefit a nation’s more abundantproductive resources. In developing countries,low- and intermediate-skilled workers aremore abundant, while in the developed world,capital owners and high-skilled workers arethe predominant resources. The losers wouldbe their counterparts: high-skilled workers indeveloping countries and low-skilled workersin developed countries.8 However, althoughone would expect financial capital to flowfrom developed to developing nations—thelatter with higher potential returns on invest-ments—financial capital has flowed into theUnited States, on net. Economic theory pro-vides no clear predictions about how the ben-efits of financial inflows would be distributedwithin nations, developed or developing. Asdiscussed later, a nation’s abundant factordoes not necessarily benefit from financial lib-eralization. The outcome depends on the mixof skills, technology, and capital intensity inproduction processes.

Who among the public favors free trade?Is this consistent with the expected winnersand losers? Survey evidence confirms that thepotential beneficiaries from globalization—high-skilled workers—favor increased global-ization in developed countries. In developingcountries, however, the evidence on attitudestoward globalization is mixed, partly becauselow-wage workers have so far benefitted onlya little from globalization, and not withoutlong delays. What is clear, however, is thatmost worker groups in developing countries

do not favor a return to old economic poli-cies of state control that limit employment-generating private entrepreneurial activities.9

Do policymakers favor free trade? Evident-ly so, especially among developed economies—as shown by the free trade zones in Europe andNorth America.10 Despite the fact that greateropenness undercuts a government’s ability tofinance larger budget expenditures (tax basesshrink faster in response to higher taxes), thereis clear evidence that openness to trade is asso-ciated with larger-sized governments. Exam-ples of such patterns are provided by Nordiccountries that engage in free trade but main-tain large social insurance programs.

One reason why free trade is associatedwith larger-sized governments is that open-ness to trade and financial flows exposes citi-zens to external economic shocks, potentiallycausing economic crises. However, there is lit-tle systematic evidence that financial global-ization by itself leads to deeper and more costlyeconomic crises. That is because, historically,most financial integration has occurred acrossdeveloped countries with well-developed fi-nancial markets. Indeed, economic crises havebeen tamer and less frequent among devel-oped nations during the current phase ofglobalization compared to the one before1914.11 That suggests such nations have con-tinued to develop better financial and otherinstitutions to minimize the effects of off-shore economic shocks. But how far do theyyet have to go? It is noteworthy that althoughvulnerability to periodic economic crises hasmostly been a feature of developing countries,the most recent crisis emanated from theUnited States and has affected developed anddeveloping countries simultaneously.

The story seems to be different for emerg-ing economies that lack well-developed finan-cial sectors. Although trade globalization usu-ally has a positive effect on emerging marketeconomies, financial globalization may not.Financial globalization has historically beenassociated with greater economic volatility inrecipient countries—especially small ones. Asdiscussed in the section on capital flows,although allowing foreign direct and portfolio

5

There is clear evidence thatopenness to tradeis associated with larger governments.

investment permits greater specialization inproduction and increases trade volumes, it alsoincreases exposure to other countries’ exports,currency fluctuations, economic shocks, andpolicy changes. A sudden increase in foreignfinancial inflows can be destabilizing if domes-tic lending institutions fail to prevent increasesin investment in risky domestic sectors andenterprises. Then, any onset of pessimistic eco-nomic expectations among the public has alarger potential for becoming self-fulfilling,leading to a crash. One study finds the likeli-hood of financial globalization–induced crash-es to be higher when trade costs are high. Thissuggests that opening up financial sectors indeveloping nations would lead to less econom-ic volatility (and lesser demands for social pro-tections by the public) if it were preceded bytrade liberalization.12

Finally, although globalization leads togreater demands for social insurance protec-tion by loser groups—for example, low-wageworkers in developed nations—it makes financ-ing larger social insurance expenditures moredifficult because trade and financial opennessitself renders cross-country tax competitionmore intense. Taxing capital income toincrease revenues would trigger capital flight,reducing capital per worker and, therefore,labor productivity and earnings. That meansthe burden of a tax imposed directly on capitalincome is shifted onto workers. Taxing high-wage workers instead would cause tax evasionand avoidance through less work. And it wouldinduce skilled workers to emigrate, given thealready high marginal taxes that they face indeveloped countries: such workers are general-ly more internationally mobile than low-wageworkers and have more ways of disguising andshifting their incomes to non-taxed sources.

Thus, the factors demanding social protec-tions the most—intermediate- and low-skilledworkers—must either pay more taxes now (thatis, self-insure) or transfer the tax burden on tofuture workers through higher explicit orimplicit government debt. Alternatively, gov-ernments could limit exposure to offshore eco-nomic shocks by reducing the degree of tradeand financial sector openness via protectionist

economic policies.13 Thus, globalization pre-sents a Catch-22 for developed economies:although cheaper imports enhance consumerwelfare, low-wage workers could bear the bruntof the costs through less employment, stag-nant wages, and the financial burden and asso-ciated distortions of additional social insur-ance provisions.

Thus, globalization holds implications formany economic issues such as wage growth,employment, immigration, job security, work-er skill acquisition, capital flows, labor pro-ductivity, and economic volatility. The follow-ing sections discuss the policy implications ofglobalization in each of these areas.

Wages and Employment

Reality is at odds with the theoreticalexpectation that low-wage workers in devel-oping countries would benefit from global-ization. The experience of developing coun-tries is mixed—intermediate-skilled workershave mainly benefitted from expanding busi-ness process outsourcing, while wages insome low-skilled sectors have stagnated ordeclined. In addition, high-skilled workersand entrepreneurs have also benefitted fromaccess to foreign capital and export promo-tion policies. The resulting economic growthhas therefore been associated with higherinequality, at least in the short term.14

In developed countries, however, low- andintermediate-skilled workers are faced withstagnant wages or at least increasing wage dif-ferentials when compared with high-skilledworkers. This is consistent with theoretical pre-dictions and has occurred despite net inflowsof capital as in the case of the United States—suggesting that most such inflows are directedat high-capital-intensity industries that mostlyemploy high-skilled workers. The reorienta-tion of production operations for relocatingsome components offshore, also known as ver-tical integration, has affected many levels ofworkers in developed countries. These workersmust retool, re-educate themselves, and moveto sectors with higher-value-added jobs that

6

In developedcountries low-

and intermediate-skilled workers

are faced withstagnant wages orat least increasingwage differentials

when comparedwith high-skilled

workers.

are “safer”—that is, less vulnerable to soonbeing outsourced.

There is robust evidence that foreign com-petition is positively related to innovationand vertical linkages with foreign firms.15

One study attributes the within-industryshift away from unskilled workers (in France)to an increase in the share of imported inputsfrom 9 percent in 1977 to 14 percent in1993.16 Another study shows that whichworkers gain and which lose depends oninter-country differences in rates of savingand capital accumulation relative to theirrespective population growth rates. High-sav-ing countries eventually enjoy higher capitalintensity, enabling high-skilled workers tocapture rents from employment. This impliesthat globalization redistributes such high-rent jobs, inducing greater cross-countryinequality in labor productivity and wage lev-els.17 Empirical studies on the U.S. economysuggest that outsourcing low-skilled workabroad has resulted in a relative shift of em-ployment demand toward high-skilled work-ers by between 15 and 33 percent acrossindustries.18

The conventional understanding is thatglobalization increases income inequality inthe developing world. However, one studysuggests that such growth in income inequal-ity is an inter-country rather than a within-country phenomenon, and that the impactof globalization has been to reduce overallinter-country inequality by raising incomesof those developing countries that openedtheir economies to foreign trade and finan-cial integration.19 Thus the appearance ofgreater income inequality from globalizationarises because incomes of non-globalizedcountries have stagnated or declined.

