Chrystia Freeland

Mitt Romney’s thumping victory in the Florida primary this week is bringing us closer to a Romney-Obama face-off in the autumn. While we do not know for sure if Romney will clinch the Republican nomination, if he does, we can already say what the central question in November will be: Is the United States one nation under God, or has it become a country where the government needs to secure a better deal for the 99 percent?

We know Romney’s view. In a television interview last month, he explained: “When you have a president encouraging the idea of dividing America based on the 99 percent versus 1 percent — and those people who have been most successful will be in the 1 percent — you have opened up a whole new wave of approach in this country which is entirely inconsistent with the concept of one nation under God.”

Meanwhile, in his State of the Union address, the president opted explicitly for the 99 percent perspective. Restoring their fortunes is “the defining issue of our time,” he said. “No challenge is more urgent. No debate more important. We can either settle for a country where a shrinking number of people do really well, while a growing number of Americans barely get by, or we can restore an economy where everyone gets a fair shot, and everyone does their fair share, and everyone plays by the same set of rules.”

The Obama analysis gets a lift from “The China Syndrome,” a recent paper on the impact of trade with China by a powerful troika of economists: David H. Autor, David Dorn and Gordon H. Hanson. The empirical study, which was cited in an important speech on inequality a few weeks ago by Alan Krueger, chairman of the president’s Council of Economic Advisers, is particularly significant because it marks a shift in consensus thinking in the academy.

In the debate about the causes of growing income inequality, U.S. economists have tended to opt for technology as the driving force. Indeed, in his remarks, Krueger referred to a survey he did of those economists, who overwhelmingly cited technological change as the most important factor.

But drawing on detailed data from local labor markets in the United States, the authors of the “The China Syndrome” argue that globalization, and in particular trade with China, is having a huge impact on blue-collar U.S. workers: “Conservatively, it explains one-quarter of the contemporaneous aggregate decline in U.S. manufacturing employment.”

The deleterious effects go beyond those workers who lose their jobs. In communities hit by the China Syndrome, wages fall — particularly, it turns out, outside the manufacturing sector — and some people stop looking for work. The result is “a steep drop in the average earnings of households.” Uncle Sam gets hit, too, especially in the form of increased disability payouts.

Autor, Dorn and Hanson are no protectionists. But in a challenge to the “one nation under God” view of the world, they offer a sharp reminder that the costs and benefits of trade are unevenly shared. As they put it, their finding does not “contradict the logic” of arguments favoring free trade: “It just highlights trade’s distributional consequences.”

When I raised the issue with Joseph E. Stiglitz, the Nobel economics laureate and longtime doomsayer about the downside of globalization, he practically crowed with vindication. “The economic theory is very clear,” he said. “What happens when you bring together countries which are very different, like the United States and China, is that the wages in the high-wage country get depressed down. This was predictable. Full globalization would in fact mean the wages in the United States would be the same as the wages in China. That’s what you mean by a perfect market. We don’t like that.”

The truth is we are no longer living in “one nation under God”; we are living in one world under God. Globalization is working — the world overall is getting richer. But a lot of the costs of that transition are being borne by specific groups of workers in the developed West.

We are accustomed to thinking of the left as having an internationalist perspective. Liberals are the sort of people who worry about poverty in Africa or the education of girls in India. The irony today is that the real internationalists are no longer the bleeding-heart liberals, they are the cutthroat titans of capital.

Here, for instance, is what Steve Miller, the chairman of insurance giant American International Group and one of Detroit’s legendary turnaround bosses, had to say about globalization and jobs. “Well, first off, as a citizen of the world, I think everyone around the world, no matter what country they’re in, should have the opportunities that we have gotten used to in the United States. Globalization is here. It’s a fact of life; it’s not going away. And it does mean that for different levels of skill, there’s going to be something of a leveling out of pay scales that go with it, particularly for jobs that are mobile, if the products can be moved, which is not everything.”

No matter what passport you hold, if you run or own a global company, that is not really a big deal. But as Autor, Dorn and Hanson show, if you are a U.S. worker, that “leveling out” can be painful indeed.

