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CARDIFF GARCIA, HOST:
Hey, everyone. This is THE INDICATOR FROM PLANET MONEY. I'm Cardiff Garcia. The global economy used to have a simple rule. The U.S. led; everyone else followed. That's how Greg Ip, the chief economics commentator at The Wall Street Journal, opened his latest column, and that column explains how things have changed. It's not like the olden days, like in the '90s and the 2000s, where, if the U.S. economy did great, it would pull the rest of the world up with it. Or, when it was doing badly, the rest of the world followed it down. In recent years, the U.S. economy is now more vulnerable to things happening beyond its borders. So what changed? Greg is going to explain that to us right after the break.
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GARCIA: Welcome back to the show, man.
GREG IP: Hi, Cardiff. Good to talk to you.
GARCIA: So Greg, I want to start with the way things used to be. You say the global economy used to have a simple rule. The US led; everybody else followed. Why was that the case?
IP: Well, if you look back in history, every major global recession often started with something happening in the United States, and if we think about it, it's not that surprising. Right out of World War II, the United States was the dominant economy. It accounted for roughly half of global gross domestic product. It was, and was for many decades, the main export market for most other countries. So if the U.S. went into recession, it was impossible for other countries not to be affected.
GARCIA: Yeah, I mean, in the simplest possible terms, the U.S. economy was so big as a share of the global economy that if, for example, U.S. consumers stopped buying products not just from American companies but from global companies, it would create huge problems for the rest of the world.
IP: Absolutely. Americans were the biggest buyers in the world of cars, of durable goods, of commodities and so forth. And even if they weren't the main destination for everybody's commodity, they had sort of an outsized impact on global prices. A good example is the oil market. Now, oil - we think of that as a global market. Well, in a world where the United States consumer is the dominant consumer of oil, obviously, U.S. developments are going to have a huge effect on the oil price, and that will affect any country that produces oil even if they don't sell a lot of the oil to the United States.
GARCIA: Yeah, and so your column lays out three reasons for why things have changed roughly in the last decade, since the financial crisis in particular, and I just kind of want to go through each of those three. So let's start with this. The share of the global economy that's taken up by the United States has simply fallen. There are other parts of the world now that have increased their share of the global economy.
IP: Exactly. So the U.S. many decades ago was - well, as I was saying, right after the '40s and '50s, was, like, half of global GDP, and nowadays, it's probably less than a quarter. And that's probably a good thing because it's mostly happened because other countries got richer, but in the last decade or two, the big story, of course, has been China, which is now the second largest economy in the world. And if we go back to that example of, like, whose consumers are driving the market, it is now Chinese consumption that drives prices for things like iron and copper and oil. It's not just American consumers.
GARCIA: OK, and reason number two that you lay out here for why the global economy does not follow the U.S. economy the way it used to is that trade is now a bigger part of the U.S. economy. This is really interesting. Can you explain that?
IP: So just by, you know, arithmetic, what happens with our foreign markets - the countries that buy our airplanes or our movies - is going to matter more to the United States now than it used to. If you look at the big blue-chip companies that trade on the stock market, something like nearly half of their profits and sales come from overseas markets. So if, you know, Chinese consumers stop buying Apple phones, that's going to hit Apple profits, that's going to drive down the value of Apple shares, and that will make Apple shareholders in the United States poorer, and they will spend less. So that is one of the new channels by which developments overseas affect the United States.
GARCIA: Yeah, and this is an interesting one also because, at least superficially, you would think that this is a very good thing because when the United States is trading more with the rest of the world, it means, of course, that there are consumers overseas for American-made products and also that American consumers have access to buying a wider variety of goods and services from the rest of the world. But it does also mean that the U.S. is then more dependent on economic activity outside of American borders.
IP: Absolutely. It's a double-edged sword, but really, this is a fundamental property of markets, isn't it? All human beings, whether as part of a community or a country or a global economy, are richer because they can trade with other people. That way, everybody gets to specialize. So we are richer as a consequence of trade, but it also means that all of us are more dependent on what happens to our neighbors, whether they are next door or in another country.
GARCIA: Greg, the final reason you lay out here for why the U.S. economy depends more on the global economy than it used to is also, I think, the most underappreciated explanation, which is that capital markets are more integrated now. What do you mean by that?
IP: What I mean is that we're used to hearing about the Federal Reserve raising interest rates and lowering interest rates and that they only did it because they were worried about inflation or unemployment in the United States. The fact of the matter is there are a lot of other interest rates in the markets that are responding to events outside the United States. In the bond market, for example, 10-year bonds, 20-year bonds - those yields are moving up and down in response to what is going on, say, in Europe or Japan.
And so when we look at interest rates in the United States today and say, I wonder why interest rates are so low in the United States, I wonder why the bond market seems to be worried about a recession in the United States, the reflecting behavior and developments that are happening in foreign markets - and if you're an American investor or even if you're the U.S. central bank, the Federal Reserve, you need to sort of incorporate what are those developments in foreign markets into your thinking. What do they mean for the United States?
GARCIA: Yeah. And Greg, I want to close here with a question about American policymaking as it affects other economies throughout the world. So if you look, for example, at the trade wars, the intent by the policymakers who have started those trade wars, the Trump administration, is that it'll be good for the American economy and bad for other countries throughout the world because again, the perception is that those countries have been ripping off the American economy. But if the U.S. is increasingly dependent on the global economy, then it also means that harming other economies has a redounding effect to the U.S. economy. And so by hurting other economies, the U.S. ends up hurting its own.
IP: That's exactly right. In an interdependent world, it's really hard to come up with some kind of economic policy weapon that can - that you can use on another country that doesn't somehow, like, ricochet back on yourself, and the trade war is a perfect example. I mean, the theory of the Trump administration is that if we impose tariffs on Mexico or Europe or China, then we would buy less from them, and that purchasing would be directed to American suppliers. So we would actually be better off, and they would suffer.
But that's really not how it works. I mean, the supply chains are so intricate that when you actually impose tariffs on the Chinese, you hurt their ability to buy stuff from us, from companies that are linked to the Chinese economy, and you see that affect American producers, American jobs. So this idea that the United States can basically throw rocks at the rest of the world and they can't throw rocks back at us - it's just not the way the world works. There's no such thing as a country that is an island today.
GARCIA: Yeah. Greg, final question - estimates from the International Monetary Fund and other global institutions have shown that the global economy this year is likely to have very disappointing growth and that that disappointment is very likely to also extend into next year. From that, it seems like there is some cause to be worried about how that's going to affect the U.S. economy given these reasons you've just laid out.
IP: There are really good reasons to worry about the fact that the global economy is slowing down. Like, in the old days, it was kind of just sort of, like, something you observed and said, well, that's happening to somebody else. It's not happening to us here in the United States. But that's just not true any longer. In fact, we've received some data just over the last week or two - surveys of manufacturers - that show their business in the United States is really suffering. There are good reasons to believe that the U.S. manufacturing sector is in a recession. It can hardly be blamed on the American consumer, who is still spending strong. It must be a reflection of what's going on in the rest of the world. So we simply cannot be complacent any longer when the rest of the world is in trouble.
GARCIA: Greg Ip, thanks so much.
IP: Cardiff, thanks for having me.
GARCIA: This episode of THE INDICATOR was produced by Leena Sanzgiri, edited by Paddy Hirsch. Our intern is Nadia Lewis. THE INDICATOR is a production of NPR.
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