Tuesday, January 20, 2004

Federal Reserve Chairman Alan Greenspan, the former swing-band musician who studied at Julliard, has hauled out his trombone again. This time, he’s been warning the world’s politicians about the growing dangers that “creeping protectionism” poses to the international financial system.

Unlike his one-stop concert in August, when he used his metaphorical horn as Fed chairman to declare that U.S. short-term interest rates would remain low for a considerable period, Mr. Greenspan recently has been playing the international circuit. His latest venues have included the 21st Annual Monetary Conference in the U.S. capital (Nov. 20); the World Affairs Council of Greater Dallas (Dec. 11); and the Bundesbank in Berlin (Jan. 13). At all three stops, Mr. Greenspan played the same tune. The only difference is that with each rendition the music has, rightly, become louder.

Apparently, the developments precipitating Mr. Greenspan’s embarkation upon a national and trans-Atlantic concert tour were the intensifying protectionist pressures in the United States and the September collapse of world trade talks in Cancun, Mexico. From November to January, his message has been as consistent as it has been emphatic: “[I]t is imperative that creeping protectionism be thwarted and reversed.”

In all three policy speeches, Mr. Greenspan has addressed the evolving American international payments imbalance, which has manifested itself in recent years in rapidly expanding U.S. current account deficits. His purpose has been to describe the kind of international economic atmosphere that would be best for the benign resolution of this growing imbalance.

Mr. Greenspan’s alarm-sounding speeches have been delivered in the context of “spreading globalization,” which, he readily acknowledges, has increasingly affected domestic economies around the globe over the past decade or so. He also recognizes that the “low-hanging trade agreement fruit” has already been picked during the nearly half-century of successful trade negotiations.

He further admits that the remaining issues, such as agricultural subsidies, which were principally responsible for the Cancun collapse, are understandably more difficult to resolve than previous trade barriers. Nevertheless, Mr. Greenspan implores, thwarting and reversing the trend toward “creeping protectionism” has become all the more urgent. That is because one of the collateral benefits of globalization has been the fostering of a high degree of flexibility in international financial intermediation. That financial flexibility has facilitated the relentless rise in living standards that trade has made possible. It is the flexibility of such a system, he argues, that will make possible the benign resolution of America’s current account imbalance.

Citing the recent experience of the United States, which has the industrial world’s most flexible economy, Mr. Greenspan takes note of the “ability of our economy to withstand a number of severe shocks since mid-2000, with only a small, temporary decline in real GDP.” If extensive flexibility has produced such indisputable benefits for the U.S. economy, he reasons, the consequences of international flexibility would be equally beneficial. He reasonably concludes that the greater the degree of international flexibility there is, the less risk of an international crisis there will be as the record U.S. current account imbalance is resolved. “The costs of any new protectionist initiatives, in the context of wide current account imbalances, could significantly erode the flexibility of the global economy,” he warned in Berlin. In today’s far more globalized financial world, the consequences of moving in the protectionist direction, he earlier cautioned in Dallas, “could be unexpectedly destabilizing,” causing America to “pay a price for doing so — perhaps a rather large price.”

While open-market economies by definition subject their participants to intense competitive pressures from around the world, Mr. Greenspan offers an unambiguous conclusion regarding the historical benefits of free trade: “On net, vigorous economic competition over the years has produced a significant rise in the quality of life for the vast majority of the population in market-oriented economies, including those at the bottom of the income distribution.”

By trumpeting this unwavering warning over the past three months from Washington to Dallas to Berlin, Mr. Greenspan clearly wants his tune heard worldwide. It may not be sweet music to the ears of politicians around the world who are responsible for making the tough trade decisions that will maintain the indispensable flexibility in international finance. But it is music they will ignore at their peril and to the long-term detriment of their citizens.

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