Smart policy, however, can make a big difference. Europe may not seem to have much to teach the rest of the world at the moment, but as Chancellor Angela Merkel leads a group of German industrialists to Guangzhou this week, Americans might want to study how Germany has turned the China Syndrome to the benefit of both its chief executives and its blue-collar workers.

It was striking to hear how encouraged both Klaus Kleinfeld and Dominic Barton sounded when Chrystia asked them about the effects of the recent turmoil in the Middle East on the business environment there. Barton believed the regime changes in Tunisia and Egypt were “the dawn of a new good thing that’s occurring” and noted that it is likely that new capital will come into these countries as a new leadership emerges. Kleinfeld, whose company is in the process of building the world’s largest integrated aluminum system in Saudi Arabia, said that Alcoa is still very comfortable in the region and that the only surprises with their Saudi partners have been positive surprises. For Kleinfeld, the most assured way to bring about stability in a region plagued by unrest is to have businesses come in and create jobs:

If there’s one thing that the Middle East needs particularly for the young — as well as well-educated people — it’s jobs. And it does it in a region which typically has not had much of an economic growth around Ras Azzour. So that’s all very, very good. And not just for us as a company but also for the region. And it’s gonna have a stabilizing as well as a kind of uplifting, positive element

Like Saudi Arabia, China has a large population that accepts a level of repression so long as the leadership can deliver economic growth. Barton, a China expert who headed McKinsey’s Asia operations before ascending to the consultancy’s top spot, said that he did not think that dissent in China would spillover and create a Middle-East-style uprising because the Chinese Communist Party has been able to stay on top of job growth. He had an interesting anecdote about McKinsey’s study on the effectiveness of China’s stimulus plan that illustrated the leadership’s obsession with maintaining growth:

During the financial crisis, there was a stimulation program that was being put in place. And we’d been asked, almost ordered to do work to figure out what sort of discount should you put on TVs in tier three cities? It was a very focused question. And the reason was they were trying to create consumer demand in a very sophisticated manner. Do you sort of drop the price by 25 percent or do you have people buy it and they get a 25 percent rebate from the mayor? That was literally the thing.

And as we were talking about this I was amazed at how sort of precise it was. I said, you know, we gotta make sure that the impact is there and how we do — sort of doing the McKinsey thing, we wanna make sure this happens. And this guy said to me, “I think we have a different definition of impact than you.” And I said, “What’s that?” And he says, “If this doesn’t work, we’re gonna have probably 12 million people that won’t have jobs. And you should know that all of the revolutions in our 5,000 year history have occurred in the countryside.”

And so there is a revolution — it — so he was just trying to explain to me we understand how important this is, you idiot, basically.

Posted by Peter Rudegeair.

UPDATE — Since I wrote this column early on Thursday morning, my prediction (in the final paragraph), that we would today hear more about Immelt and his ideas on how to create U.S. jobs has been vindicated: President Obama this morning appointed Immelt to lead his outside panel of economic advisers. To hear more from Immelt, watch my exclusive interview with him here.

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For Jeffrey Immelt, the CEO of General Electric, the 130 year-old American industrial behemoth, the financial crisis marked the end of the age of America’s economic dominance.

“I came to GE in 1982,” Immelt told me this week in Washington. “For the first 25 years, until the bubble crashed in 2007, the American consumer was the definitive driver of the global economy.” But Immelt said the future will be different. For the next 25 years, he said, the American consumer “is not going to be the engine of global growth. It is going to be the billion people joining the middle class in Asia, it is going to be what the resource-rich countries do with their new-found wealth of high oil prices. That’s the game.” A lot of that game will be played in China. At a moment when it is compulsory on the American right to pay homage to the exceptionalism of the United States, Immelt, a life-long Republican, is matter-of-fact about China’s inevitable rise.

“It is going to be the biggest economy in the world,” Immelt said of China. “The only question is when.”

In the U.S. public discourse, the big strain in the American-Chinese economic relationship is the yuan, and what many Americans view as the government-manipulated undervaluation of the Chinese currency.

