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Is there anything (new) left to say about globalization? Mark A. Wynne Vice President & Associate Director of Research for International Economics Federal Reserve Bank of Dallas Presentation to Global Interdependence Center Meeting Mexico City October 5, 2017

The views expressed are those of the author and do not necessarily reflect the views of the Federal Reserve Bank of Dallas or the Federal Reserve System

Globalization • Globalization - defining phenomenon of our era

• Comparable to industrial revolution, Reformation etc.

• Not new – nineteenth century / pre WWI • Key difference – migration • Extension of franchise • Creation of welfare state • Gains from free movement – $78 trillion

• Modern globalization more inclusive

Globalization 2.0 • The World Is Flat (2005)

• No it isn’t • Leamer JEL (2007) review – open questions

• The China shock

• Autor at al. (2013) • Did we get this wrong?

• The Great Recession / Global Financial Crisis / Great Trade Collapse

Globalization 2.0 • Is modern globalization different?

• Baldwin (2016) The Great Convergence • Globalization 1.0: movement of goods; • Globalization 2.0: movement of ideas; • Globalization 3.0: movement of people

• Trade versus technological change as drivers of change • Trade as technology • Disruption – faster/more pervasive today than in the past? • Relation to globalization

• Interconnectedness

• Fragility versus robustness • Butterfly effect

Globalization 2.0: Policy â€˘ Globalization and inflation

â€˘ The global slack hypothesis â€˘ Global liquidity and inflation â€˘ Other?

â€˘ The â€œconundrumâ€? â€˘ Pre-crisis â€˘ Back again?

â€˘ The global savings glut

â€˘ Role in holding down đ?‘&#x;đ?‘&#x; âˆ— ?

â€˘ Demographics â€˘ Rodrikâ€™s new trilemma: cannot simultaneously pursue democracy, national sovereignty and globalization

Economic theory • Old trade theory

• Ricardo • Heckscher-Ohlin

• New trade theory

• Krugman et al. – imperfect competition

• New new trade theory

• Firm level understanding • Global value chains

A concrete example: how important are global shocks in state business cycles? • The U.S. economy has become more globalized over time • Not all states are equally globalized • Differences in geography • Differences in industry mix

• Globalization means individual U.S. states are potentially more vulnerable to external shocks • Quantify how much of state-level employment fluctuations can be explained by global and national macroeconomic business cycles • About a quarter of employment fluctuations can be explained by global business cycle alone on average (across states) • Big differences across individual U.S. states.

• Trace the contribution of global and national shocks over time to state employment growth • Focus on 3rd and 11th Federal Reserve Districts

