9 November 2001


"It is the business of people who are concerned about employment to talk about fiscal and monetary policy. It is not solely the province of the Financial Ministers and central bankers."
Robert Reich

"Globalisation is one of those terms to have gone from obscurity to meaninglessness without any intervening period of coherence."
Robert Reich

Robert Reich
The global economy is teetering

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Former US Secretary of Labour ROBERT REICH was a keynote speaker at the Global Employment Forum. Here is an essential summary of his remarks from the Forum and from newspaper interviews earlier this month.


  • There's no longer any doubt that the United States is in a recession. More than 400,000 jobs were lost last month, the biggest job loss in two decades. Meanwhile, national output is shrinking. Consumer spending is dropping. And consumer confidence is plummeting.

    That's just the United States. The rest of the world is as bad or worse. Germany, the largest economy in Europe, is in a slump, dragging the rest of Europe down with it. The Japanese economy is nearly comatose. Argentina, until recently South America's powerhouse, is in deep recession and about to default on its international loans. The former "tigers" of Southeast Asia — Malaysia, Singapore, Hong Kong and Taiwan — are basket cases. The global economy is teetering.

    That's partly because American consumers — deep in debt, worried about keeping their jobs and now stressed out about terrorism — have been buying less from abroad. Gloom moves around the globe at the speed of an electronic impulse, so our fears about the future have spread to consumers in other nations. And because global corporations over-invested in factories, equipment and information technology and then put on the brakes so quickly, business spending has collapsed around the world.


  • Fiscal and monetary policy are two levers that must be used appropriately in the interest of full employment. As Labour Secretary in the United States, I never had an opportunity to talk at length about fiscal and monetary policies. The Treasury Secretary told me nicely, pleasantly again and again — even with different Treasury Secretaries — that it was none of my business.

    Now that I am no longer Secretary of Labour, I can assert to you that it is the business of Labour Ministers. It is the business of people who are concerned about employment to talk about fiscal and monetary policy. It is not solely the province of the Financial Ministers. And it should not solely be the province of central bankers.

    Fiscal and monetary policy is one of the most important centres of social policy in our countries and it is important that it be understood as a lynchpin of social policy. Both fiscal and monetary policy must be understood as centrepieces of social policy.

    When the economy slows, the people who are likely to be hurt the most in our countries are people who are at the end of the labour queue — the end of the employment line — people who are likely to be fired first, to lose their jobs first, are people who have the least connection to the labour market, whose skills are least developed.

  • That does not mean that we should not fight inflation. Inflation — particularly accelerating inflation — does not help anyone. But those officials in charge of fiscal policy and also in charge of monetary policy have some discretion in terms of whether they err on the side of fighting inflation or err on the side of enhancing — or at least protecting — the level of employment.

    When I say "err", I simply mean to face a very basic fact of policy-making. No-one knows the future. Central bankers and also Ministers of Finance do not know precisely whether their decisions are going to be absolutely correct. There is an element of discretion. There is an element of error. The question is naturally: do you err on one side or the other, knowing full well that if you err on the side of fighting inflation or err on the side of fighting unemployment, the social consequences are quite different.

    Our central bankers understand that their primary responsibility is to fight inflation, but that is not their sole responsibility. It is vitally important, now that the world economy faces a contraction, that our central bankers continue to reduce short-term interest rates and pilot us toward a tight labour market, as tight as is consistent with avoiding accelerating inflation and that may entail some experimentation.


  • Even if central bankers all row together, that still won't be enough to get the global economy moving. To make up for the passivity of consumers and businesses, governments will have to run deficits — spending more and taxing less — at least for the next year.

  • I think it's striking that we are talking about stimulus in the United States and Europe, at the same time the IMF is telling developing countries to cut spending. How do we reconcile that? In the North, we believe in Keynesian economics. In the South, we believe in Hooverite economics. I think it is a potentially explosive issue.