Some U.S. business people—who share Immelt’s enthusiasm for the Chinese market—are so keen to court Sino-investors that they are reluctant to publicly to criticize China’s exchange rate policy.

Immelt is bolder. He supports the open complaints from Obama and his administration about the exchange rate – but not why you might think. For the GE chief, the yuan is a valid focus of U.S. economic policy, not because of its impact on his company’s bottom line, but because of its impact on American public opinion.

Here’s how Immelt explained GE’s perspective: “Is it the one, two, three, four or five issue for GE? It isn’t, because we make and sell things in so many different countries around the world.” Yet Obama was right to complain, Immelt added, because “it’s important for the President to do the right things inside our country so that people feel like China can be a partner, and if it means sometimes you have to talk tough … then I want the President to do that.” But the GE chief had a warning for those Americans tempted to attribute China’s rise, and possibly their own country’s economic malaise, to the Chinese exchange rate.

“If the American people sit back in the comfort of their home, whether it is in Ohio or New York state, and think that the only reason the Chinese succeed is because of the cheap currency, they’re missing the point. And I think that’s dangerous.” The China challenge, in Immelt’s view, is about much more than a manipulated exchange rate and “cheap labor.” “It is the adaptability, it is the speed with which they move, it is the unanimity of purpose, it is the productivity of thought,” he said, adding that when he visits his interlocutors at the Ministry of Railways in Beijing, the mandarins are at work on Sunday.

Nor does Immelt flinch when, in conversation, it is suggested that this “business model that works for them” is Communist authoritarianism. “That has been very effective,” he said. “They’re in their 12th five-year plan and they’ve done quite well.”

Immelt thinks he knows what America needs to do to thrive in this changed world. “If you want to be a great country, which the U.S. has every right to want to be, you have got to be thinking about being a better exporter,” he said. “Our only destiny can be as a high-tech exporter, that creates jobs, high-paying jobs … Export-led growth is the key to national success.” Happily for Immelt, that national destiny would be very good indeed for high-tech manufacturers, like – to take one not very random example – GE.

Both the approach, and the man who advocates it, are finding favor in a White House keenly aware that Obama must be seen as trying to reduce stubbornly high unemployment.

Expect to hear more on Friday, when Obama and Immelt, who is a member of the President’s Economic Recovery Advisory Board, are scheduled to visit GE’s birthplace in Schenectady, N.Y., and talk about … how to create American jobs in the competitive global economy.

This fall, much of the United States seemed to have settled on a narrative for the country’s struggle to adapt, after a debilitating financial crisis, to a post-industrial and post-unipolar global economy: China and its undervalued currency are largely to blame.

Proof that this was a nationally compelling storyline came during the acrimonious midterm election campaign. U.S. politics have rarely been more polarized, but complaining about China was something both parties could agree on.

John Boehner, the presumptive new Republican Speaker of the House, attacked the Democrats for “a stimulus that shipped jobs overseas to China instead of creating jobs here at home.” Harry Reid, the Nevada Democrat who hung on to his Senate seat and his job as Majority Leader, accused his Tea Party opponent Sharron Angle of being “a foreign worker’s best friend” for supporting corporate tax breaks that helped businesses outsource jobs to China and India.

This rare bipartisan consensus is why Americans were astonished to discover, when the Group of 20 gathered in South Korea this week, that in much of the rest of the world, it is the U.S. that is seen as the world’s rogue economic player.

That sentiment erupted with particular intensity in the wake of the Federal Reserve’s decision to pump $600 billion into the economy, a measure emerging market leaders worry will release a flood of money into their countries and which Europeans fear will bring inflation. But the rest of the world’s complaints about the U.S. run deeper than Fed chairman Ben Bernanke’s resort to quantitative easing.

The U.S. criticism of China rests on a fundamental critique of its economic model – an authoritarian system which suppresses domestic demand and artificially lowers the price of its exports. Critics of the United States likewise have begun to articulate a systemic challenge to how the U.S. economy works.