The structural adjustments in labor mar-kets implied by these changes can be very dif-ficult for some worker groups and could takea long time to complete. Such ongoing adjust-ments generate higher frictional unemploy-ment that can persist for decades. The contin-ual downward pressure on wages, increasingspecialization, and potentially higher outputand consumption volatility from increased

exposure to external economic shocks impliesgreater economic uncertainty facing workers.Indeed, there is clear evidence that worker per-ceptions of economic insecurity are height-ened in industries with more foreign directinvestment activity.20

It is not surprising, therefore, that the in-creased globalization should be accompa-nied by calls to expand social insurance pro-tections for workers and limit the pace ofglobalization through protectionist policies.Some observers advocate enhanced social in-surance support on moral grounds.21 Giventhe danger of government creep and ever-increasing generosity of social protections attaxpayer expense, proposals for expandingsuch protections against the undesirableeffects of globalization should be subject torigorous scrutiny by weighing costs againstbenefits: that is, whether the income securitythey purchase is worth the costly distortionsto output, employment, and consumptionthat they bring about from increases in taxesfor financing them. Demonstrating that thebenefits of enhanced social protectionswould exceed the costs of funding them isusually very difficult, but such considera-tions are usually ignored in the policymakingprocess.

Immigration

Some observers are concerned that greaterglobalization will be accompanied by immi-gration of low-wage workers into developedeconomies. However, it is not the absolute lev-els of wages in developed and developingcountries that is relevant, but differentialsbetween them at different skill levels. In devel-oped countries, wage premiums associatedwith higher education and skills have in-creased rapidly during the last three decades.That would suggest inter-country wage differ-entials would be highest for those with inter-mediate and high skills. Indeed, the evidencesuggests Mexican migrants to the UnitedStates are more educated on average andoccupy the middle and upper portions of the

7

It is not surprising that increased globalizationshould be accompanied bycalls to expandsocial insuranceprotections.

wage distribution in Mexico, confirming thatconjecture.22

Furthermore, in both the United Statesand Europe (especially Germany), immigra-tion is not found to adversely affect natives’wages and employment because the two work-er groups are not close substitutes in employ-ment. Rather, new immigrants are similar toand compete with earlier immigrants. Manystudies have suggested that immigration leadsto lower wages for native workers. However, arecent study that adopts a more comprehen-sive and dynamic method in evaluating theissue finds a large positive impact of immigra-tion on the wages of nonimmigrant workersin the United States.23

Another issue is that immigrants imposecosts on federal, state, and local welfare pro-grams. Indeed, the payment of a “replacementwage” (e.g., traditional welfare payments) forwhich both natives and immigrants qualifywithout working builds immigration pressureand simultaneously generates more unem-ployment by reducing the overall demand forworkers and reducing their willingness towork.24

If developed nations elect to providesome form of income support (this paper isagnostic as to the wisdom of that choice),then they should remove the perverse incen-tive against labor market participation bytransitioning—in a deficit-neutral manner—to a “wage subsidy” program for native andimmigrant workers patterned on the U.S.Earned Income Tax Credit. The drawback, ofcourse, is that gradually phasing out thesubsidies at higher wage levels introduces acorresponding work disincentive. However,because wage subsidies are focused on work-ers rather than on welfare recipients, theyincrease total employment and, most likely,output as well in the economy, as comparedto welfare benefits that are not contingenton employment.

One proposal for regulating the numberof immigrants entering developed countriesis to levy a head tax on immigrants—graduat-ed by skill or qualification levels. This wouldenable developed countries to finance wage

subsidies or other types of social insurance tonative low-wage workers. However, globalcompetition for skilled workers is likely tobecome more intense with growing needsamong developed nations to support theiraging populations. Nations that seek limitson immigration through a head tax are likelyto lose better-qualified immigrants to othercountries. Besides, such a tax would not nec-essarily attract high-human-capital workersdue to borrowing constraints—because mostof the wealth of such immigrants is tied up intheir future earning capacity. Rather, itwould attract already wealthy but not neces-sarily highly educated immigrants. Further-more, although this policy is intended toattract high-skilled workers, it runs contraryto the “ability to pay” principle of public eco-nomics—a graduated head tax favoring high-human-capital immigrants imposes highercosts on low-skilled immigrants who wouldlose opportunities to acquire skills andbecome more productive over time.

The Management of“Community Effects”

Ill-conceived policies in developed econo-mies—such as awarding welfare benefitsunrelated to employment—can result inhigher unemployment among citizens andmore immigration, with many new immi-grants ending up unemployed. These policiescompound the problems already facingimmigrants, such as language barriers andinsufficient education. Those are the twobiggest obstacles that prevent them frombecoming economically self-sufficient. Two-thirds of low-wage U.S. immigrant workersare not proficient in English, 30 percent havenot completed high school, and 18 percenthave less than a ninth-grade education.25 InEurope, 40 percent of immigrants originatefrom another European Union (EU27) coun-try, whereas the rest originate in near equalparts from Asia, Africa, and America.26 Thediversity of immigrants in Europe generatesan entirely new set of issues pertaining to

8

Traditional welfare

payments build immigration pressure and

generate moreunemployment by

reducing the overall demand

for workers.

social and cultural segregation and low eco-nomic mobility because of language barriers.

Difficulties in finding jobs and alienationfrom the social mainstream can lead bothimmigrant and domestic low-wage workers tobecome involved in black markets and crime.Policy reforms should therefore aim to createan economic environment for attractinghigh-skilled foreign-born workers and en-couraging quicker assimilation of low-skilledimmigrants into the national economic andcultural mainstream. The latter is a key ele-ment for improving immigrants’ economicproductivity, especially across their successivegenerations. Indeed, some analysts argue thatin view of developed nations’ prospectiveneed for young workers in key non-tradableservice sectors such as health care, better stew-ardship of such “community effects” is anurgent public policy concern.27 Similar to thewage subsidy program above, if developednations choose to publicly provide job train-ing, education, and youth programs, thenthose programs should be reformed so as tolessen perverse incentives and ease the nega-tive effects of globalization. However, as dis-cussed below, there are serious questionsabout the benefit of such programs, even ifthey undergo reform.

Job-Training ProgramsAlthough most measures of human capi-

tal consider just the level of formal schooling,training on the job is just as important fordetermining workers’ skill levels. Indeed, theimportance of such training is likely toincrease in developed countries as rapid tech-nological progress accelerates skill-obsoles-cence and competition from foreign workersintensifies the need to move to higher-value-added jobs that are less vulnerable to out-sourcing. Hence, upgrading skills continu-ously during one’s career is likely to gainimportance for workers in developed nationsin order to minimize unemployment spellsand avoid earnings declines. The increase inintra-cohort skills-based wage differencessince the 1980s has also raised the impor-tance of upgrading low-wage workers’ skills.

What is the best way to increase workerskills? Under competitive labor markets, firmowners and managers have poor incentives totrain workers because of the risk of themquitting soon after acquiring new skills. Thatseems to call for government-run job train-ing programs. But independent governmentprograms are generally unsuccessful inincreasing workers’ productivity and wagesbecause such training is divorced from pro-ductive activity. Should the government sub-sidize or regulate firms so as to promote on-the-job training? The answer based on recentstudies seems to be “no.”

Under the more usual noncompetitivelabor market conditions (created by transac-tions costs, asymmetric information aboutworkers’ existing skills, inability to observethe degree of shirking on the job, and so on),firms can extract rents by setting wages belowworkers’ productivity levels. If more rents canbe extracted from higher-skilled workers,firms have an incentive to train workers, evenin general rather than just firm-specific skills.This directly undermines the case for govern-ment job-training subsidies. Governmentsubsidies would also be ineffective becausewithin-firm training levels are difficult to ob-serve.

Thus, some analysts suggest regulating theamount of on-the-job training that workersmust receive—perhaps by setting minimumcriteria—say, hours or dollars spent per less-educated and low-skilled workers on training.However, such regulation is also unlikely toprove effective: recent studies suggest thatwage differences explained by differences inschooling and workplace experience are onlyslightly reduced when the amount of job train-ing is accounted for.28 And if government job-training regulations become too draconian,they can distort the amount of training offeredby firms or increase the gap between workercompensation and productivity, leading tosuboptimal outcomes, not only for workertraining but also employment.29 Thus, recentevidence does not, on balance, support govern-ment subsidies or regulations to increase jobtraining by firms.

9

Recent evidencedoes not, on balance, supportgovernment subsidies or regulations toincrease job training by firms.

