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Globalization's Impact on U.S. Growth
and Inflation
Remarks before the Dallas Assembly

Richard W. Fisher
President and CEO
Federal Reserve Bank of Dallas

Dallas, Texas
May 22, 2006

The views expressed are~ own and do not necessarily reflect official positions ofthe Federal Reserve System.

Globalization's Impact on U.S. Growth and Inflation
Richard \V. Fisher
It is a pleasure to address the Dallas Assembly. I was a member of the Assembly during the
1980s when I was young enough to qualify for it, and I am delighted to see that it is as spry and
active as ever.

I am also delighted to see Stuart Bumpas sitting in the audience-one of Dallas' most
distinguished lawyers-less spry but no less wry. Stuart is uniquely wise. When I was licking my
wounds from my midlife crisis-running for the U.S. Senate in 1994-he gave me the perfect
restorative: a first edition of P. G. Wodehouse's The Code of the Woosters. It was the Doubleday
Doran first printing of 1938, which I added to the 30-odd works of Wodehouse I had been
collecting since my undergraduate days.
Many of you may not be familiar with Wodehouse, the creator of Jeeves and Bertie Wooster,
among countless comedic figures. He wrote over 70 novels, some 300 short stories, 18 plays,
and, with Jerome Kern and other greats of the musical theater, the book for more than 30 musical
comedies. Evelyn Waugh, George Orwell, John le Carre and almost every other writer of his day
considered Wodehouse the single best writer of the English language.
I am old-fashioned enough that I still read and reread Wodehouse, in order to keep a whimsical
balance to an otherwise too-serious life. And being a money man at heart, I display Code of the
Woosters, Stuart's gift, prominently among my Wodehouse collection. It trades at around $800
in rare book circles. Which effectively means I am the first Texan in history to actually take
money off a lawyer.
Wodehouse once set out to read all of Shakespeare. "But you know how it is," he wrote. "Just as
you have got Hamlet and Macbeth under your belt, and are preparing to read the stuffing out of
Henry the Sixth ... something of Agatha Christie's catches your eye and you weaken."
Today, you are going to get the hard stuff, not the Agatha Christie or a more modern version or
anything else that might be remotely titillating or of immediate gratification. Were I trendy, I
suppose I could remind you that in the devout culture of central bankers, every numerary wears
the cilice of inflation on his or her intellectual thigh as we pursue our avowed goal of providing
the monetary conditions for sustainable non-inflationary economic growth. But there is nothing
new or mysterious there. That has always gone with the territory and always will.
What is new is the way in which globalization is affecting the gearing of our economy and what
an increasingly integrated world means for operating the levers and pulleys of monetary policy. I
want to share some personal thoughts on this important subject with you today, for it is what I
and the Dallas Fed research team spend a great deal of time grappling with.
I know many of you are eager for some clue about the latest direction of interest rates or some
tidbit that might be turned to profit. I will do my best to disappoint you on that front. It was not
for nothing thatNew York Times columnist Bill Safire taunted the Fed a few weeks ago for being

coy when those who watch us want a full frontal view. He referred to us as "the House of Hints,"
which, being old-fashioned, I consider totally complimentary.
Should I impart any hints at all today, please bear in mind that I am speaking strictly in a
personal capacity. I speak neither for my Fed colleagues nor for the other participants in the
deliberations of the Federal Open Market Committee.
A little over a week ago, I beetled off to Argentina. After meetings and a speech at the Argentine
central bank, my wife Nancy and I visited what we believe to be the eighth natural wonder of the
world. On the speck of the map where Argentina touches Brazil and Paraguay is a little place
called Cataratas del lguazu. Surrounded by hundreds of miles of rain forest and dense jungle,
Mother Nature created there the most beautiful waterfalls imaginable. No town is within miles of
this place. And no economic activity invades its pristine scenery, except for ecotourism So I was
astonished when my BlackBercy started buzzing. Harvey Rosenblum, the Dallas Fed's research
director, needed an answer to something or other. There I was, in the middle of a South
American jungle, thumbing out an e-mail so work could get done thousands of miles away.
Picture thatin your mind's eye-and kindly ignore the image of my Nancy's annoyance!
Being able to work almost anytime from almost anyplace is globalization at work. Technology,
capital, labor and ideas, now able to move at unprecedented speed across national boundaries,
have integrated the world to an unprecedented degree.
Imagine if this had been 10 years ago and I had been manager of a manufacturing operation or a
retailer or a service provider that was malfunctioning in my absence. Imagine the painful and
slow process that would have been required to ask and answer that question. Operations would
have had to shut down for hours or even days as the folks here waited for me to return from
vacation or at least reach my hotel, where I could receive a phone call or fax and transmit my
decision back to Dallas. My company's profitability would have been hurt, and the nation's GDP
would have taken a slight hit.
With BlackBercy in hand in today ' s wireless, interconnected world, it made scant difference
whether I was in the jungles of lguazu or here in my office.
In this and countless other ways, globalization is reconfiguring the economic engine of America.
Our citizens and companies do not seek to utilize inputs that are shipped over the surface of the
sea or through cyberspace from faraway places for the sheer adventure of it or to brag that their
BlackBercy works even in lguazu. They do it because it makes them better off; because it
enhances efficiency. This is the natural process of capitalism as it spreads across the world at
brushfire speed, blown hither and yon by the incessant desire of businesswomen and men to
drive down costs, make greater profits and grow their enterprises, and in doing so raise the
bottom line for the world economy-a higher GWP.
Let me give you a few numbers that illustrate the breadth and depth of the world's march toward