That view is behind the declaration by China’s leading state-backed rating agency that there are “serious defects in the United States development and management model.” Germany has been equally forthright. Finance Minister Wolfgang Schauble told Der Spiegel: “The American growth model is … stuck in a deep crisis.”

The tricky truth is that both perspectives—the “blame China” paradigm, and the “blame America” one—are right. We are at a turning point in the world economy, one comparable to the global grinding of gears around the time of the two world wars. At this complicated and volatile moment, it just so happens that the world’s two most important economic players—the U.S. and China—aren’t fully in sync with everyone else.

Mohamed El-Erian, the CEO of bond giant Pimco, and a former International Monetary Fund economist, described the problem to me thus: “National responsibilities are conflicting with global responsibilities for both the U.S. and China. That is a real problem for the global economy.”

Seen from this perspective, China and the U.S., so often framed as rivals, actually look like twins. Both countries are preoccupied with domestic growth: China sees itself mainly as a poor country that needs to get richer, while the U.S. is grappling with a painfully slow recovery from the financial crisis. But the chosen paths to growth at home in each of these countries – a weak currency and an export-led economy for China; monetary expansion and perhaps a weaker currency for the U.S., too – are unwelcome in much of the rest of the world.

That clash, Mr. El-Erian fears, “will lead to increasingly inward-looking social and political reactions” in many countries. That’s a problem, he thinks, because today’s global economy is designed to be open: “our globalized world is now hardwired to be outward-oriented.”

Poor countries are accustomed to being told by outsiders what they need to do at home if they want to participate in the global economy; in fact, that’s one way you could define the historic role of the IMF. What is different today is that the world’s dominant economy and its rising one are the two countries whose domestic priorities are causing the greatest disruption for the rest of the world.

Small countries are used to accommodating big ones. But big countries are accustomed to setting the rules. Mr. El-Erian believes that “we will be writing about this period as an historic time of fundamental global re-alignment.” A big part of that realignment is figuring out how to balance national needs against global ones, and doing that turns out to be especially hard if you are used to determining the international rules of the game.

Tony Hsieh and Sanjay Madan wrote the program to create LinkExchange over a weekend. Before the following weekend, they had more than a dozen websites participating in their ad-sharing network. Over the next several weeks they worked frantically on the project. They refined their business in real time, learning—quickly!—from their mistakes. Less than a year later, the Harvard grads were offered $1 million (U.S.) for the company. Less than a year after that, they sold it for $265 million.

That was 1996. Since then, this story of development on the run has become commonplace. Hacker culture is now part of the broader culture: “beta test” is in the dictionary, and we accept innovative, albeit imperfect, beta releases even from multibillion-dollar global behemoths such as Google. We’re prepared to accept flaws because the tech revolution is progressing so quickly that it is usually better to be fast, and possibly wrong, than to try to be perfect and end up being slow. By the time your flawless product is released, it will likely be obsolete.

Technologists aren’t the only people operating in a rapidly changing, uncertain environment. Thanks both to the tech revolution and to globalization, that is true of all of us, including our governments. But, as Nobel-Prize winning economist Michael Spence argued at a private equity conference in Quebec City this week, emerging-market governments seem to be better at dealing with an unpredictable, volatile world than Western ones. They are like Silicon Valley entrepreneurs—willing to act swiftly, even if it means making mistakes. Leaders in the West are more like Detroit, reluctant to make bold moves until it is too late.

Part of the problem is the way we judge various types of mistakes. Spence argues that we make two types of mistakes—implementing a bad idea, and failing to act on a good one. If you are religiously minded, you could think of these as sins of commission and sins of omission. In stable times, sins of commission are probably worse. If your industry isn’t changing very much or if your country’s economy and the world economy are on an even keel, launching an expensive new product or government program that fails is probably more damaging than missing out on a great opportunity.

But in times of radical change, making a mistake is less risky than doing nothing at all. Spence thinks that emerging-market leaders understand this better than Western ones do, and he cited the examples of China’s fast and big stimulus program after the financial crisis and the Indian government’s willingness to act to burst asset bubbles.

