Home / Opinion / Views /  The US should promote globalization of labour

Just as dearer money was losing its scare, Silicon Valley Bank (SVB) went bust in the US after a run on deposits was set off by news of how badly its bond portfolio was battered by rising rates of interest. This followed a curveball thrown by US Federal Reserve chair Jerome Powell in his testimony before lawmakers. Its hawkish tone on inflation proving stubborn evoked the spectre of the world’s most influential central bank reverting to steep rate hikes after having reduced its pace of action recently. Robust consumer spending and factory data underpin Powell’s inflationary concerns, although the chief worry is continued tightness in America’s labour market. Joblessness remains very low and hiring too strong for its slowing economy, making space for wage-push inflation that would have to be fought with tighter credit. As the return of big rate hikes by the Fed will hit asset values globally, investors were shaken by Powell’s words. India could suffer renewed capital outflows, currency weakness and inflationary pressures, for example, if domestic rates do not keep up. This constitutes a scenario that should keep policymakers on high alert.

As a startup lender based in California, SVB was uniquely exposed to chunky withdrawals and had too much money in US Treasury bonds bought at pandemic highs, but other American banks have also seen their holdings lose value. So, while the contagion risk of SVB is not the alarming kind we saw of entangled East Coast banks caught in the financial crisis of 2007-08, today’s anxieties will not ease till the US federal funds rate reaches a peak, which may turn out higher than projected earlier. For price stability to be restored, America’s labour market needs to develop slack; US joblessness in January was 3.4%, its lowest since 1969, and a scarcity of workers can still inflate payrolls, business costs and price tags. “Although nominal wage gains have slowed somewhat in recent months, they remain above what is consistent with 2% inflation and current trends in productivity," Powell said, “Strong wage growth is good for workers, but only if it is not eroded by inflation." This is the crux of what has kept the financial world on edge. The pandemic shrank America’s workforce in a wave of opting out that left recruiters in a scramble for fewer people. And so far, the Fed’s efforts to cool the US economy have not been able to reduce demand for workers in line with shrunken supply. This imbalance looks likely to persist, as covid might have bent its labour-supply curve out of whack well beyond the near term. Life is too short not to maximize leisure, some folks might have told themselves.

The solution to America’s problem lies in Washington, but in politics instead of central bank actions. The US needs to open itself up to immigrants in vast numbers and stare down political resistance to this idea. Xenophobia is costly and it makes sense to minimize this tab. The globalization of capital with labour held behind border controls has led to distortions which the US, given its global heft, must help resolve anyway. This moment offers President Joe Biden a historic chance to decisively reverse Donald Trump’s ‘wall-em-out’ policy, which was a victory of ethnic conservatism over compassion and economic wisdom. The US was short of workers even before covid, with its entry gates kept clenched. Today, it must open them wide for the sake of its own economy—and the world’s. Labour globalization is a good way forward. To champion this cause, however, economics must trump politics.

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