However, if developed nations choose toadopt public policies that support job train-ing, those policies should emphasize skillacquisition in future growth sectors such ashealth care and elder care. For example, U.S.government policies toward community col-leges during the 1980s and 1990s appear tohave successfully induced curricula gearedtoward changing local labor markets.30

Wage SubsidiesThe earlier discussion suggested that, if

developed nations elect to provide some formof income support, replacing welfare paymentswith wage subsidies would remove work disin-centives created by the former for workers withlow skills. Could wage subsidies also promoteskill acquisition by low-wage workers? The out-come depends on how skills are generallyacquired. If labor force attachments alone aresufficient for skill acquisition (learning bydoing), wage subsidies would result in moreskill acquisition by encouraging more work.31

However, if working and skill acquisition arerivalrous—more work implies less time spenton skill acquisition—then wage subsidies couldreduce skill acquisition. These effects probablyvary at different skill levels and change as work-ers progress in their careers.

Hence the total impact of wage subsidieson skill acquisition is likely to be uncertain.Studies on this issue support the “learning bydoing” method of acquiring skills—implyingthat wage subsidies could result in more skillacquisition by lower-wage workers directly, byencouraging greater labor force participationand more work by those already in the laborforce.32 Thus, on balance, replacing tradition-al welfare payments with wage subsidies suchas the Earned Income Tax Credit program inthe United States removes a disincentive forlow-wage workers to work and gain skill. Acaveat, as one study suggests, is that becausewage subsidies increase the opportunity costsof acquiring skills at low wage levels butreduces those costs at wage levels where thesubsidy is phased out, those subsidies wouldretard skill acquisition by low-wage workersbut encourage it for intermediate-wage work-

ers—thereby increasing earnings inequalityover time.

Primary and Secondary Education andYouth Programs

Finally, there is an intergenerational com-ponent to generating positive communityeffects among low-wage workers and immi-grants. Promoting greater labor-force attach-ments among adult workers helps in trans-mitting skills, civic values, and a work ethic totheir children. Complementary institutionsfor fostering better assimilation of migrantsand low-wage families over time and for theirsuccessive generations are effective, integrated,and competitive primary and secondaryschool systems for children.

Second-generation immigrants often lagbehind their native counterparts in primaryand secondary school. School choice has addedcompetition in the U.S. school system, forcingeducators to turn out children who can eitherenter higher education or start out strong inthe workforce no matter their background. Re-cent research shows that competition betweenschools (whether public, private, or charter)fosters innovation in teaching methods toeffectively impart new skills that a changinglabor market requires.33 Competition will con-tinue to promote innovation in schooling,resulting in new methods for assimilatingimmigrant cultures and teaching in settingswith growing diversity. Currently, in somecommunities, charter schools are using bothSpanish and English to better assimilate re-cently immigrated populations.

Recent evidence on government programspoints to only partial effectiveness of school-to-work programs in increasing the skill levelsof youth—for whom traditional adult jobtraining programs also fail.34 In Germany, theschool-to-work programs take the form ofapprenticeship systems in different industries;in Japan they operate through contractualarrangements between schools and employers;in the United States, the 1994 School-to-WorkOpportunities Act operated until No ChildLeft Behind removed it in 2001. Such pro-grams, which are more prevalent in Europe

10

Wage subsidiescould result

in more skillacquisition by

lower-wage workers by

encouraginggreater

labor force participation

and more work by those already

in the labor force.

than in the United States, target high schooland college graduates, integrating youthemployment, job training, and informationabout labor market opportunities. The fastertransition from school graduation to employ-ment fosters stable labor-force attachments athigher wages. Unfortunately, there is no evi-dence on how long the positive short-termeffects persist. In addition, time devoted tothese programs implies time spent away fromacademic preparation for further educationthat could boost career wages significantly.35

Another facet could be student loans sys-tems (including loan repayment scheduling)that reward the completion of schooling andtraining, but some current programs in theUnited States, such as the GI bill, reward peo-ple for merely going to school rather than fordoing well and completing school.

Finally, policies that induce higher rates ofschool dropouts—such as minimum wage lawsand the provision of generous welfare benefitsunrelated to employment—should be revised.36

Policymakers need to be careful to strike theright balance between encouraging work andencouraging the pursuit of more training,especially among younger workers. Too muchemphasis on the former could degrade the lat-ter objective. Indeed, in the United States thePersonal Responsibility and Work Opportun-ity Reconciliation Act of 1996 (better known aswelfare reform) induced many former welfarerecipients to begin working, but one study esti-mates that it also reduced the probability ofcollege enrollment by 20 percent among un-married females living in low-educated non-two-parent households.37

Capital Flows

The export-oriented growth policies ofChina and other developing economies andthe two-decade-strong consumption binge inthe United States and other developed nationsled many developed economies to experiencemassive trade deficits. At its peak, the U.S.international trade deficit equaled $760 bil-lion in 2006. Despite an ongoing recession,

the U.S. trade deficit remained at almost $700billion in 2008. However, trade deficit figuresoffset gross imports and exports of goods, ser-vices, and earnings each year. Taking the ratioof the sum of imports and exports to GDP,which fully reflects the U.S. economy’s expo-sure to foreign trade, produces the figure of 40percent in 2008. And even that large number isdwarfed by corresponding ones for majorEuropean economies.

Trade imbalances correspond directly withcapital flow imbalances that restore “balance”to each country’s international transactionaccounts. Large U.S. trade deficits mean thatworld capital moves to the United States, onnet. Much of it is attributed to continuedinvestment by the Chinese government of itstrade surpluses in U.S.-denominated securi-ties. However, in terms of gross financial flows,most foreign investments in the United Statesare accounted for by capital flows fromEurope, not from emerging markets: of thetotal Organization for Economic Co-opera-tion and Development investment flows of$33 trillion in 2007, $16 trillion were directedto the United States. Among the major Euro-pean economies in 2008, Italy, France, Spain,and the United Kingdom exhibited sizabletrade deficits, but Germany and Sweden hadlarge export surpluses and corresponding netcapital outflows.

Who Is Engaged in FinancialIntegration?

Thus the availability of cheap importsfrom developing countries had the normaleffect of increasing consumption and reduc-ing saving rates among developed countries,and increasing net capital flows toward thelargest developed countries—mainly theUnited States. Thus, in contrast to the theo-retical expectation that capital would flowfrom developed to developing countries withcheap labor and growing product markets,capital moved in the opposite direction, onnet, during the 1990s and 2000s. Moreover,financial globalization is primarily a North-North phenomenon, enabling citizens ofdeveloped nations to better diversify their

11

The availabilityof cheap importsfrom developingcountries had thenormal effect ofincreasing consumption andreducing savingrates amongdeveloped countries.

assets. Gross capital flows from North toSouth relative to total capital are far small-er—just 15 percent of total global flows,although they have grown rapidly from their1980s share of 5 percent.

Although economists agree about thepotential benefits of trade liberalization, theydiffer on those of financial liberalization.Financial liberalization is just as difficult toimplement for developing countries today as itwas during the pre-1914 globalization phase.Lacking mature financial sectors, emergingnations are unable to float their currencies ifthey wish to attract foreign capital becauseexchange rate volatility would reduce foreigninvestment inflows. Hence, many choose topeg their currencies to developed country cur-rencies—especially to the U.S. dollar.38

Financial Integration’s EconomicEffects—What are the Pathways?

Prominent economists such as JosephStiglitz and Jagdish Bhagwati believe thatfinancial liberalizations by developing coun-tries would most likely lead to financial collapseand that the “claims of enormous benefits fromfree capital mobility are not persuasive.”39 Theissue hinges not upon whether financial global-ization is inherently beneficial or not, but onwhether it can be implemented correctly inthose countries.

Although greater economic and financialintegration permits diversification from nar-row production bases, it also induces greaterspecialization in production and makescountries susceptible to external economicshocks. What are the pathways by whichfinancial flows can lead to increased eco-nomic volatility?

First, the empirical evidence on the im-pact of greater financial openness on nation-al output growth is mixed: several studiesfind little empirical evidence that fluctuationsin national output (and output growth) be-come more pronounced with greater finan-cial openness.40 However, studies on theshort-term inflation/output gap tradeoff—the amount by which output growth must bereduced below potential, on average, to

achieve a specific percentage point reductionin inflation—suggest adverse output growtheffects from financial liberalization. That is,the sacrifice in output growth required toachieve a given decline in inflation hasincreased, making output growth morevolatile after financial liberalizations.41 Thus,it remains unsettled whether the fluctua-tions in output growth increase or decreaseas a nation opens itself to freer trade andinternational financial integration.