The effectiveness of China’s government—especially in contrast with the paralysis of some Western nations—is often understood as evidence of the greater agility and decisiveness of authoritarian states. Spence’s analysis suggests another phenomenon could be at work. Emerging-market leaders—both the democrats and the dictators—are more accustomed than their Western counterparts to fast and disruptive change: They’ve experienced revolution, hyperinflation and devaluation. That may give them an edge in today’s volatile global economy.

Speaking at the same conference, Glenn Hutchins, co-founder and co-CEO of private equity firm Silver Lake in New York, said that in the corporate world the heat is shifting from Western companies to ones in the emerging markets. In the past, he said, developed Western economies were “the best crucible” for coming up with the most appealing inventions and the most effective business practices that were then exported to the rest of the world. But Hutchins, argued that emerging markets, with their rapid growth and demanding, low-income consumers, were turning out to be a tougher—and therefore better—hothouse for pace-setting companies than the West.

“It used to be that to be a global company you had to forge your business model in the crucible of competition in North America,” Hutchins said. “Today what you are seeing is companies that are growing up … whose business models are being forged in the crucible of competition in the emerging markets.”

American financiers haven’t been getting a lot of praise lately for their skill at capital allocation. But the speed with which the smartest investors, such as Hutchins, have grasped the shift of ideas to the emerging markets is impressive. Western politicians could do worse than to follow their example.

Following her chat with Glenn Hutchins at the Quebec City Conference about how globalization is changing corporate strategy, Chrystia interviewed NYU Economics Professor A. Michael Spence about how globalization is bringing about structural change in the world’s leading economies.

Spence, a 2001 winner of the Nobel Prize, chairs the Commission on Growth and Development, a multilateral effort to determine the practical conditions developing nations need to implement in order to achieve high growth. Given his expertise in emerging markets, it comes as no surprise that he thinks their future is bright. Spence was impressed with emerging markets’, especially China’s, brisk comeback following the capital flight and collapse in world trade that resulted from the financial crisis, and he thought they would be able to sustain their current growth rates:

American policymakers — and other Nobel Prize winners – are far less impressed with China’s resurgence, which they view as the result of the malevolent Chinese policy of keeping the yuan undervalued. Spence, however, argued that a one-off revaluation of the sort Washington demands will not only be bad for China, since it will destabilize most of the country’s export-oriented businesses. But it would also be bad for the global economy, since China is the engine for growth in large parts of the world. Instead, he said, China should focus on finding a way to make necessary structural changes while sustaining growth:

China is in a complex set of transitions, and one of the objectives of Chinese policy in navigating through this next five years, is going to be to increase domestic consumption and domestic incomes and let that drive the economy. Part of that will involve a reduction in excess savings in China… That’s in China’s interest; it’s also in the global economy’s interest. But what the global economy wants from China is success in making these structural changes in such a way that the growth is sustained. Chinese growth is an enormously important factor in the global economy and especially in the emerging markets. I mean, I think it’s widely known that the growth in Latin America–which is running at a rate of 4.5% real–is dependent on the growth in Asia.

Finally, Spence told Chrystia that as the United States looks for ways to pay for much-needed investments in education and infrastructure, it has much to learn China, particularly in the area of self-sacrifice:

I mean, look, I know people don’t get it in the Western world, so let me describe China thirty years ago. Thirty years ago China had a per capita income of $500, changed direction, and started saving at 35% and investing at 35%. OK? Now when you have a $400 income and you’re saving at 35%, that means you’re consuming 66% of $400. That is a huge commitment to the future as opposed to the present, right? Now you either make the commitment, as the Chinese did and all the other high-growth developing countries, or you don’t. And there’s lots of developing countries that haven’t made the commitment and the investment and savings rates are down around 15%, and you just can’t sustain high growth on that.

