June 1, 2005

Congressional Votes On Financial Rescues, Globalization
Reflect Constituent Skill Levels; Bank Donations Matter

By Barry Jagoda

A new study shows that members of Congress vote for international financial rescues based on constituent skill levels, which indicate how they are affected by economic globalization. Legislators are also influenced to vote for these bailouts when they have received political contributions from large international banks.

In this first systematic analysis of congressional positions on global financial rescues, the author, J. Lawrence Broz, associate professor of political science at UCSD, examines how global economic integration affects those with various income and skill levels, focusing on major financial rescues organized by the Clinton Administration to bolster economies in Mexico and several Asian nations. He analyzes congressional voting on three proposals, in 1995, 1998 and 1999, intended to restrict executive branch flexibility at rescuing national economies in trouble.

The congressional votes studied by Broz were efforts to modify the Exchange Stabilization Fund (ESF), an arm of the U.S. Treasury that draws on gains from currency market operations to finance its rescue of national economies in peril. Although the ESF is somewhat independent, Congress may vote to restrict its activity, particularly in efforts to alter the direction and pace of global economic integration, where U.S. constituents gain or lose from globalization.

In summarizing the study results, Broz says, "I show that the U.S. Congress is highly divided on the policy of using American resources to fund international financial rescues ("bailouts” to detractors). Members of Congress who represent constituencies that are harmed by economic globalization tend to oppose rescues while members that represent pro-globalization workers and international banks tend to support them. These findings are important because the ability of the U.S. executive to stabilize the international financial system depends upon the continued support of Congress."

The much used term “globalization” is a shorthand way of describing an economically integrated world economy. With globalization, low-skilled workers in the United States are likely to lose income because they must compete with low-skilled workers in developing countries. However, the incomes for higher-skilled managerial and professional workers increase with globalization because the demand for their advanced technological skills rises with global economic integration, according to Broz.

Broz separates skill levels in a congressional district by the percentage of the district aged over 25 with a four-year college degree and the percentage employed in executive, administrative, managerial and professional occupations. The more high-skilled workers in a district, the more likely that member of Congress will be to support financial rescues.

Wholesale and international banking companies, called “money center banks,” greatly benefit when there is intervention to stabilize a nation’s economy. Though the reason for the rescue is often related to maintaining a strong global economy, banks are advantaged when loans they have made to these countries are paid by the rescue, or “bailout,” process. The banks benefit directly because the risks of foreign lending is reduced and shifted to taxpayers of the rescuing country.

The study is published in the July issue of the American Journal of Political Science. A PDF of the full article may be obtained by email to journalnews@bos.blackwellpublishing.net

Media Contact, Barry Jagoda, (858) 534-8567
COMMENT: J. Lawrence Broz, (858) 822-5750