Second, consumption volatility (fluctuationsin consumption growth) should theoreticallydecline with greater openness to foreign cap-ital inflows. Being averse to sudden declinesin their consumption and living standards,most people try to smooth them when facedwith negative income shocks. They do so byborrowing when income is temporarily lowand saving the extra income when it is tem-porarily high. Thus, larger foreign capitalinflows should allow risk-averse citizens toincrease their ability to borrow and maintainsmoother consumption profiles over time,despite volatility in income and output. Theevidence, however, shows that greater finan-cial openness is associated with even largervolatility of total national consumption (andconsumption growth). That is, economic andfinancial integration does not appear to con-fer the benefit of improved risk-sharing andconsumption-smoothing as economic theo-ry predicts. This is consistent with findingsthat—given uncertainty over the likelihoodthat a country would default on its debt—globalization opens some asset markets butcloses others, leading to imperfections inrisk-sharing within and across countries.42

For example, channels that provided credit todomestic households and firms before finan-cial liberalization may be reorganized whenliberalization opens other investment oppor-tunities so that some sectors and consumersexperience credit shortages and are forced todownsize or consume less.

Third, the evidence suggests that financialintegration induces stronger synchronicity ofincome and consumption growth acrosscountries, generating more coordinated busi-

12

Although greater economic

and financialintegration

permits diversification, it also induces

greater specialization inproduction and

makes countriessusceptible to

external economicshocks.

ness cycles across developed and developingcountries.

Recent studies on the links between anation’s financial openness and output growth(not output growth volatility) find a positiveassociation, even after accounting for indi-rect effects such as globalization-inducedimprovements in macroeconomic policies,corporate governance, and so on. However,the direction of causation—whether global-ization induces faster economic growth in acountry or whether global capital flows areattracted to countries that already exhibitsigns of emergent growth based on good eco-nomic and political institutions—remainsdifficult to decipher.43 One study that exam-ines the connections between finance, eco-nomic growth, and capital market integra-tion over the long term concludes thatoutput growth and globalization are both ledby prior development of a nation’s domesticfinancial sector.44 A well-developed financialsector directly fosters economic growth butalso fosters financial integration with foreigninstitutions seeking to allocate capital effi-ciently.

Obstacles to Continuing FinancialGlobalization in Developing Countries

As mentioned earlier, higher volatility ofconsumption growth (and perhaps also out-put growth) associated with greater globaliza-tion stimulates demand for greater govern-ment protections through larger socialinsurance programs—welfare, unemploymentprotections, social security, health benefits,and so on. But some analysts point out thatfinancial integration and trade openness aremore pervasive today than during the pre-1914globalization era, yet we do not witness com-parably severe financial instability and politicalpressures for trade restrictions as were com-mon then because of institutional advantagessuch as better macro-stabilization policies,social welfare systems, and stronger counter-vailing interests among high-skilled workersand capital owners.45 Admittedly these viewsare still evolving; many recent studies do nottake into account the current economic crisis.

But if macro/monetary policies are successfulin stabilizing world economies relatively soon,such views may retain currency.

For developing countries, although finan-cial deepening increases the access of thepoor to credit, dysfunctional legal systemsand unenforceable property rights reduce theamount of available collateral and com-pound the credit market problems of adverseselection and moral hazard to limit the bene-fits of increased foreign capital inflows. Thekey culprits are corruption or “financialrepression” from government officials andincumbent financial firms through politicalconnections that siphon away large chunksof financial investments for personal use.46

The channels by which financial liberaliza-tion can lead to crises are twofold: by inducingmal-investment by banks and other lendingagencies, and by generating a fiscal shock. Thefirst channel usually occurs because of riskmispricing by domestic banks. In part, thisoccurs because capital market liberalizationleads to expectations of higher asset prices,lower cost of capital, and higher incomes indeveloping countries, which induces investorsto take on more risky projects.47 Subsequentinvestment losses turn lending booms intobusts, starving even viable industries of capi-tal. If a financial panic ensues from wide-spread bank failures, the loss of output andemployment can be quite large. Alternatively,if the government faces a large fiscal imbal-ance and cannot finance its debt—partlybecause liberalizations involve reduction orelimination of revenues from tariffs48—it oftenexhorts or forces banks to buy more govern-ment paper. If investors subsequently loseconfidence in the government’s ability torepay its debts, and they attempt to sell theirholdings of government securities en masse,the ensuing decline in the value of govern-ment bonds and increases in interest rates cre-ates a large hole on the asset side of bank bal-ance sheets. That can lead to a decline inbanks’ viability, a banking panic and, again, adecline in credit availability to viable firms.

These factors prevent the world from effec-tively being “flat” (that is, with lower barriers)

13

A well-developedfinancial sectordirectly fosterseconomic growthbut also fostersfinancial integration with foreign institutions seek-ing to allocatecapital efficiently.

where capital flows are concerned. This lack offlatness has been documented for EastEuropean nations and Russia. Poor corporategovernance and high political risks pose barri-ers to obtaining the full benefits of financialglobalization. Hence, the role of 21st centuryfinancial sector reforms designed to reducerisk exposures of financial firms can beapproached in two ways: The first, which willlikely be the main focus of the G-20 nations, ispreventing international investors—mostlylarge businesses, pension and mutual funds,investment banks, and so on—from assumingunwarranted risks in their international in-vestment portfolios.

A better approach would be to encouragedeveloping nations to improve their systemsof corporate governance, reduce ownershipconcentrations that encourage policies inimi-cal to shareholder interests, improve publicand corporate accounting systems, and pro-mote better political and bureaucratic institu-tions to minimize corruption. Such measuresare more likely to reduce investment risks com-pared to simply constraining investors’options. Indeed, the benefits of the latter mea-sures are likely to accrue to both developingand developed countries, the former enjoyingsmaller risks of capital-inflow-induced crises,and the latter gaining from broader invest-ment options with lower risks.

Population Aging inDeveloped Countries:

How GlobalizationCan Help

According to the 2009 Aging Report of theEuropean Commission, the old-age populationdependency ratio will increase from 25 per-cent today to more than 50 percent by 2050.That is, instead of four workers (aged 15–64)for each retiree (aged 65+), there will be justtwo among the EU27 by 2050.49 Spain, Italy,Ireland, and Slovenia are projected to experi-ence extreme increases in old-age dependencyratios of between 57 and 60 percent by 2050,

implying 1.5 workers per person aged 65 andolder.

Part of the reason for the projected increasein age-dependency ratios is continued lowEuropean birth rates. The number of births per1,000 females per year has declined from about2.3 in 1970 to 1.8 in 1990, and to about 1.5today. Demographers project European birthrates to increase only slightly through 2050.Another factor is increasing longevity: maleand female life expectancies at birth are pro-jected to increase by 7.1 and 5.8 years respec-tively. The looming shortage of young workersfor generating adequate economic output forsupporting a massive increase in older popula-tions ought to be a first-order concern of poli-cymakers in developed economies.

Assuming a strictly pay-as-you-go socialinsurance system (inclusive of medical care forretirees), simple calculations under standardproductivity and demographic assumptionsshow how much social insurance taxes mustincrease to maintain retirees’ living standardswhen the worker-to-retiree ratio declines.50

The calculations reported here for EU27 coun-tries as a group are based on demographic andeconomic projections calibrated according totwo European Commission monographs.51

Under these assumptions,52 just maintain-ing European retirees’ living standards at their2010 levels would require an increase in thepayroll tax rate from 15 percent to 22 percent,an increase of almost 50 percent. Alternatively,if the payroll tax rate were maintained at 15percent throughout, retiree living standardswould decline by 2050 to just 88 percent oftheir 2010 level. These two alternatives capturein simple terms the dimensions of the eco-nomic challenge for Europe as a whole be-cause of an aging population. Note, however,that the foregoing understates the true size ofthe challenge because it does not take accountof the projected faster growth of health carecosts per person (because of population aging)compared to productivity growth in Europe.