Posted by Peter Rudegeair

On a recent trip to Hong Kong Chrystia recorded a podcast for the American Chamber of Commerce in China, about an op-ed she published in the Washington Post this summer that critiqued China’s economic system of state capitalism.  Chrystia, invoking a recent speech from Mike McFaul of the National Security Council, tells the Chamber that while the Chinese system succeeded in raising the country out of the lowest rungs of poverty, there is no historical evidence that suggests it can turn China into a rich nation:

My argument, and as it turns out quite independently, Mike’s argument, was we have to be really careful about thinking that authoritarian regimes are better at modernization, and one reason why we have to be careful is there is some historical evidence that says that authoritarian regimes can be quite good at the early stages of modernization.  They can be pretty good at that brute force moment when you’re dragging and economy out of being an agrarian society into industrialization.  What we haven’t seen yet—and as we look across the world, across histories—we haven’t yet seen that an authoritarian state is able to move an economy to the next level, and in fact what we’ve seen is that even in those countries where an authoritarian state successfully led an industrialization effort, as the country got richer and the economic transformation that needed to be achieved was more complex, what you actually have had happening is democratization.  There are some Asian countries that are a really good example of that.  I think South Korea is perhaps the best one.  […]  What we don’t have evidence of is that the state capitalist model… works in a really rich country.  All the countries that are really rich are democracies.

Chrystia also elaborates on a topic she touched on in her original op-ed, namely economic historian Joel Mokyr’s thesis that the same centralized, authoritarian decision-making process which foreigners marvel at today actually caused China to miss out on the Industrial Revolution centuries ago:

What is most interesting is China could have been the place where the Industrial Revolution actually started.  If you look at medieval Chinese history, China had all of the ingredients for an Industrial Revolution centuries before Western Europe did, but it didn’t happen in China.  And why was that?  Because China had a highly centralized authoritarian state, and just as those elements were coming together, the Chinese state, which was authoritarian and centralized, decided, “We don’t want that,” and decided to go in another direction.  That couldn’t have happened in Western Europe because Western Europe was much less centralized.  Suffered from that of course—lots of wars, lots of countries moving in bad directions, less good at doing all sorts of things.  But because you didn’t have this centralized, authoritarian decision-making process, industrialization did happen in Western Europe.  And when one Western European country slowed down, went off the rails, became too authoritarian, that process—those people, those ideas—very quickly jumped across the border into another country and the energy, the economic growth went there.  And the whole continent, the whole society benefitted.

Do go listen to the whole thing.

Posted by Peter Rudegeair

As the U.S. mid-term elections approach, it is easy to despair about the quality of this country’s political debate. Christine O’Donnell, the surprise Tea Party-backed Republican candidate for the Senate seat in Delaware, has captured the nation’s attention with her opposition to masturbation and a campaign ad in which she assures voters that she is neither a witch nor a graduate of Yale University. Here in New York, Buffalo businessman Carl Paladino, running for the governor’s office, has made his contribution to the carnival atmosphere by discussing his rival’s “prowess” and urging reporters to investigate whether he was a faithful husband.

Part of my job at the moment is appearing as a commentator on other people’s TV shows. Viewed from the green room or the studio, America’s political discourse can look particularly grim. I sometimes find myself in the role of finger-wagging, middle-aged scold calling for a discussion of global financial imbalances, rather than the latest juicy scandal or mockable example of political foot-in-mouth disease. TV producers, I’m afraid, find this schoolmarmish persona as unappealing as my kids do — and given the juicy alternatives available it is hard for me to blame them.

But the campaign trail has always been as much about providing a circus as it is about bread and butter issues. And, dipping just below the froth of the cable sound bites and the blogosphere, I’ve realized this campaign is actually revealing a country that is struggling seriously and passionately to come to grips with the very big issues it faces.

The first is America’s role in the world economy. After a century on top, this is the year when ordinary Americans have realized their country needs to re-establish a place for itself in the global economic order (unemployment at nearly 10 per cent is a powerful instructor). This epiphany doesn’t tend to express itself in measured debates about global financial imbalances or special drawing rights and the role they could play in creating a new reserve currency. Instead, the big focus has become China, with politicians in both parties arguing that the undervalued renminbi is a significant source of America’s woes and calling for a tough reaction, possibly including import tariffs.

