Solving U.S. Domestic Issues: Think Globally, Respond Globally

The presidential primaries in Ohio were a focal point for the nation. The most contentious issue was NAFTA, the North American Free Trade Area agreement approved during the Clinton presidency to integrate the markets of Canada, Mexico and the United States.

But in the Ohio primary debate, NAFTA became a symbol for the larger issue of the globalization of the world economy in which jobs that are thought to be local go global, financial instability triggers global repercussions and oil, rice and corn prices escalate on global markets, affecting costs at the pump and the supermarket close to home.

What international institutions offer is a different approach to managing those issues that are both domestic and global.

Instead of relying excessively on free markets and unbridled competition, international institutions offer opportunities for cooperation and coordination as more effective ways to deal with these problems with strong local-global interfaces.

They provide answers to the political signal Ohioans sent in March.

Financial security: The current round of financial market instability began last summer when the drive to wring more profit from mortgages and other financial instruments suddenly burst the bubble in the U.S. housing market. It forced foreclosures on private homes and bankruptcy on investment firms and banks with insufficient reserves to cover the risks in their portfolios. This domestic crisis quickly translated into turbulence in other markets, with bank crises in Britain and France, followed by a projected slowdown in global growth, as U.S. demand for imports declines as all of us tightened our belts.

At the spring meetings of the International Monetary Fund and the World Bank, ministers of finance from major countries failed to give the IMF a strong role in dealing with the financial crisis. There is a decided reluctance on the part of ministers to take public responsibility for the crisis, which they regard as a crisis of markets, not of institutional capacity, both at the domestic and international level. Relying on markets to provide solutions lets officials off the hook.

Job Loss: The underlying weakness in the U.S. economy is a penchant on the part of all of us to consume more than we earn, which means that the private savings rate in the United States is astonishingly low by comparison with other countries. This is mirrored by an immense public sector fiscal deficit as the U.S. government has once again cut taxes at the same time as it increased spending for defense, just as we did in the 1980s.

These deficits in the private and public sectors immediately translate into a trade deficit, which requires that we use borrowing from abroad to cover our trade, consumption and fiscal deficits simultaneously.

Inevitably, we have to correct the triple deficits to rebalance the domestic economy, which ushers in a slowdown in our economy, leading to greater job losses beyond those caused by freer trade and more open markets.

The U.S. has been better at admonishing others to hold to the dictates of monetary and fiscal discipline in an open world economy than it has been in pursuing those policies itself. Now others are pressing the U.S. to put its house in order.

International institutions provide the opportunity to generate agreement among countries on coordinated and cooperative policies on the big global imbalances generated by the large U.S. deficits, mitigating the growth-dampening effects of the U.S. adjusting alone.

Cost-Push Inflation: The spiraling upward of the world oil price is driving food prices up while pushing producers of corn to shift to ethanol, driving up corn prices still further. Efforts to get oil producers to increase oil output to offset demand increases from China and other dynamic emerging economies like India have failed.

Despite having a global energy market, the world does not have global energy coordination mechanisms to help investors organize energy capacity increases around anticipated sources of international demand.

Large private energy companies and authoritarian governments with state-owned companies, such as Gazprom in Russia, would prefer free markets over cooperative efforts to meet long-term global energy needs and dampen down energy prices.

The value of international institutions to this agenda of domestic concerns is twofold.

First, the existence of international institutions encourages countries to think hard about the value of cooperation and coordination in addressing issues that, if left to the competitive forces of the market alone, are likely to generate still more financial disequilibrium, global imbalances and volatile price movements, such as we have seen ripple through the American economy recently.

Second, senior national officials are the ones who basically call the shots in most international institutions, not the institutions themselves or their senior officials. The international institutions bring national officials face-to-face with their own responsibility for major disturbances in global trends.

International institutions are convening places in which national officials gather around a conference table to have a global conversation about global challenges and the global aspect of domestic difficulties.

Without these institutions, countries would try to manage on their own global problems which are now characterized by spillover effects and which are more caused by competitive markets than resolved by them.

So, Ohio was right to blow the whistle in the primaries in March and suggest that reliance on free trade, market liberalization and unfettered competition had gone far enough for now, and that some assertion of public responsibility for job losses, financial instability and commodity price volatility needed to be taken to manage the global dimensions and common domestic aspects of these issues.

Rather than argue that free markets and unfettered competition can manage large global disturbances, there is a need now to reap the benefit of cooperation and coordination derived from the international institutions that stimulate common responses to common afflictions.

Ohioans are on the right track. But the message to political leaders to take public responsibility for domestic problems with global linkages has yet to get through.

A strong U.S. approach to global problems that impact on America domestically and stronger U.S. leadership in the international institutions still have a way to go to redress the overzealous embrace of market fundamentalism in the U.S. approach perceived by Ohio in March.