Increased immigration could provide analternative to higher taxes, with immigrantlaborers providing more revenue to Europe’spublic retirement programs. However, the

14

If the payroll tax rate were

maintained at 15 percent

throughout,retiree living

standards woulddecline by 2050 tojust 88 percent of

their 2010 level.

increase in immigrants necessary to hold thepayroll tax rate at roughly its current level isunlikely to be politically acceptable: under onescenario, worker immigration would have tobe increased by 1.0 percent of the total popu-lation immediately, and the flow of additionalimmigrants would have to grow at 8 percentper year through 2050. Under this scenario,the payroll tax rate for maintaining retiree liv-ing standards would have to increase to 17.3percent by the early 2030s, but would thendecline back to 15 percent by 2050. Alter-natively, this increase in immigration wouldmean that retiree living standards would needonly decline 4 percent from their 2010 levelsthrough the mid-2030s, but then recover backto 2010 levels by 2050.53

Under parallel calculations, the agingproblem appears to be even more urgent inthe United States than in the EU27 becausemany among the latter have much youngerpopulations. Although the higher projectedU.S. birth rate means that the domestic pop-ulation of workers increases at a faster pace,the retiree population increases even faster,especially through 2030. The United Stateshas a worker-to-beneficiary ratio of about 3.0today (as opposed to 4.0 for the EU27), butthat declines to about 2.0 by 2030 (ratherthan by 2050 for the EU27). The rate ofdecline slows beyond 2030 in the UnitedStates because, with the baby-boomers re-tired, only increasing human longevity con-tinues to depress the worker-to-beneficiaryratio. However, the social insurance system inthe United States is less generous, with socialinsurance contributions at only 7.0 percent ofGDP today.

Keeping all except demographic parame-ters the same and repeating the calculationsas above shows that the U.S. social insurancecontribution rate would need to increase to15 percent by 2030 and then decline back toabout 8.0 percent by 2050. Thus the UnitedStates would need to double the social insur-ance contribution rate by the end of twomore decades in order to maintain retiree liv-ing standards at today’s levels. Again, thecaveat about rapidly rising health care expen-

ditures applies to the United States, perhapseven more strongly compared to Europe.

Thus, maintaining living standards ofretirees but at the same time preventing pay-roll taxes from increasing rapidly (and per-manently) in developed economies is a chal-lenge that must be approached by alternativemeans. One way would be to harness theforces of globalization to better exploit thecheaper factors, resources, and developmentpotentials in emerging markets. Indeed,some analysts hypothesize that vast pools ofunemployed workers in developing countriescan easily augment the developed world’slabor supply without relocating.54

However, making full use of these re-sources would require that the current South-to-North direction of capital flows be reversedand existing global imbalances in trade andinvestment flows be reduced. But the successof this strategy will require considerableimprovements in business conditions, eco-nomic policymaking, corporate governance,and political stability in developing countries.Such reforms would clearly benefit those coun-tries because, as discussed earlier, reformingfinancial and trade institutions would enablethem to reap the benefits of openness—moreinvestment, faster output growth, and higherliving standards—without hindrance by thepreviously experienced shortcomings of eco-nomic volatility and crises.55 Notwithstandingthe fact that the current crisis emanated fromrisk mispricing and mal-investments in theUnited States, which will probably trigger reg-ulatory changes, leaders contemplating thenature of the new world economic order forthe 21st century should continue to prioritizethe developmental objectives of financial sec-tors in emerging markets.

New World Economic Order

The recent economic crisis has led to asharp decline in international trade volumesand, despite lip service to eschew protection-ist policies, many nations have adopted avariety of targeted anti-competitive policies.

15

Success willrequire considerableimprovements in business conditions, economic policymaking,corporate governance, andpolitical stabilityin developingcountries.

The pre-crisis economic order was marked bycontinued negotiations of trade and finan-cial liberalization within the context of theWorld Trade Organization’s Doha round.However, the emergence of the so-calledBRICK nations (Brazil, Russia, India, China,and South Korea) as economic powerhous-es—with increased negotiating power vis-à-visdeveloped nations—has stalled progress onmultilateral trade rules under the Doharound. Another feature of the pre-crisis orderwas the dollar’s role as a global reserve cur-rency, enabling the United States to maintainlow borrowing rates, reap better trade terms,and accrue seignorage benefits. Although thecrisis has interrupted globalization, nascenteconomic recoveries in developed nationsand continued economic development ofBRICK nations means that the process willeventually resume. Finally, the pre-crisis eco-nomic order was marked by global imbal-ances as financial flows moved primarilytoward North countries, chiefly the UnitedStates.

United States as Hegemonic Defender ofOpen Markets

The pre-recession (2007–09) internationaleconomic order was that of the United Statespromoting and protecting international tradeand financial integration, almost by default asit has been the only superpower since the late1980s.56 The dollar’s relative stability in inter-national markets, despite the emergence of theeuro as an alternative currency and despite theaccumulation of massive current accountdeficits during the 1980s and 1990s, is theresult of a purely domestic objective of main-taining price stability after the debilitatinginflationary period of the late 1960s and1970s. This made the dollar attractive as aninternational reserve currency that many high-saving nations (China, oil exporters, Germany,etc.) used as a “store of value.” Those nations’policies of investing trade surpluses in dollar-denominated financial assets supported theUnited States’ other domestic policy goals ofmaintaining free trade and financial opennessby sustaining domestic investment and help-

ing to maintain low unemployment despitelow U.S. national saving.

The influence of developed nations (notjust the United States) on the policies ofinternational lending and regulatory institu-tions such as the World Trade Organization,International Monetary Fund, and WorldBank promoted trade agreements and pro-vided conditional assistance to nations expe-riencing foreign exchange shortfalls duringeconomic crises. The assistance was subjectto nations introducing austere fiscal, mone-tary, and exchange rate policies for restoringtheir economies to health. But those policiesalso promoted moral hazard among privateindividual and institutional investors, induc-ing greater risk-taking on internationalinvestments. Thus the economic incentivescreated by the institutional setup of the earli-er economic order may have initiated a seriesof economic crises of which the one thatbegan with the financial panic of 2007–08 isbut the latest example.

The fact that the latest economic crisisbegan in the U.S. subprime housing sectorsuggests inappropriate regulation (ratherthan nonregulation) of U.S. and global finan-cial institutions, but also hubris on the partof key policymakers about their ability to pre-vent a financial sector meltdown fromspreading to the real economy. This crisis hasraised concerns about appropriate macro-prudential regulation of financial enterprisesto contain their leverage ratios and risk expo-sures. But recent G-20 declarations notwith-standing, there appears to be no agreementabout how such international “super-regula-tions” and “peer-reviews” should be designedand conducted in order to maintain opentrade and continued growth in financial inte-gration. The confusion is understandablegiven that the goals of containing risk expo-sures while continuing an incipient econom-ic recovery and extending global financialintegration are fundamentally contradictory.

Toward a New Economic Order?Because imposing tighter international

financial regulations may slow global recovery

16

There appears to be no agreement

about how international

“super-regulations” and

“peer-reviews”should bedesigned.

from the current crisis, the new internationaleconomic order will take some time to emerge.The overt change following a severe financialsector collapse and the recession-induceddecline in trade volumes has been the emer-gence of the G-20 group of nations as thesteward of the global economy. However, theemergent order may remain quite similar tothe pre-crisis economic order if the UnitedStates is successful in containing inflationarypressures and the dollar’s exchange valueremains unimpaired. That requires a timelywithdrawal of extraordinary monetary infu-sions undertaken in 2008 to aid the U.S. andglobal economic recovery. In addition, reformsto eliminate massive fiscal imbalances indeveloped countries will be necessary to pre-vent taxes from escalating and maintain theyounger generations’ incentives to continueinvesting in human and physical capital.Maintaining tax rates as low as possible isclearly a prerequisite for maintaining futureproductivity growth and meeting emergentchallenges on many fronts: population aging,energy conservation, climate change, risinghealth care costs, and so on. However, skepti-cism is growing about whether all of thedaunting economic policy challenges can bemet in a timely manner.57

At the microeconomic level as well, thepost-crisis economic order is unlikely to stopthe erosion of economic security for workersin developed nations—indeed, quite the oppo-site. If the new regulatory framework beingdebated successfully preserves the process ofglobal economic integration, workers in thedeveloped world will continue to experienceheightened job insecurity and competitionfrom foreign workers. They would be forced toadapt by acquiring new skills and being moremobile. Thus, policymakers in developednations will face increasing political pressuresto reduce these uncertainties via expandedsocial protections.