Three economic mandarins I interviewed this week — Laura Tyson, a former advisor to President Bill Clinton, Glenn Hubbard, a former advisor to President George W. Bush, and James Wolfensohn, the former head of the World Bank — all told me that this China bashing was not entirely merited, and that it could have a counter-productive impact in Beijing. They are probably right. But it is always a mistake to confuse campaign advertisements with actual policies—most voters certainly don’t. And the fact that mainstreet Americans are grappling with their country’s changing role in the world — outsourcing is the theme of one of this season’s sitcoms — is significant and important.

The second big subject America is chewing over is its fiscal situation. Again, it is easy here to feel the heat and bemoan the lack of light: after all, the Republicans, who are making the most hay of this subject, are mostly guilty of, St Augustine-like, calling for a balanced budget, but declining to name what they would cut to get there. The bigger point, though, is that American voters care passionately about this issue. Even if you believe in a stimulus in the short term—and Hubbard surprised both me and Tyson this week by conceding that would be wise—it is surely a good thing for America and the rest of the world that the country cares about what is certain to be one of its toughest political challenges in the coming decade.

Finally, Americans are starting to wrestle with what is likely to be the third big issue of the next 10 years—the country needs to upgrade its physical and social infrastructure. The second problem—the budget deficit—will make this tough. But the first challenge can’t be resolved without it. Americans get that: hence the heated national debates around education, healthcare and signature projects like the New Jersey tunnel.

Of course, there is no national consensus on these three big questions, and most of the debate about them obscures as much as it reveals; that is called democracy and a free press. But what’s remarkable is how central these issues are to the current political debate. Look beyond the today’s latest gaffe, and you’ll find an America thinking hard about its place in the post-American century.

“There is no other policy tool available [besides quantitative easing],”‘ Laura Tyson, a former chairwoman of the Council of Economic Advisors, said at this morning’s Reuters/YouTube live debate on how to fix the economy. Tyson argues that additional Fed purchases of long-term bonds is the most viable way to energize the U.S. economy since a new fiscal stimulus bill is unlikely to pass Congress:

She appears alongside Glenn Hubbard, another former CEA chairman, who maintains the Fed will spend another $1 trillion to lower rates by 20 basis points. “We can’t inflate our way to prosperity,” he said.

Tyson disagrees and thinks the risk to inflation is low. She admits we have to convince the rest of the world that the U.S. has no intention to inflate away its debt.

Their conversation then turned to China. Both agree that the increasingly fiery rhetoric Washington directs toward Beijing is counterproductive and that the U.S. is better served by enacting policies to reduce its trade deficit:

HUBBARD: If [the U.S. and China] both keep beating up on each other and try to beggar our neighbor, we’ll get into a very bad place. China does have a protectionist policy. It does have a mercantilist policy. And I think focusing on those things quietly rather than from the hilltops, as the administration is doing, would be the right answer.

TYSON: [the rhetoric towards China is] a mistake for them and it’s a mistake for us. … but I honestly think that, just like Glenn does, the exchange rate is not the issue here … frankly, I think we’ve seen much more of a sign that the Chinese are rebalancing and restructuring than we’ve seen in the United States so far. [...]

HUBBARD: [If you focus] on export led growth, you’re guaranteeing, at some point, to have a large financial crisis, because you’re building up a lot of negative net present value projects in China.

As for a second fiscal stimulus, Tyson said the U.S. should spend $1 trillion on infrastructure over the next five years. She thinks direct aid to states should be a priority at a time when 25% of the nation’s children live in poverty and state and local governments are forced to lay off 88,000 teachers because of budget shortfalls.

Surprisingly, Hubbard conceded that a second stimulus would be helpful, but said it should only take the form of investment incentives and a mass refinancing of mortgages held by Fannie Mae and Freddie Mac. While infrastructure spending could be stimulative, he says shovel-ready projects are few and far between.

