Beverly Hills
Oh sure, you say, it's easy for the fat-cat financiers and globaloney experts gathered in Beverly Hills at the Milken Conference to advocate an open global economy. It's all upside for them. The hedge funds of Greenwich and venture funds of Sand Hill Road can suck up the Fed's excess liquidity and then deploy it around the globe into assorted non-dollar denominated assets. Meanwhile, the average guy is stuck spending $85 to fill up his family SUV.

Washington Post columnist Eugene Robinson, speaking on an Income Mobility and Inequality panel with The Wall Street Journal's Paul Gigot, noted the irony. He said that he had finished his panel homework -- thick studies of income demographics -- the previous day sitting beside he chic pool at the Beverly Hilton. Although income mobility in the U.S. is still pretty good, even according to the more pessimistic studies, Robinson could not help but note the vast inequalities that persist, or even grow. As he sipped a cool drink surrounded by cool people, he read about 70% dropout rates in some inner-cities and real-wage stagnation on the one hand versus hedge fund billions on the other.

So, irony noted. Now, can we get back to explaining why global engagement and trade is good for all Americans, rich and poor?

Beverly Hills
Here at the annual Milken Institute Global Conference, what do I wake up to this morning? A big, page-one story in The Wall Street Journal entitled "Rising Nationalism Frays Global Ties."

The global economy appears to be entering an epoch in which governments are reasserting their role in the lives of individuals and businesses. Once again, barriers are rising. Call it the new nationalism.

From barriers to the free movement of financial capital (investment) and human capital (immigration) to new restrictions on the Internet, reporter Bob Davis recounts the troubling protectionist trends and finds numerous analysts who say we may be in for a long retrenchment of the global economy.

"The era of easy globalization is certainly over," says Pulitzer Prize-winning author Daniel Yergin, whose 1998 book, "The Commanding Heights," detailed the triumph of markets over nations, starting with British deregulation under Margaret Thatcher. "The power of the state is reasserting itself."

Just a decade ago, Asia, Latin America and Russia were on financial life support from the International Monetary Fund and World Bank. The U.S. was planning yet another round of global trade negotiations. The European Union was writing a constitution to shift power to Brussels from member nations.

Now borrowers shun the IMF and World Bank. Trade talks are shelved. Barriers to foreign investment are rising around the world. State-owned companies are expanding, particularly in oil and gas. Public support of immigration restrictions is growing in countries from the U.S. to India.

This is why PFF launched our new Center for Global Innovation. To combat these trends by highlighting the abundance of the world economy and the deep, dark consequences of protectionism. See our self-description which presages many of the themes in Davis's article.

As we here from Nobel economists, entrepreneurs, financiers, and policymakers at the Milken Conference, we'll have more to say. Although we agree with Davis's article that nationalism is rising and ties are fraying, we are not so convinced a new balkanized world is our inevitable fate.

New nationalism could play out over a lengthy span, says Michael Klein, chief economist at the World Bank's private-sector arm, the International Finance Corp. "Disparate national interests may pull [countries] in different directions and render global actions more difficult," Mr. Klein says. "We're in for several decades of these centrifugal forces."

It will take herculean efforts, but with enough like-minded leaders, we hope CGI will help block this illiberal tide and point the path toward more, not less, global freedom and innovation.

Several days ago we mentioned IBM's strong sales and earnings in the context of our focus on "global services" and the Dallas Fed's new report on the topic. Today, BusinessWeek illustrates the point:

Quick quiz: Which company is more "American"—Mumbai-­based Tata Consultancy Services, or Armonk (N.Y.)-based IBM (IBM)? Evaluate the two based on where they make their sales, and the answer is surprising. TCS, India's largest tech-services company, collected 51% of its revenues in North America last quarter, while 65% of IBM's were overseas.

Do we begin to see why the international trade statistics are misleading, if not utterly irrelevant? Do we understand that the "trade gap" is therefore not an argument for protectionist policies?

I don't agree with a lot of Larry Summers' economics, but he is often quite an insightful thinker on globalization. Here the former Treasury Secretary and Harvard president is talking to David Wessel of The Wall Street Journal about American universities. But his insight can be applied to the U.S. economy as a whole.