  • Developing nations must be allowed to spend more and tax less. The International Monetary Fund — the world's most important lender — must stop insisting on balanced budgets. Fiscal austerity may have been appropriate when the global economy was growing briskly. Now it's a recipe for joblessness and misery.


  • Maybe we need circuit breakers to slow the pace of layoffs, just as we have circuit breakers in the stock market that stop trading when stocks are falling too fast. Large layoff announcements seem to have a chilling effect among populations because everyone figures they may be next. That undermines consumer confidence and ends up creating situations that generate more mass layoffs, because businesses suffer when consumers grow less confident.

    So we ought to be considering as a temporary measure, some sort of circuit breaker so that a company could not fire more than 5 percent of its workers in a particular year unless it was facing severe economic problems.


  • When I became Labour Secretary of the United States in 1993 the assumption among economists was that the so-called natural rate of unemployment — the rate below which you could not go without risking accelerating inflation — was 6 per cent in the United States as we measure unemployment. Well it turned out that because of technological changes and globalisation it was possible to achieve levels of unemployment substantially below 6 per cent without igniting accelerating inflation in the United States.

    All of the old economic rules had changed. Why? Because companies were much more competitive with one another; competition overall was much more intense; it was more difficult for companies to raise their prices even if their wages did inch upward; labour unions in the United States were less powerful than they were in the 1980s; technology allowed companies to outsource around the world. And many other reasons I could give you contributed to a state of affairs in which it was possible to run the United States economy, not at 6 per cent, but at 5½ per cent, at 5 per cent, some people would say even at 4½ per cent unemployment, without risking accelerated inflation. And Alan Greenspan deserves credit in the 1990s for understanding the new economy and its influence on that supposed putative trade-off between inflation and unemployment.


  • Globalisation is one of those terms to have gone from obscurity to meaninglessness without any intervening period of coherence. But let me just say this: Globalisation is also very important and entirely consistent with more jobs and better jobs, decent wages and decent jobs. One of my fears is that the legacy of the last few years, including what occurred on 11 September, may cause something of a withdrawal or a step backward from globalisation.

  • In the United States there were a number of polls taken in the years 1999-2000 asking the American public "do you think globalisation is good for you" or asking "do you think trade is good for you" and again and again the polls came back saying "no, we do not think globalisation is good for us, we do not think trade is in our interest".

    Why is there this fear? In the United States in 1999 and again in 2000, unemployment reached the lowest point that it has been in 30 years. The American economy between 1993 and the year 2000 generated 23 million net new jobs. But it was a very buoyant economy and yet there is this resistance, this fear of globalisation.

    I want to suggest to you that the fear stemmed not so much from a fear of being unemployed, because again unemployment was at the lowest rate it has been in 30 years. The fear stemmed from a fear of losing one's income, one's livelihood.

    This is because even though unemployment was low, the chance of losing your job and having to get a new job, often that paid less, was very high in 1998, 1999, 2000 right through the 1990s. The rate of layoffs, the rate of job loss stayed high. It never dropped from what that rate had been in the last recession of 1990 and 1991.

    In other words, even though unemployment dropped, job insecurity stayed high. That job insecurity and the likelihood that although you will be employed you will lose a good paying job and have to take a job that pays less. It generates a great deal of fear.

    The easiest culprit, the easiest force to blame is globalisation. Although it is not entirely globalisation, it is not simply factories moving abroad. Technology is at least as great a force, there are many, many jobs that are rendered obsolete because of new technologies. But nevertheless, globalisation is an easy target.

  • It is very important that in order to avoid a backlash against globalisation, we understand that decent work, a job with some degree of employment security and wage security, is an important political ingredient for maintaining a consensus in favour of open trade, and in favour of globalisation.
    Sources — Robert Reich, Professor of economic and social policy Brandeis University, Speech to the Global Employment Forum, Geneva1 November 2001; International Herald Tribune 7 November 2001 "IHT Roundtable Advice for a recovery: Tax Cuts, and Layoff relief" edited by David Ignatius; Los Angeles Times, 6 November 2001 "The Global Economy Is Teetering" BY Robert Reich (


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