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Tom Friedman will be pissed: There's a new paper out from the National Bureau of Economic Research that suggests the increase in workers around the world due to globalization and free trade led to the financial crisis, mainly because their home countries weren't prepared to participate in a modern economy.
As workers from developing nations moved to compete on the economic stage, the money they made and the world’s inability to absorb that new wealth helped fuel the crisis.Why did newfound wealth cause such woe? First, many of these nations had issues with domestic demand and exported their rising savings, giving Wall Street the liquidity that eventually landed the financial system in hot water. That capital was in part forced overseas because of undeveloped local financial markets and legal issues. The problem was exacerbated by short-sighted currency policies pursued by developing-world governments.This flood of developing-world investment entered the U.S. and created “perverse incentives” across the economy, leading to the meltdown in finance. The researchers deem what struck the U.S. economy over the past two years as but a “symptom” of the broader impact of all these new workers.At the NBER Web site, the paper's summary concludes that "a sustainable recovery will only occur when the natural flow of capital from developed to developing nations is restored." That is why the American government is so bullish on the idea of "rebalancing" the economic relationship between the U.S. and China in such a way that Chinese demand picks up the slack from the American consumer who had been driving global growth. Even now, low U.S. demand is hurting recovery here at home.
-- Tim Fernholz