"American universities right now are pre-eminent," says Lawrence Summers, who was deposed as Harvard's president in 2006. "They have enormous advantages in wealth, in the attractiveness of the U.S. as a place to study and teach, in their demonstrated excellence. The threat to the top universities is not imminent. But Oxford and Cambridge didn't perceive the threat as imminent. The combination of Britain's losing relative economic ground and deep complacency, lack of major investment in science and technology and governance modes that favored internal equity over external competitiveness caused them to lose their position over two generations." (my emphasis)

As we know from experience, external competitiveness is usually the key to higher levels of wealth all-around and over time mostly transcends the "internal" distributional concerns. As Summers nicely points out, "equity" is a euphemism for stagnation and decline.

UPDATE: By complete coincidence, I came across this brief Forbes article on the influence of college professors on the "equity" versus "efficiency" debate.

Here are a few good excerpts from Richard Fisher's Chicago speech today that highlighted the Dallas Fed's new report on global services.

At forecasted growth rates, we calculate that China will add $116 billion to world demand for medical care in just one year. India will contribute an additional $25 billion. Together, the incremental demand for medical care from just these two markets will be more than four times larger than the contribution from the U.S. Turning to global spending on recreational services, one year’s added demand comes to $79 billion from China and $16 billion from India, compared with $23 billion from the U.S. Down the line, these gains should be even bigger, provided China and India continue to grow their economies.

Now throw in all the services beyond medical care and recreation. Then consider the world beyond China and India, a mix of emerging nations and traditional markets, most seeing their incomes rise. This is new business. Their domestic producers will meet a good chunk of the added demand, but China, India and other countries will shop the globe for what they cannot find at home or what is better elsewhere. Here, we have advantages in many areas. Medicine, finance, education, legal services, forensics, architecture and design, engineering technology, film and other aspects of entertainment—in these service areas and more, America is second to none....

Check out the Dallas Fed's annual report "Opportunity Knocks" on the huge importance of services to the U.S. (and any advanced) economy. Richard Fisher, the Dallas Fed's president, and his chief economist Mike Cox have been doing a great job studying globalization and highlighting its opportunities, which vastly outweigh its challenges. IBM's big boost in revenues and profits, announced today, is a prime example. But the Dallas Fed also highlights many smaller, unknown Texas service-sector companies who are exploiting the same global phenomena.

Michael Malone issues a challenge to America:

We are about to experience the greatest, and most culturally challenging, consumer expansion since the discovery of the New World. In his new book, "Jump Point," Silicon Valley marketing veteran Tom Hayes reveals that the world's leading cell phone companies predict the world market for Internet users is about to triple. What had been one billion wireless users just a few years ago jumped to two billion by the end of 2007 – and will jump again to three billion by 2011.

That timeline may be optimistic. But the U.S. needs to get its competitive house in order soon, or it will face a very tough world.

Most of Malone's prescriptions for meeting this challenge are sound:

"We need to be prepared for a world where knowledge workers around the world are hired online by the minute – in other words, radically simplified employee contracts, payroll tax documentation and W-2s, and improved tax laws on home offices, part-time work, and self-employment. But most of all, we must not impede this inevitable transformation by doing anything to limit free trade...."

"Create a Fat Pipe....The U.S. needs to have the fastest, cheapest and most reliable Internet access on the planet, both inside our borders and in our connections to the rest of the world."

Other Malone ideas are clinkers, for example:

"Like the railroads and the interstate highway system before it, we need a program of direct investment, subsidies and tax breaks to assure that Americans always have the world's best Web access...."

But at least he knows just how integrated the world is becoming and that we need a new agenda to succeed.

Matthew Slaughter of Darthmouth's Tuck business school is one of the most consistently interesting academic commentators on globalization. This morning, after the news of India's Tata Group acquisition of Ford Motor Co.'s Jaguar and Land Rover lines, he writes about the hugely important role foreign investment plays in the U.S. economy.

From 1987 through 2006, the U.S. received a lot of greenfield FDI: $220 billion worth. But over that same period, it received $1.78 trillion of new FDI via mergers and acquisitions (M&A) with existing U.S. businesses. M&A activity, not greenfield investment, is far and away the predominant method foreign companies use to invest in the U.S. It accounts for more than 88% of new FDI in the U.S. over the past two decades. M&A transactions have been essential for insourcing companies to expand in -- and generate benefits for -- the U.S.