Trade as a percentage of gross world product has risen from 15 percent in 1986 to nearly
27 percent today .




Since 1986, the stock of foreign direct investment assets has nearly quadrupled as a
percentage of gross world product, and the stock of cross-border portfolio investment
assets has increased by a multiple of eight.
More people than ever are crossing national borders-for business and pleasure. On
average around the globe, countries received just one foreign visitor for every 100 people
in 1950. By the mid-l 980s there were six. Since then that number has doubled to 12.
The world communicates much more and in whole new ways. Since 1991, international
telephone traffic has more than tripled. The number of cell phone subscribers has grown
from virtually zero to 1.8 billion-30 percent of the world population- and Internet users
will soon hit 1 billion. (That number, by the way, includes one husband whose wife gave
him a blistering lecture on the purpose of getting away from it all in Iguazil.)

From these data alone, it is clear that globalization unleashes competition and accelerates the
forces of creative destruction, to borrow the term coined by the great economist Joseph
In this turbulent sea of change, there are challenges and opportunities. Business leaders, like
many of you here, confront them every day . The men and women who manage America's
businesses-the busy fingers of Adam Smith's fabled invisible hand-work 24/7 to hone their
companies' productivity and competitiveness. They get it. They understand that America' s
workers and businesses prosper by tapping into the opportunities inherent in a hyperinterconnected, integrated world.
I am not sure those of us in the policymaking realm "get it"-at least not yet. Just as
globalization has created new dashboards for business operators, it has rewired the lights and
switches on policymakers' control panels. My guess is that the relationship between these lights
and switches and the real world of production, prices and jobs is not what it was two decades
ago-or a decade ago or even two years ago. It is important that policymakers begin to better
understand what is actually going on. Traditional theories and economic models that do not
adequately incorporate globalization are likely to result in policy responses that might be too
strong or too weak, too soon or too late.
In the world of central banking, as I said earlier, we are keenly interested in how globalization
affects our ability to deliver on our mandate for economic growth with stable prices. We know,
of course, that more open economies bring added competition-much of it from places like
China and India-that can produce in great volume at lower cost. So we see, for example, that
the prices of clothing, electronics, white goods, toys and other heavily traded goods have been
held in check. That is the obvious part of globalization-the impact on the availability and prices
of traded goods. That is a no-brain er.
Less visible, but no less important, is the incentive foreign competition gives U.S. producers to
increase efficiency and remain competitive. We at the Fed talk regularly with hundreds of CEOs,
COOs and CFOs, from companies big and small, throughout this vast nation. Almost all of them
dwell on the growing internationalization of their businesses and the need for driving
productivity up and holding costs down. Under relentless pressure from both consumers and
shareholders, they profit by finding the most attractive inputs and processes available anyplace
on earth and anywhere within cyberspace.