Posted by Peter Rudegeair

Get ready for the next wave of globalization. The emergence of the emerging markets is old news, of course: after all, Tom Friedman discovered that the world was flat back in 2005. But even as much of the developed world is struggling with weak consumer demand and stubbornly high levels of unemployment, the emerging market countries are writing a new chapter in the story of the global economy.

We are accustomed to thinking of our economic relationship with the countries Fareed Zakaria describes as “the rest” as a two-way exchange between west and east or north and south: western companies setting up call centers in India or manufacturing their goods in China, for instance; and, more recently, savings-rich emerging market economies, especially China, investing in US treasuries, or Russian oligarchs buying London mansions.

That was Globalisation 1.0. In the next stage, some of the biggest deals and some of the most important capital flows will be between emerging markets, with no need to stop-over at Heathrow or JFK. Forget the last decade’s race-to-the-bottom rivalry between Wall Street and the City of London to be the world’s financial capital; the new motto of the moneymen, as one Manhattan banker put it to me this week, is “Mumbai, Dubai, Shanghai or goodbye.”

One place you can watch Globalisation 2.0 gathering pace is on the 49th floor of the ‘C’ tower in the high-tech high-rise complex the locals call Moskva City, on the banks of the Moskva river, half a mile downstream from Russia’s White House, where Prime Minister Vladimir Putin is currently installed. The fancy modern furniture (the “Ziricote veneer,” a sign informs visitors, is “sourced in Chile”) and contemporary art are standard New York hedge fund decor. But Stephen Jennings, the 50 year-old New Zealander who receives visitors here, is betting on a world that by-passes the west altogether.

Jennings is a founder and CEO of the Renaissance Group, a Moscow-based financial company with ambitions to be the premier investment bank for intra-emerging market capital flows. As Jennings put it, he wants Renaissance “to provide the plumbing”.

Last year, Jennings went home to Wellington to deliver the annual Trotter lecture, a stage he used to lay out his vision of the rise of indigenous emerging market players. “Multinationals’ advantages in terms of know-how and capital have been neutralized by their inability or reluctance to grow explosively in complex, foreign environments,” he argued. “In many emerging markets and in an increasing number of industries, the market leaders have local roots. The largest metals group in the world is Indian. The largest aluminum group in the world is Russian … The fastest-growing and largest banks in China, Russia and Nigeria are all domestic.”

Jennings knows that emerging markets are “highly idiosyncratic.” But, he told me, some of the savviest emerging market champions seem to be discovering they have more in common with each other than with their erstwhile tutors in the west: “they have analogous business models and states of development … they are all culturally attuned to these fast-growing markets.”

One of the best examples is eight floors above Jennings’ office: DST, or Digital Sky Technologies, the Moscow-based internet investor which made a global splash with a landmark deal with Facebook. Earlier this year, DST formed a three-way partnership with Naspers, the South African media company, and Tencent, the Chinese internet firm. Together the three hope to dominate the emerging market internet space. Another seminal intra-emerging market deal was the acquisition by Bharti, the Indian telecom giant, of most of the African properties of Kuwait-based Zain.

A high-tech executive who lives in California and has close ties to Bharti told me the Indian firm has a competitive advantage over western rivals in what he believes will be the explosively growing African market: “They know how to provide mobile phones so much more cheaply than we do. In a place like Africa, how can western firms compete?”

It would be wrong, of course, to count the west out. Multinational behemoths like GE, Coca Cola and HSBC have been quick to understand the opportunity emerging markets represent and agile in adapting to local conditions. The reliability and the reputation of these global brands can make them appealing partners for even the most aggressive emerging market entrepreneurs. And when it comes to paradigm-shifting innovation, western companies like Apple and Facebook are still setting the international agenda.

In fact, it may be western politicians rather than western CEOs who will be blindsided by this coming wave of globalization. Lackluster economic growth and persistent unemployment are fueling protectionist sentiment in many developed countries, especially the US. At a time when emerging market countries and companies are getting better and better at doing business with one another, that impulse may not only be self-destructive. Even worse, it could be futile.