The second key feature of insourcing that the Tata transaction underscores is who does it. For many decades, the bulk of FDI into the U.S. flowed from other high-income countries such as Germany, Japan and the United Kingdom. But in recent years there has been a rise of FDI from multinational firms based in developing countries such as China and India. In 2006, outward M&A transactions by Indian companies totaled $23 billion, more than five times the 2005 total and approximately 20 times the annual total in 2000.

But, Slaughter warns, populism threatens to undermine this great American advantage.

In recent U.S. policy discussions about inward FDI, however, these facts have largely been ignored. Instead, many voices are calling for new restrictions on inward M&A -- especially on transactions from nontraditional countries....

There is no law of physics that the U.S. will continue receiving transactions like Tata's. The world has recently enjoyed some of strongest, most widely shared growth ever seen -- in large part due to dramatically liberalized trade and investment regimes. For globally engaged companies like Tata, all this means an ever-wider range of countries in which they can expand. For the U.S., all this means stiffer competition to attract and retain these companies. The U.S. share of global FDI inflows has already been declining for decades: from 31.5% in 1988-1990 to 24% in 1998-2000 and to just 16% in 2003-2005.

American policy makers should strive to make the U.S. a premier location for the dynamic, high-productivity activities of globally engaged companies -- both insourcing companies and U.S. multinationals alike. To truly be such a location would require dramatic progress on many fronts: renewing the president's trade promotion authority; resuscitating the World Trade Organization's Doha Development Round; passing comprehensive immigration reform.

The U.S. recently blocked Bain Capital's acquisition of 3Com because China's Huawei was to be a small minority partner in the deal. Some say there are classified details that raised security concerns. But the U.S. should not lightly go down the path of protectionism.

Over the last couple years I've been watching the globalization research of Richard Fisher and his team at the Federal Reserve Bank of Dallas. So I was especially interested to see on Tuesday that Fisher, for the second Fed meeting in a row, dissented from the FOMC 75 basis-point rate cut, preferring "less aggressive action." Charles Plosser of the Philly Fed joined Fisher's dissent. This was a clear signal there is more strong-dollar, anti-inflation fight at the FOMC than the market had realized. For months the Fed's weak-dollar helicopter currency drops had scared Wall Street into panic and, finally, Bear Stearns close to bankruptcy. Fisher's dissents, however, seem to have been the key factor that helped stabilize the dollar, boost the sagging equity markets, and bring oil and commodity prices down from record-highs.

Fisher has been a key figure in expanding global trade. As deputy U.S. Trade Representative in the late 1990s, he implemented NAFTA, worked on agreements with Vietnam, Singapore, Korea, Japan, and Chile, and negotiated China and Taiwan's ascension into the WTO.

But recently he's come to believe that economics has not kept up with world-wide trade and global communications. He created the Globalization and Monetary Policy Institute within the Dallas Fed to study these issues. Just a week ago at an international trade and monetary meeting in France he said monetary economics has not caught up with globalization:

Globalization means that we can no longer guide policy by ignoring trade and capital flows or the invisible but nonetheless effective links between countries that have been forged through cyberspace. Yet it appears to me that the default framework for thinking about monetary policy continues to be the closed-economy model.

3Com today withdrew its CFIUS application to be purchased by Bain Capital, in a deal where China's Huawei would have been a 17% minority partner. Without having to issue an official ruling, the Committee on Foreign Investment in the U.S. basically blocked the deal.

This is a big blow for the American economy. Not so much in the size of this modest deal -- $2.2 billion -- but in the message it sends to the rest of the world: America does not want your capital. Our borders are closed.

I wrote about the Bain - 3Com deal and the general importance of extending, not severing, our economic networks in "Breaking Metcalfe's Law."

In large portion, America's powerful economic engine has been built on our openness to the world economy -- its people, capital, and ideas. But now -- just as globalization spreads wealth and capitalism across the globe, increasing opportunities for peace and prosperity far beyond most of our wildest dreams -- protectionism flourishes. As one smart person told me last week: "In the era of globalization, America has the best hand to play. And we're not playing it."