One obvious assist to business has come from the fact that globalization has enormously
increased labor supply. The math here is pretty simple. In the early '90s, the disintegration of the
stranglehold of the Soviet Union released millions of hungry workers into the system, from little
Estonia to bigger countries like Poland. China joined the World Trade Organization at the turn of
the century, and over 700 million workers came into play. And now India, with its hundreds of
millions of working-age people, has joined the game.
The U.S. economy has benefited from this surge of new workers. While China gains as an
important source of the world's manufacturing output, its gains have come at the expense of
former powerhouses like France and Italy and Japan and other more rigid, less competitive
countries. We, on the other hand, have been better able to innovate and adapt and compete. Fearmongering to the contrary, the United States is not losing ground to this growing Asian giant,
despite the long-term shrinking of our manufacturing sector relative to our services sector. It may
surprise you to know that, despite the fact that the U.S. remains the world's largest manufacturer,
only 10.5 percent of U.S. jobs are in the manufacturing sector (and only 1.5 percent are in
agriculture). We have prospered, and we have driven unemployment down to the lowest level in
over four years, by moving up the value-added ladder and becoming the world's dominant power
in creating innovative services.
Increasing competition in the labor market, I should note, does not come just from vast labor
pools making goods and equipment in factories located abroad. It also comes from immigrants,
who have contributed more than half of U.S. labor force growth in the past decade. The spread of
Information Age technology and the removal of the isolationist yoke of communism and statist
regimes create opportunities for virtual immigration as well. In a world wired with fiber-optic
cables, foreign workers deliver services from far off-a software program written in Estonia, a
call-processing center in Bangalore, or back-office work sent to the Caribbean.
It would thus appear that one clear consequence of the spread of globalization, the global
workforce's increasing integration into the U.S. economy, has dulled wage pressures here,
exerting downward pressure on inflation.
What about the impact of imported goods? Analysts who focus only on traditional measures of
trade deny globalization's impact on inflation, noting that imported goods make up a mere 10
percent of U.S. consumption. In nations more integrated with the rest of the world, the import
share may rise to 20 percent or 25 percent. The tail never wags the dog, so other countries'
impact on our inflation has to be remote-or so the theory goes.
I beg to differ.
To be sure, anybody who wanders down the aisle of a Wal-Mart or a Costco or Target store
knows that whatever the portion of imported tradable goods, prices of clothing and electronics
and almost everything else that you can feel, smell, watch or listen to have become more
affordable because of globalization. But the impact is more invasive than that. The distinction
between tradables and nontradables is not fixed and absolute. Over time, more and more items
become tradable as technological barriers fall and transport costs shrink.
Alan Blinder, a thoughtful economist with a much bigger brain than mine, points out that we can
no longer follow the traditional dichotomy between tradables as things that can be put in a

container and shipped and nontradables as things that cannot be packed up and sent. "In the
future, and to a great extent already in the present," Blinder writes, "the key distinction for
international trade will no longer be between things that can be put in a box and things that
cannot. It will, instead, be between services that can be delivered electronically over long
distances with little or no degradation of quality, and those that cannot."
Professor Blinder teaches economics at Princeton, which shows he has a healthy sense of humor.
But he is also a former Fed vice chairman, which tells you he is a serious player. He is well
aware that the preponderance of our economic activity and household income derives from
Even when you think in terms oflabor rather than products, you see a blurring of the concept of
what is "tradable." Real estate, the leisure and hospitality industries, and medical services are
generally considered purely domestic, immune from the vagaries of global competition. It is not
difficult, however, to detect important global influences in all of them. Who does much of the
construction work? Who cleans the rooms and cooks the meals at many of our hotels and resorts?
How many doctors and nurses have come to this country from overseas?
The supplies, and therefore the prices, of many so-called nontradable goods and services are
clearly impacted by globalization-at least by my notion of globalization, which includes the
cross-border movement of labor and capital as well as goods. You don't have to live on the
border with Mexico to grasp that notion. Just go to a construction site in Chicago or Miami or
Seattle and watch and listen. As the great economist Yogi Berra once said, "You can observe a
lot just by watching."
Without added labor from overseas in all of its forms, U.S. wages would be rising faster. Many
might welcome that. After all, Americans would be receiving fatter paychecks. But we would
also be facing higher inflation, with all its unpleasant consequences. Without the contribution of
the global workforce, moreover, the quantity and variety of goods and services available in the
United States would diminish.
I have argued, within the temple of the Fed and without, that globalization has in these and many
other ways expanded our concept of "capacity constraints" and redefined our sense of "resource
utilization." It has helped tame inflation. That has been the trend of recent years. But it has not
exorcised for once and for all time the demon of inflation.
The International Monetary Fund recently released its World Economic Outlook, which includes
a chapter on globalization and inflation. The report issues a warning that I think bears repeating.
"Globalization," the IMF concludes, "has undoubtedly provided some brake on inflation in the
industrial economies in recent years and has allowed for a more measured monetary policy
[meaning we have been able to keep interest rates low] .. .. However, globalization cannot be
relied upon to keep a lid on inflationary pressures .... Strong global growth and diminishing
[global] economic slack have reduced the restraining impact of declining import prices on
Even if you argue, as I do, that globalization's effect is not limited simply to prices of imported
goods and services, one can envision a scenario in which increased resource utilization in other
countries might add to inflation rather than mitigate it. We might well be seeing evidence of this