The economic crisis of 2007–09 has pro-voked different responses from differentcountries. Most have introduced economicstimulus packages to extend unemploymentassistance, expand public projects, support

investment, and provide assistance to finan-cial institutions to enable resumption oflending activities. Although these supportsshould be removed as economies recover,they may not be fully reversed as the above-mentioned economic pressures from global-ization become more intense and unemploy-ment rates remain high.

Thus, forces that would interrupt globaliza-tion and those that would promote it are bothpresent: The recent financial crisis has weak-ened the developed world economies, promot-ed “beggar-thy-neighbor” policies that benefit-ed some nations at the expense of others, anderoded support for continued globalization.But regional interests may promote globaliza-tion in a fragmented form as countries seek tomaximize the advantages of internationaltrade and integration without any global pow-er to enforce international laws, norms, andinstitutions. However, such a world economicorder involves considerable uncertainty andcould ultimately turn out to be unstable.Distaste for the consequences of a breakdownof the international economic order—whattranspired after 1914 in terms of economic andphysical destruction from two world wars—may provide sufficient momentum to allowthe U.S.-led order to continue for a few moredecades. However, no nation appears capableof stepping into the U.S. role as the UnitedStates did when Great Britain was economical-ly spent after World War II.58 The only candi-dates are Europe, China, and India, but theyare each either not interested or economicallyand militarily not capable of successfullyassuming the role of global hegemon.

Summary and Conclusion

G-20 officials are likely to be concernedabout the need for reforms to better anticipateand defend against future economic crises,restore balance to global financial flows, andintroduce mechanisms for a smoother andmore fool-proof process of risk determinationto regulate cross-border financial flows andinvestments. Can and will such controls be

17

Forces that would interruptglobalization andthose that wouldpromote it areboth present.

introduced appropriately? Or will regulatorsovershoot and lengthen the time of recoveringfrom the current crisis and end up stiflinglong-term economic growth?

G-20 officials focused on designing an eco-nomic and financial regulatory order duringseveral recent conclaves. Their September 2009conclave in Pittsburgh, Pennsylvania, released a58-point resolution aimed at strengtheningfinancial regulations to ensure greater stability,openness, and transparency of financial insti-tutions’ transactions and introduce periodicpeer reviews and “early warning systems” tocheck if systemic risks are heightened.59

The resolution clearly indicates that G-20officials are likely to focus on financial sectorregulations because the last recession was trig-gered by poor investment decisions by thelargest multinational financial institutions.But the next crisis is unlikely to repeat the mis-takes of the current one. Changes in countryprofiles, of endowed resources, skills, work-force compositions, and so on are likely tooccur, indeed, more rapidly than in the past.G-20 lawmakers should, therefore, also con-sider ancillary objectives, given prospectivedevelopmental needs of different countries.

The key issue facing developed economiesis future population aging. The key issue foremerging economies is maximizing the useof their resource bases while minimizingvolatility from openness to global trade andcapital flows. Both objectives appear to becomplementary rather than contradictoryand should induce participants to acceleratethe process of globalization.

Several other areas should also be ad-dressed:

On immigration. The first Bretton Woodssystem adopted immigration limits to servenational welfare state objectives and satisfypolitical preferences in democratic developedcountries. Some analysts recommend that thenext world economic order should achieve a“feasible globalization” via multilateral visaschemes to temporarily expand entry into theadvanced nations of a mix of skilled andunskilled workers from developing nations.60

However, others believe that with the advent of

new technologies, the physical relocation of alarge number of workers to developed coun-tries is not necessary. A reversal of capital flows,from North to South, would be necessary toemploy those workers, increase their incomes,and generate greater output for sustainingaging populations in developed countries aswell—a win-win result from increased global-ization.61 Such a scheme would likely increaseincomes significantly despite a relatively smallincrease in cross-border worker migration.

On social insurance. If developed nationselect to provide support for low-wage work-ers, that support should be based on policiesthat do not disincentivize employment andoutput. Welfare benefits without considera-tion of employment effects should be reject-ed in favor of wage subsidies. The latterwould increase employment and possiblyoutput, on net, but only if wage subsidies arephased out earlier along the income scale soas to minimize the work disincentives amongintermediate skill workers. A second consid-eration is greater human capital acquisitionthrough improved education and workertraining: better assimilation of immigrantand low-wage populations into the nationaland cultural mainstream, and transmissionof a good work ethic and civic values to thenext generation. Policies for improving andsustaining such “community effects” wouldrender prospective economic challenges ofdeveloped countries easier to meet.

On capital flows. The new economic orderappears likely to focus on subjecting privatefinancial institutions to more stringent regu-lations so as to reduce their risk exposures. Butthat would constrain global capital flows,whereas the need is to expand them—and notjust in the short-term to hasten recovery fromthe current recession. The key for expandingcapital flows, especially toward “South” coun-tries, is reforming emerging countries’ finan-cial systems: better corporate governance, lesscorruption, and growth-oriented macro-eco-nomic policies. These reforms are in the inter-ests of both developed and developing econ-omies as the gains would flow to both. Indeed,the goal of expanding world financial flows,

18

The financial crisis hasincreased

skepticism aboutwhether the

United States canavoid weakening

the dollarthrough higher

domestic inflation.

especially within the South and from North toSouth, is consistent with the vision expressedat the Pittsburgh G-20 summit—of a shiftaway from dependence on the United States asthe “consumer of last resort,” toward greaterparticipation by developing economies where-in consumers with access to financial re-sources can enjoy better and more stable livingstandards.

Other than the United States, no countryor group of nations appears interested or iscapable of steering the global economy backto normalcy and promoting further globaleconomic integration. But whether theUnited States can successfully pursue such acourse will depend on whether it can main-tain a strong domestic economy. The finan-cial crisis has increased skepticism aboutwhether the United States can avoid weaken-ing the dollar through higher domestic infla-tion. And doubts about political will amongU.S. lawmakers to soon reduce unfundedsocial spending commitments to manage-able size are growing. Surmounting bothchallenges early is essential for maintainingeconomic vitality through low taxes and pre-serve progress achieved through globaliza-tion during the last five decades.

NotesThe author thanks Angela Erickson for extensiveand valuable research assistance.

1. Ann Harrison, “Globalization and Poverty: Whatis the Evidence,” NBER Working Paper no. 12347(June 2006).

2. Pinelopi Koujianou Goldberg and Nina Pavcnik,“Distributional Effects of Globalization in Develop-ing Countries,” Journal of Economic Literature 45, no.1(March 2007): 39–82.

3. See Simon Evenett, “What Can Be Learnedfrom Crisis Era Protectionism: An Initial Assess-ment,” Business and Politics 11, no. 3 (2004), http://www.bepress.com/bap/vol11/iss3/art4/.

4. Frederic S. Mishkin, “Is Financial Globali-zation Beneficial?” Journal of Money, Credit andBanking 39, no. 2–3 (March –April 2007): 259–94.

5. Robert J. Samuelson, The Great Inflation and Its

Aftermath (New York: Random House, 2008).

6. Paul Krugman and Anthony J. Venables, “Glob-alization and the Inequality of Nations,” QuarterlyJournal of Economics 110, no. 4 (November 1995):857–80.

7. Paul Beaudry and Fabrice Collard, “Globaliza-tion, Returns to Accumulation and the WorldDistribution of Output per Worker,” Journal ofMonetary Economics 53, no.5 (2006): 879–909.

8. Globalization benefits all workers, on net, be-cause it reduces the prices of goods and servicesthrough cheaper imports. Therefore, althoughglobalization can make some workers worse off rel-ative to others, the collective absolute welfare of theloser groups could, in principle, be improved.

9. Kevin H. O’Rourke, “Heckscher-Ohlin Theoryand Individual Attitudes toward Globalization,” inEli Heckscher, International Trade, and EconomicHistory, ed. R. Findlay et al. (Boston: MIT Press2006), pp. 107–38.

10. Note that many so-called free trade agree-ments include protectionist provisions for main-taining subsidies to certain domestic industriesand worker groups such as agriculture, steel, min-ing, and so on.

11. Michael D. Bordo and Antu Panini Murshid,“Globalization and Changing Patterns in theInternational Transmission of Shocks in Finan-cial Markets,” Journal of International Money andFinance 25, no. 4 (2006): 655–74. This analysisobviously excludes the recent financial and eco-nomic crisis.