• A puzzle

Globalization of the U.S. economy Share of international trade in U.S. GDP

Percent 35 30 25 20 15 10 5 0

1929

1939

1949

1959

1969

1979

1989

1999

2009

Globalization of the U.S. economy Share of international trade in U.S. GDP

Percent 35 30 25 20

Deglobalization during Great Depression and WWII

15 10 5 0

1929

1939

1949

1959

1969

1979

1989

1999

2009

Globalization of the U.S. economy Share of international trade in U.S. GDP

Percent 35 30 25 20

Deglobalization during Great Depression and WWII

Postwar recovery

15 10 5 0

1929

1939

1949

1959

1969

1979

1989

1999

2009

Globalization of the U.S. economy Share of international trade in U.S. GDP

Percent 35 30

Trade boom due to GATT & containerization

25 20

Deglobalization during Great Depression and WWII

Postwar recovery

15 10 5 0

1929

1939

1949

1959

1969

1979

1989

1999

2009

Globalization of the U.S. economy Share of international trade in U.S. GDP

Percent 35 30

Trade boom due to GATT & containerization

25 20

Deglobalization during Great Depression and WWII

Onset of Globalization 2.0

Postwar recovery

15 10 5 0

1929

1939

1949

1959

1969

1979

1989

1999

2009

Globalization of the U.S. economy Share of international trade in U.S. GDP

Percent 35 30

Trade boom due to GATT & containerization

25 20

Deglobalization during Great Depression and WWII

Onset of Globalization 2.0

Postwar recovery

Great Trade Collapse

10 5 0

1929

1939

1949

1959

1969

1979

1989

1999

2009

State export shares in 2016 vs 1996 Percent

State export share of GSP in 2016

States became more globalized LA

20 WA

MS AL TN ND

5 0

HI DC

OH UT IDWV IL GA WI IA KS NV DE NC FL MN NENH NJ CT MA PA NY ME AR MO RI NM VA MT WY OKMD CO SD

OR AZ

States became less globalized 10

State export share of GSP in 1996

Employment growth: Texas & U.S. Percent

Texas employment growth

National average

8 6 4 2 0 -2 -4 -6 1980

1985

1990

1995

2000

2005

2010

2015

Employment growth: Texas, U.S. and all states range Percent

min-max range

Texas employment growth

National average

15 10 5 0 -5 -10 -15 1980

1985

1990

1995

2000

2005

2010

2015

Decomposing employment growth • Decomposition of employment growth requires identifying assumptions, which are often controversial in economics • We postulate the following hierarchical identification assumptions:

• Global foreign output aggregate is driven by global shocks • National (U.S.) output and employment are driven by global shocks + national shocks • State-level employment driven by global shocks + national shocks + residual state-specific shocks

• For want of a better word, the state-level employment fluctuations that are not explained by global shocks or national shocks are attributed to a residual statespecific shock

• This does not necessarily mean that these developments must solely originate from within the state

Share of state employment variation explained by global, national and residual state-specific shocks Percent

Global shock, avg = 24.8

100 90 80 70 60 50 40 30 20 10 0

AK DC ND LA WV NH RI MT MA HI NJ WY ME MS VT MD OK DE FL NY MI IA SD AR NE CT VA NM MO AZ GA CO ID SC NV KY TN UT IN OR OH KS TX NC AL MN PA CA WA WI IL

Share of state employment variation explained by global, national and residual state-specific shocks Percent 100

Global shock, avg = 24.8

National shocks, avg = 30.7

90 80 70 60 50 40 30 20 10 0

AK DC ND LA WV NH RI MT MA HI NJ WY ME MS VT MD OK DE FL NY MI IA SD AR NE CT VA NM MO AZ GA CO ID SC NV KY TN UT IN OR OH KS TX NC AL MN PA CA WA WI IL

Share of state employment variation explained by global, national and residual state-specific shocks Percent

100

Global shock, avg = 24.8

National shocks, avg = 30.7

Residual state-specific shocks, avg = 44.5

90 80 70 60 50 40 30 20 10 0

AK DC ND LA WV NH RI MT MA HI NJ WY ME MS VT MD OK DE FL NY MI IA SD AR NE CT VA NM MO AZ GA CO ID SC NV KY TN UT IN OR OH KS TX NC AL MN PA CA WA WI IL

Summary: I • Global business cycle alone can explain about 25 percent of employment fluctuations on average (with large differences across states) • Range from a low of 0.3 percent in Alaska to 42.6 percent in Illinois • Texas: 34.9 percent; Pennsylvania: 37.5 percent

• Global and national business cycles together can explain about 56 percent of employment fluctuations, on average. • This leaves about 44 percent of employment fluctuations (on average) that cannot be accounted for by the global and national business cycles. • Range from a low of 18.5 percent in North Carolina to 91.9 percent in DC • Texas: 40.3 percent; Pennsylvania: 22.1 percent

Cumulative one year effect of a 0.5% negative global foreign output shock on statesâ€™ employment growth Percentage points

= 80% confidence interval

Average = -0.79

1.0

-0.5 -1.0 -1.5 -2.0

0.0

0.5

Cumulative one year effect of a 1% negative national U.S. output shock on statesâ€™ employment growth

-0.2 -0.4 -0.6 -0.8 -1.0 -1.2 -1.4 -1.6 -1.8

0.2 0.0

= 80% confidence interval

Average = -0.76

Percentage points

Contributions of shocks to Texasâ€™ employment growth Percentage points

U.S. recessions

TX employment growth (Q/Q)

1.5 1.0 0.5 0.0 -0.5 -1.0 -1.5 -2.0 -2.5

1985

1990

1995

2000

2005

2010

2015

Contributions of shocks to Texasâ€™ employment growth Percentage points

U.S. recessions

Global shock

TX employment growth (Q/Q)

1.5 1.0 0.5 0.0 -0.5 -1.0 -1.5 -2.0 -2.5

1985

1990

1995

2000

2005

2010

2015

Contributions of shocks to Texasâ€™ employment growth Percentage points

U.S. recessions

Global shock

National shocks

TX employment growth (Q/Q)

