Jackson Hole: Globalization Applauded, Policy Avoided
Sunday August 27th, 2006 / 19h56
easybourse.com
By Brian Blackstone
Of DOW JONES NEWSWIRES
JACKSON HOLE, Wyo. -(Dow Jones)- At the start of the Federal Reserve Bank of Kansas City's symposium on globalization, participants were given a small backpack produced by a Kansas company.
The bags are designed, marketed and, if needed, embroidered in Kansas, but mostly manufactured in China.
It was cited by the conference host, Kansas City Fed President Thomas Hoenig, as an example of the benefits of globalization. And not surprisingly, globalization got a ringing endorsement from global central bankers and private-sector economists who met in Jackson Hole Friday and Saturday.
Still, some differences were apparent on issues like how best to respond to globalization's effect on prices and whether large current account imbalances were signs of strength or weakness.
On balance, there was broad agreement that globalization makes the jobs of central bankers to contain price pressures and stabilize output easier.
"Globalization creates favorable milieu for maintaining low inflation by flattening the output-inflation tradeoff faced by central banks," Harvard Professor and former International Monetary Fund Research Director Kenneth Rogoff wrote in a paper delivered at the conference.
Globalization creates "the potential for continued improvements in productivity and living standards and for a reduction in global poverty," Fed Chairman Ben Bernanke said in a speech at the start of the symposium.
Bernanke, like other speakers, stuck to the big picture topic of globalization and didn't venture into the near-term policy outlook.
For the Fed, the lack of any guidance on the near-term outlook suggests policy remains dependent on economic data, making this week's figures on inflation and employment critical for the September Fed meeting.
At the symposium, Princeton Economists Gene Grossman and Esteban Rossi-Hansberg took on opponents of offshoring by arguing that global trade has no more impact on wages than productivity, and "no reasonable economist, commentator, or policy maker has ever raised her voice against improvements in labor productivity."
Still, Bernanke argued that opponents of globalization must be heard to create a consensus toward world economic integration.
"The challenge for policy-makers is to ensure that the benefits of global economic integration are sufficiently widely shared...that a consensus for a welfare-enhancing change can be obtained," Bernanke said.
In a nod to that view, the conference included discussions on growth strategies for Africa, South Asia and Latin America.
Globalization is "beneficial" to the pursuit of low and stable inflation, said Charles Bean, chief economist at the Bank of England. Yet while it provides a "favorable tailwind," to central bankers, Bean noted that those winds can be "changeable."
Headline Vs. Core Inflation
Indeed, symposium participants noted that there are inflationary flip-sides to globalization as well. And differences seemed apparent over how central banks should account for the upside and downside price effects.
Bean, for instance, noted that the rise in oil prices in recent years is owed in part to faster global growth, which central bankers should bear in mind when they decide which inflation measures to focus on.
"The fact that the rise in global oil prices is the flip side of the globalization shock to me renders highly suspect the practice of focusing on measures of core inflation that strip out energy prices while retaining the falling goods prices," Bean told the Jackson Hole audience, which included the majority of Federal Open Market Committee members.
The BOE has an inflation target of 2% for the overall consumer price index, and aims to keep inflation within one percentage point around that level.
The European Central Bank also targets overall inflation, in the ECB's case under 2% over the medium term. Both the BOE and ECB hiked rates this month, while the Fed kept rates steady in August for the first time in over two years, betting that slower demand growth will trim price pressures.
The Fed doesn't have an official inflation target, though it's thought to have a 1% to 2% "comfort zone" for the core personal consumption expenditures price index, which - unlike inflation gauges used by European offfials - excludes food and energy.
Differences Over Current Account
There were different views over the importance of the U.S. current account deficit to the global economic outlook.
Martin Feldstein, head of the National Bureau of Economic Research, said "too little attention" was paid in Jackson Hole to the U.S. current account gap, the consequences of which he thinks will dominate monetary policy in coming years.
"The major international challenge for the Fed (and other major central banks) will be managing their economies through declining current account deficits" in the U.S., Feldstein said.
In the Fed's case, it could mean both rising real interest rates and a falling dollar, Feldstein noted.
Yet one notable paper, written by IMF Research Director Raghuram Rajan, concluded that the U.S. current account gap, and China's huge surpluses, aren't so unusual. He found that developing countries like China that run current account surpluses tend to grow faster, as do developed countries like the U.S. that run large deficits.
"Neither China nor the United States, both fast growing countries for their stage of development, are running perverse current account balances relative to the norm," he concluded. "They are just extreme examples of their respective class of country."
When and how the U.S. current account adjusts remains a wild card for the global economy. After all, while global production is increasingly integrated, global sources of demand still rest largely with U.S. consumers.
Arminio Fraga, former central bank governor of Brazil and now chief executive of Gavea Investimentos, noted at the conclusion of the Jackson Hole conference that there is "a lot of burden" on U.S. consumers.
"Can the world make up for what is maybe a deeper slowdown than the markets are pricing in?" he asked.
-By Brian Blackstone; Dow Jones Newswires; 202-828-3397; brian.blackstone@dowjones.com
Sunday August 27th, 2006 / 19h5 |