12. Philippe Martin and Hélène Rey, “Globaliza-tion and Emerging Markets: With or WithoutCrash?” American Economic Review 96, no. 5 (De-cember 2006): 1631–51.

13. Dani Rodrik, “Trade, Social Insurance, and theLimits to Globalization,” NBER Working Paperno. 5905 (January 1997); and Anna Maria Mayda,Kevin O’Rourke and Richard Sinnott, “Risk, Gov-ernment and Globalization: International SurveyEvidence,” NBER Working Paper no. 13037 (April2007).

14. Goldberg and Pavcnik, pp. 39–82.

15. Yuriy Gorodnichenko, Jan Svejnar, andKatherine Terrell, “Globalization and Innovationin Emerging Markets,” NBER Working Paper no.14481 (November 2008).

16. Vanessa Strauss-Kahn, “The Role of Globali-zation in the Within-Industry Shift Away from

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Unskilled Workers in France,” in Challenges toGlobalization, ed. R. Baldwin and A. Winters (Uni-versity of Chicago Press 2004): 209–33.

17. Beaudry and Collard, pp. 879–909.

18. Robert C. Feenstra and Gordon H. Hanson,“Globalization, Outsourcing, and Wage Inequal-ity,” American Economic Review 86, no. 2 (May1996): 240–45.

19. Peter H. Lindert and Jeffrey G. Williamson,“Does Globalization Make the World More Un-equal?” in Globalization in Historical Perspective, ed.Michael D. Bordo, Alan M. Taylor, and Jeffrey G.Williamson (Chicago: University of Chicago Pressfor the NBER, 2003): 227–70.

20. Kenneth Scheve and Matthew J. Slaughter,“Economic Insecurity and the Globalization ofProduction,” American Journal of Political Science 48,no. 4 (October 2004): 662–74.

21. Edmund S. Phelps, “Raising the Employmentand Pay of the Working Poor: Low-Wage Employ-ment Subsidies Versus the Welfare State,” AEAPapers and Proceedings 84, no. 2 (May 1994): 54–58.

22. Daniel Chiquiar and Gordon H. Hanson, “In-ternational Migration, Self-Selection, and theDistribution of Wages: Evidence from Mexicoand the United States,” Journal of Political Economy11, no. 3 (April 2005): 239–41.

23. For example, Gianmarco I. P. Ottaviano andGiovanni Peri, “Rethinking the Effects of Immigra-tion on Wages,” NBER Working Paper no. 12497(August 2006); and Francesco D’Amuri, GianmarcoI. P. Ottaviano, and Giovanni Peri, “The Labor Mar-ket Impact of Immigration in Western Germany inthe 1990s,” NBER Working Paper no. 13851(March 2008).

24. Hans-Werner Sinn, “Migrations and SocialReplacement Incomes: How to Protect Low-Income Workers in the Industrialized Countriesagainst the Forces of Globalization and MarketIntegration,” International Tax and Public Finance12 (2005): 375–93.

25. Randy et al., “A Profile of the Low-Wage Im-migrant Workforce,” Immigrant Families andWorkers Brief no. 4 (November 2003).

26. Anne Herm, “Recent Migration Trends: Citi-zens of EU-27 Member States Become Ever MoreMobile while EU Remains Attractive to Non-EUCitizens,” European Commission: Eurostat, No-vember 18, 2008.

27. Phelps, pp. 54–58.

28. Jill Constantine and David Neumark, “Train-ing and the Growth of Wage Inequality,” IndustrialRelations (1996):491–510.

29. Daron Acemoglu and Steve Pischke, “BeyondBecker: Training in Imperfect Labor Markets,”Economic Journal Features 109 (February 1999):F112–F142.

30. John S. Levin, “Public Policy, Community Col-leges, and the Path to Globalization,” HigherEducation 42, no. 2 (September 2001): 237–62.

31. Note that income effects of wage subsidiesgenerally discourage work effort at higher wagelevels.

32. James J. Heckman, Lance Lochner, and RicardoCossa, “Learning-by-Doing vs. On-the-Job Train-ing: Using Variation Induced by the EITC toDistinguish between Models of Skill Formation,”NBER Working Paper 9083 (July 2002). The studycautions that the average effect of a wage subsidyon work and skill acquisition responses couldmask considerable heterogeneity across workergroups. However, low-wage workers would general-ly work more and thereby acquire skills.

33. Jeffrey S. DeSimone, Mark Holmes, and NickRupp, “Does School Choice Improve SchoolQuality? Evidence from North Carolina CharterSchools, chap. 6 in Improving School Accountability:Check•Ups or Choice, ed. Timothy J. Gronberg andDennis W. Jansen (Rockville, MD: Elsevier, 2006),pp. 131–55.

34. David Neumark and Mary Joyce, “EvaluatingSchool-to-Work Programs using the new NLSY,”NBER Working Paper no. 7719 (May 2000).

35. David Neumark, “Alternative Labor MarketPolicies to Increase Economic Self-Sufficiency:Mandating Higher Wages, Subsidizing Employ-ment, and Raising Productivity,” NBER WorkingPaper no. 14807 (March 2009).

36. Ibid.; and Stuart Landon, “High School Enroll-ment, Minimum Wages and Education Spend-ing,” Canadian Public Policy 23, no. 2 (June 1997):141–63.

37. Dhaval M. Dave, Nancy E. Reichman, andHope Corman, “Effects of Welfare Reform on Ed-ucational Acquisition of Young Adult Women,”NBER Working Paper no. 14466 (November2008).

38. Michael D. Bordo and Marc Flandreau, “Core,Periphery, Exchange Rate Regimes, and Globaliz-ation,” NBER Working Paper no. 8584 (November2001).

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39. Jagdish Bhagwati, “The Capital Myth: The Dif-ference between Trade in Widgets and Dollars,”Foreign Affairs 77, no. 3 (May–June 1998): 7.

40. M. Ayhan Kose et al., “Financial Globalization:A Reappraisal,” International Monetary FundStaff Papers (April 2009).

41. Alon Binyamini and Assaf Razin, “Inflation-Output Tradeoff as an Equilibrium Outcome ofGlobalization,” Israel Economic Review (December2008); Frederic S. Mishkin, “Globalization, Macro-economic Performance, and Monetary Policy,”Journal of Money, Credit and Banking Suppl. no. 41,no. 1 (February 2009): 187–96.

42. Fernando A. Broner and Jaume Ventura,“Globalization and Risk Sharing,” NBER WorkingPaper no. 12482 (August 2006).

43. Juan Carlos Hallak and Jim Levinsohn,“Fooling Ourselves: Evaluating the Globalizationand Growth Debate,” in The Future of Globalization:Explorations in Light of Recent Turbulence, ed. E.Zedillo (London and New York: Routledge, 2008).

44. Peter L. Rousseau and Richard Sylla, “FinancialSystems, Economic Growth, and Globalization,”in Globalization in Historical Perspective, ed. M.Bordo, A. Taylor, and J. Williamson (Chicago: Uni-versity of Chicago Press 2003), pp. 373–413.

45. Michael Bordo, Barry Eichengreen, and Doug-las A. Irwin, “Is Globalization Today Really Differ-ent than Globalization a Hundred Years Ago?”Wirtschafts Politische Blätter 2 (2000): 121–29.

46. Mishkin, “Globalization, MacroeconomicPerformance, and Monetary Policy,” pp. 187–96.

47. Martin and Rey, pp. 1631–51.

48. Joshua Aizenman and Yothin Jinjarak, “Glob-alization and Developing Countries: A ShrinkingTax Base?” Journal of Development Studies 45, no. 5(2009): 653–71.

49. The total dependency ratio, which includeschildren and retirees as dependents, will increasefrom 49 percent in 2008 to 75 percent by 2050 inthe 27 European Union countries.

50. Note that this estimation is qualitatively dif-ferent than typical intergenerational transfer cal-culations, which assume that retiree living stan-dards will be maintained at the same level as thoseof retirees in 2010. The normal exercise is to inves-tigate the implications of allowing retiree livingstandards to grow with average economywidewages. It is different in yet another way: returns tocapital owned by retirees is an important compo-

nent of retiree incomes, helping to maintainretiree living standards. Usually, capital income isnot considered when calculating the generosity ofsocial insurance programs by measuring itemssuch as the rate at which benefits replace pre-retirement labor earnings.