1.5 1.0 0.5 0.0 -0.5 -1.0 -1.5 -2.0 -2.5

1985

1990

1995

2000

2005

2010

2015

Contributions of shocks to Texasâ€™ employment growth Percentage points

1.5

U.S. recessions

Global shock

National shocks

Residual state-specific shocks

TX employment growth (Q/Q)

1.0 0.5 0.0 -0.5 -1.0 -1.5 -2.0 -2.5

1985

1990

1995

2000

2005

2010

2015

Contributions of shocks to Louisianaâ€™s employment growth Percentage points

U.S. recessions

Global shock

National shocks

Residual state-specific shocks

LA employment growth (Q/Q)

2 1 0 -1 -2 -3 -4 -5 -6 -7 -8

Hurricane Katrina

1985

1990

1995

2000

2005

2010

2015

Contributions of shocks to New Mexicoâ€™s employment growth Percentage points

2.0

U.S. recessions

Global shock

National shocks

Residual state-specific shocks

NM employment growth (Q/Q)

1.5 1.0 0.5 0.0 -0.5 -1.0 -1.5 -2.0 -2.5 -3.0

1985

1990

1995

2000

2005

2010

2015

Contributions of shocks to Pennsylvaniaâ€™s employment growth Percentage points

1.0

U.S. recessions

Global shock

National shocks

Residual state-specific shocks

PA employment growth (Q/Q)

0.5 0.0 -0.5 -1.0 -1.5 -2.0

1985

1990

1995

2000

2005

2010

2015

Contributions of shocks to New Jerseyâ€™s employment growth Percentage points

1.0

U.S. recessions

Global shock

National shocks

Residual state-specific shocks

NJ employment growth (Q/Q)

0.5 0.0 -0.5 -1.0 -1.5 -2.0 -2.5

1985

1990

1995

2000

2005

2010

2015

Contributions of shocks to Delawareâ€™s employment growth Percentage points

2.0

U.S. recessions

Global shock

National shocks

Residual state-specific shocks

DE employment growth (Q/Q)

1.5 1.0 0.5 0.0 -0.5 -1.0 -1.5 -2.0 -2.5

1985

1990

1995

2000

2005

2010

2015

Exports alone explain little of the cross-state differences in share of state employment variance explained by the global shock Share of state employment variance explained by global shock

Percent

RÂ˛ = 0.0392

45 40 35 30 25 20 15 10 5 0

State exports share of state GSP (percent)

Industry composition explains some of the state differences Share of state employment variance explained by global shock

Percent

RÂ˛ = 0.4295

45 40 35 30 25 20 15 10 5 0

Industry composition (based on share of construction, manufacturing and services sectors in state GSP)

Oil price swings Percent, year/year

U.S. recessions

WTI Oil price

160 120 80 40 0 -40 -80 1980

1985

1990

1995

2000

2005

2010

2015

Oil prices as an explanation of state-level employment fluctuations • Oil prices alone can (unconditionally) explain:

• About 12% of fluctuations in foreign economies aggregate real output • About 5% of fluctuations in the U.S. output, and about 8% of fluctuations in the U.S. national employment • About 15% of fluctuations in the Texas employment

• Oil prices and global/national/state output and employment variables are jointly determined (interdependent)

• Suggests that results above are likely over-estimating the importance of oil market developments.

Summary: II • Global business cycle explains a non-trivial part of state-level employment fluctuations (about a quarter on average) in the U.S. • Impact of shocks vary across states

• Global and national business cycles have contributed in varying amounts to Texas and Pennsylvania’s employment growth • A slow global recovery has held back these states’ employment growth since 2012, while national factors have contributed to it • A 0.5% negative shock to global output leads to a total loss of 111,652 jobs in Texas, and 41,411 jobs in Pennsylvania, one year after the shock

• Further research is needed to explain why states are impacted differently

• International trade is but one of the channels through which states are impacted by global economic developments

Conclusion • Is there anything (new) left to say about globalization?

• Yes • Theory and empirical work still catching up with the new realities

• Open issues:

• Robust mechanisms for dealing with the people who lose out to ensure continued political support for open borders • NAFTA etc.

• Policy coordination