as growing demand in emerging economies drives up the prices of oil, copper, zinc and other
commodities, even after netting out the speculative excess that has been impacting those
My point is that even though the playing field has been enlarged and reconfigured by
globalization, and even though the world is a far more exciting place, moving at the pace and
with the suspense of a modem thriller, there still are some time-tested risks that Federal Reserve
officials and other central bankers must fear and manage. We are cursed with still having to
"read the stuffing out of' the classic texts, even as some of us seek to improve upon them and
adapt them to modem society. The advent of China and India, the introduction of the Internet,
new frontiers of science like the Human Genome Project and yes, even the BlackBeny and the
iPod and other drivers of greater efficiency, productiviiy, interconnectivity and economic
homogenization, do not overturn the basic premise, for example, that too much money chasing
too few goods or productive investments leads to inflation-regardless of whether the sources or
placement of those monies are in new places and in new technologies.
That said, globalization is not going to go away, even if politicians given to the expediency of
protectionism or building walls or other costly follies draw up laws that attempt to slow it down.
Globalization is here to stay.
Globalization is not a one-off event; its effects are dynamic and profound. An analogy is the
deregulation of U.S. banks and airlines in the late 1970s, both supposedly one-off events. Who
would argue that these companies aren't still adjusting to these one-time shocks? When I helped
negotiate China into the World Trade Organization, a process that was not completed until the
start of the Bush 43 administration, I knew my yet-to-be-born grandchildren would be dealing
with the tail end of the changes wrought by China's entry into the global marketplace.
I think it is pretty clear that with the emergence of China-and, following in its wake, India,
Vietnam and practically everyone else-countries will face heightened competition for valuable
factors of production, especially for capital to finance them. Many of these nations, including our
own, will have to adjust their fiscal, monetary, legal and regulatory policies if they are to attract
capital. We discuss this in the Dallas Fed's 2005 annual report, which, by the way, reads more
like Agatha Christie than Shakespeare, despite its being rooted in fact, not fiction. You might
want to go to our web site. Our study finds that the most successful countries in a globalized
world place the least burden on the free flow of capital, ideas, people, goods and services.
Even politicians, regardless of party or country, who are genetically wired to thrive on spending
O.P.M.-other people's money-are getting the message. The Financial Times recently reported
that Peer Steinbriick, Germany's finance minister, "pledged to fight back against low taxation in
competing European countries, promising a tax system that improved German companies' global
competitiveness." By way of explanation, Steinbriick said, "An effective tax rate of 39 percent is
not internationally competitive." His words contrast sharply with those of his predecessor, who
argued that the Poles, Estonians and other new Europeans should raise their taxes if they want to
play nice. Taxes impact costs, and costs impact inflation. Who knows what chain of events a
reduction or restructuring in German taxes would set off in Europe and around the world?
This is what keeps the economists at the Fed on their toes. Economists like to model things. They
take the real world, distilling it into equations and graphs to measure how this affects that. The

models have enhanced our understanding of the choices consumers, workers, companies,
investors and governments make every day. Without them, central bankers would be
handicapped in making informed decisions.
Economic models dealing with global influences have been around for hundreds of years.
Modeling evolves along with the economy. The problem is that few models deal with today's
rapidly changing manifestation of globalization. Tremendous complexity is required to capture
the sophisticated working and resulting impacts of the changes we are experiencing.
So far, the models I have seen in the academic literature look at globalization the way a
mechanic might look at a vintage Mustang and time how long it takes for it to go from zero to 60
both before and after replacing the rear axle. The problem is, our globalizing economy is not a
vintage car. It is more like a 2006 BMW Z4 roadster, fully equipped and Bluetooth enabled. It is
a very complex, highly integrated, technologically advanced and brilliantly engineered vehicle
that just cannot help exceeding the posted speed limit. Models telling us that changes in the
classic Mustang's rear axle will barely impact its performance are oflittle use to anyone trying to
estimate the top speeds at which a new BMW can handle curves safely. We need to continue
devising and refining economic models for a new generation, so we can negotiate the curves on
the superhighway that is the modern economy. This is what the research team at the Dallas Fed
has been called on to do.
Many of the new realities of globalization are obvious. Unless you have been on another planet,
you all know the forces of globalization, now unleashed, continue to remake our world. The
challenge lies in understanding what's going on around us and then harnessing that knowledge so
that the U.S . can continue to prosper in a rapidly changing, hypercompetitive world economy. As
members of the Dallas Assembly, you have to constantly do this in your businesses, in your law
firms and in the many ways you serve this great community. At the Federal Reserve, we must do
the same. We will keep you posted on what we learn. And we ask you to return the favor.
Thank you.