Free LOSING CONTROL by Stephen D. King

policymakers really deliver on their promises or are they, instead, losing control of our economic destiny?

PART TWO
BROKEN ECONOMIC BAROMETERS

CHAPTER THREE
THE PLEASURES AND PERILS OF TRADE
BLACK HOLES
    Black holes cannot be observed directly. Their effect can be seen only through their gravitational pull. Celestial objects that used to behave in a predictable manner begin to act differently as they approach a black hole. They may start to move faster than normal. They may heat up and emit radiation as they’re sucked in to the void. The presence of a black hole can be detected only through these indirect routes.
    The emerging nations are a bit like a black hole. There is little available data, the data that is published is often deemed unreliable and historical comparisons are typically meaningless. For example, communist Czechoslovakia, hidden behind the Iron Curtain, was a very different economy from the capitalist Czech Republic, which now nestles in the bosom of the European Union.
    Proving that emerging nations are economically influential is, therefore, tricky, at least for statisticians. The available information is not generally up to the task in hand. An alternative approach is tothink about the influence of the emerging nations indirectly. What effects are emerging economies having on the Western world? And have policymakers in the Western world properly come to terms with these effects?
    These are key questions. For Western policymakers, economic success is in part a question about expectations management. If, for example, a policymaker claims that rising US exports to China are a ‘good thing’, US workers can reasonably expect to experience rising incomes as trade with China opens up. Similarly, if a policymaker claims the delivery of persistently low inflation is the best single way of producing lasting economic health, investors should not have to worry about impending economic and financial crises.
    Yet the promises of policymakers have not been met. World trade has increased dramatically as emerging nations have made their presence felt, but the trade flows we’re seeing today are not purely the result of comparative advantage, the mainstay of the free-trade argument, and have certainly not delivered rising incomes for all concerned. Meanwhile, after years in which inflation has been broadly under control, the early years of the twenty-first century witnessed the most extraordinary economic and financial boom and bust. If price stability was such a good thing, why did the world go on to experience an economic crisis second only to the disasters of the 1930s?
    It seems to me that the gravitational pull of the emerging nations has upset the barometers we typically use to calibrate economic success. In Part Two, I examine this gravitational pull in three different areas – trade, capital markets and price stability. Has increased trade brought benefits for all? Have the economic specializations associated with higher trade volumes – for the US and the UK, primarily in financial services – genuinely contributed to lasting economic stability? Why, despite the rapid growth of emerging nations, have returns for investors been so poor? And, most controversially,has the achievement of low inflation in the Western world become a source of economic instability?
VORSPRUNG DURCH TECHNIK
    One of the more obvious theoretical benefits of globalization is its impact on trade. Why should the West worry if, for example, rising demand in China, India and elsewhere boosts export opportunities for Western companies and, in the process, creates Western jobs? Certainly, standard trade theories suggest that increased specialization brings benefits to all involved. The reality, however, is more complex. The world trade system is undergoing a series of seismic shocks, creating both winners and losers in the process. To understand why, we need to go back to the economic world as it was before the destruction of the Berlin