51. “Paying for the Grey: The 2009 Aging Report,”European Economy (July 2008); and “Public Fi-nances in EMU,” European Economy (April 2008),both from the directorate general for economicand financial affairs.

52. Prospective population growth is set to 0.3percent per year (including current immigration).However, the worker population is assumed togrow at negative 0.1 percent per year, whereas thepopulation of retirees, initially set at just 25 per-cent of the working population, grows at 1.6 per-cent per year. These growth rates deliver an old-age dependency ratio of 0.50 by 2050. The growthrate of the capital stock is set to 0.7 percent peryear; capital’s share in output is set to be 35 per-cent; total-factor productivity growth is set to 1.1percent per year; and it is assumed that 75 percentof capital is owned by the country’s retirees, therest being owned by domestic workers and for-eigners. Capital returns help to sustain retiree liv-ing standards, although with a growing numberof retirees, the amount of capital per retiree wouldalso decline under a fixed growth rate of the capi-tal stock. The Social Security payroll tax rate isassumed to be 15 percent in 2010—calibratedaccording to the share of social contributions inGDP averaged over 27 EU countries.

53. The medium-term increase in the payroll taxrate and decline in retiree living standards occursbecause the worker-to-beneficiary ratio continuesto decline for a few years after 2010 despite fasterimmigration. It takes more than three decades foradditional immigration and the associatedincrease in the returns to capital to become sig-nificant enough to fully offset the effects of adeclining worker-to-beneficiary ratio on retireeliving standards.

54. Ravi Jagannathan, Mudit Kapoor and ErnstSchaumburg, “Why Are We in a Recession? TheFinancial Crisis Is the Symptom not the Disease!”NBER Working Paper no. 15404 (October 2009).

55. Indeed, historical evidence in the area of laborregulations shows that although domestic pres-sures gave rise to a latent appeal for labor regula-tions, nations acquiesced to these demands onlywhen their major trading partners had previouslypassed comparable pieces of legislation. The out-come was a level playing field in labor laws acrosstrading partners. Such evidence of robust comple-mentarities between trade and regulation stands in

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opposition to the frequent claim, espoused in thelate 19th century and echoed in the current wave ofglobalization, that competitive forces drive laborstandards down in a race to the bottom. A similardevelopment may be feasible in other sectors aswell, driven by the need to expand access resourcesand markets located abroad. See MichaelHuberman and Christopher M. Meissner, “Ridingthe Wave of Trade: Explaining the Rise of LaborRegulation in the Golden Age of Globalization,”NBER Working Paper no. 15374 (September 2009).

56. The qualification is motivated by the ongoingdebate among political economists about thenature of the United States as an imperialist pow-er in seeking the glories of “empire.” ManyAmerican commentators on the left and the rightargue against the United States pursuing goalssimilar to those of Great Britain during the 19thand early 20th centuries—to avoid sacrificing lib-

erty at home for the sake of power abroad. SeeNiall Ferguson, Empire (New York: Basic Books,2002).

57. Jeffrey Garten, “We Must Get Ready for aWeak Dollar World,” Financial Times, November30, 2009, p. 11.

58. This point was also made by Deepak Lal in aspeech at the Metropolitan Club, WashingtonDC, December 14, 2009.

59. (G-20) “Leaders’ Statement: The PittsburghSummit ” September 24–25, 2009.

60. Dani Rodrik, “Feasible Globalizations,” inGlobalization: What’s New? Ed. M. Weinstein (NewYork: Columbia University Press, 2005).

61. Jagannathan, Kapoor, and Schaumburg.

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STUDIES IN THE POLICY ANALYSIS SERIES

658. The Libertarian Vote in the Age of Obama by David Kirby and David Boaz (January 21, 2010)

657. The Massachusetts Health Plan: Much Pain, Little Gain by Aaron Yelowitz and Michael F. Cannon (January 20, 2010)

656. Obama’s Prescription for Low-Wage Workers High Implicit Taxes, Higher Premiums by Michael F. Cannon (January 13, 2010)

655. Three Decades of Politics and Failed Policies at HUD by Tad DeHaven(November 23, 2009)

654. Bending the Productivity Curve: Why America Leads the World in Medical Innovation by Glen Whitman and Raymond Raad (November 18, 2009)

653. The Myth of the Compact City: Why Compact Development Is Not the Wayto Reduce Carbon Dioxide Emissions by Randal O’Toole (November 18, 2009)

652. Attack of the Utility Monsters: The New Threats to Free Speech by Jason Kuznicki (November 16, 2009)

651. Fairness 2.0: Media Content Regulation in the 21st Century by Robert Corn-Revere (November 10, 2009)

650. Yes, Mr President: A Free Market Can Fix Health Care by Michael F. Cannon (October 21, 2009)

649. Somalia, Redux: A More Hands-Off Approach by David Axe (October 12, 2009)

648. Would a Stricter Fed Policy and Financial Regulation Have Averted the Financial Crisis? by Jagadeesh Gokhale and Peter Van Doren (October 8, 2009)

647. Why Sustainability Standards for Biofuel Production Make Little Economic Sense by Harry de Gorter and David R. Just (October 7, 2009)

646. How Urban Planners Caused the Housing Bubble by Randal O’Toole (October 1, 2009)

645. Vallejo Con Dios: Why Public Sector Unionism Is a Bad Deal for Taxpayers and Representative Government by Don Bellante, David Denholm, and Ivan Osorio (September 28, 2009)

644. Getting What You Paid For—Paying For What You Get: Proposals for theNext Transportation Reauthorization by Randal O’Toole (September 15, 2009)

643. Halfway to Where? Answering the Key Questions of Health Care Reformby Michael Tanner (September 9, 2009)

642. Fannie Med? Why a “Public Option” Is Hazardous to Your Health by Michael F. Cannon (July 27, 2009)

641. The Poverty of Preschool Promises: Saving Children and Money with theEarly Education Tax Credit by Adam B. Schaeffer (August 3, 2009)

640. Thinking Clearly about Economic Inequality by Will Wilkinson (July 14, 2009)

639. Broadcast Localism and the Lessons of the Fairness Doctrine by John Samples (May 27, 2009)

638. Obamacare to Come: Seven Bad Ideas for Health Care Reformby Michael Tanner (May 21, 2009)

637. Bright Lines and Bailouts: To Bail or Not To Bail, That Is the Questionby Vern McKinley and Gary Gegenheimer (April 21, 2009)

636. Pakistan and the Future of U.S. Policy by Malou Innocent (April 13, 2009)

635. NATO at 60: A Hollow Alliance by Ted Galen Carpenter (March 30, 2009)

634. Financial Crisis and Public Policy by Jagadeesh Gokhale (March 23, 2009)

633. Health-Status Insurance: How Markets Can Provide Health Securityby John H. Cochrane (February 18, 2009)

632. A Better Way to Generate and Use Comparative-Effectiveness Researchby Michael F. Cannon (February 6, 2009)

631. Troubled Neighbor: Mexico’s Drug Violence Poses a Threat to the United States by Ted Galen Carpenter (February 2, 2009)

630. A Matter of Trust: Why Congress Should Turn Federal Lands into Fiduciary Trusts by Randal O’Toole (January 15, 2009)

629. Unbearable Burden? Living and Paying Student Loans as a First-Year Teacher by Neal McCluskey (December 15, 2008)

628. The Case against Government Intervention in Energy Markets: Revisited Once Again by Richard L. Gordon (December 1, 2008)

627. A Federal Renewable Electricity Requirement: What’s Not to Like?by Robert J. Michaels (November 13, 2008)

626. The Durable Internet: Preserving Network Neutrality without Regulation by Timothy B. Lee (November 12, 2008)

625. High-Speed Rail: The Wrong Road for America by Randal O’Toole (October 31, 2008)

624. Fiscal Policy Report Card on America’s Governors: 2008 by Chris Edwards(October 20, 2008)

623. Two Kinds of Change: Comparing the Candidates on Foreign Policyby Justin Logan (October 14, 2008)

622. A Critique of the National Popular Vote Plan for Electing the President by John Samples (October 13, 2008)