Paul Krugman Says I “Have a Point and Deserve Some Respect!”
Friday, December 28, 2007 at 05:47PM
Skeptic in Economics, Free market fundamentalism, Free trade, Globalization

The New York Times editorial board has consistently advocated for "free trade agreements," even those they haven't read. Yesterday, in a full page New York Times ad, the Consumer Electronics Association asserted that opposing the Columbia Free Trade Agreement is indistinguishable from a desire to re-introduce Smoot-Hawley protectionism. In today's column, New York Times columnist and long-time trade booster, Paul Krugman, called a time out and sent both to their rooms.

Krugman made his chops as a young economist "advancing" theory about international trade, including publishing several influential papers and writing a successful textbook. He endorses a theory that trade between countries that have very different "factor endowments" can have "large effects on income distribution, and leave large groups worse off," as he explains in one of his blog posts, "Bit of background on today's column." Cutting through the jargon, this means that if a high-wage nation like the USA trades extensively with a low-wage nation like China, some large groups in the USA will have lower incomes.

In 1995 Krugman published a paper in which after looking at available data he concluded that any such effects on the US economy were only "modest." Not any more. In today's column, Krugman says, "The trouble is that these effects may no longer be as modest as they were, because imports of manufactured goods from the third world have grown dramatically—from just 2.5 percent of G.D.P. in 1990 to 6 percent in 2006." "[W]hen it comes to manufactured goods, it's at least arguable that the . . . highly educated workers who clearly benefit from growing trade with third-world economies are a minority, greatly outnumbered by those who probably lose."

I applaud Krugman for changing his views when he gets new facts. He makes clear he still believes in the benefits of "keeping world markets relatively open" (notice he doesn't say "free trade"), especially for the billions of people who don't live in America. Then he gave this good advice to his editorial board, "I am arguing for an end to the finger-wagging, the accusation either of not understanding economics or of kowtowing to special interests that tends to be the editorial response to politicians who express skepticism about the benefits of free-trade agreements." Krugman concludes his column by saying, "[T]hose who are worried about trade have a point, and deserve some respect." Hey, that includes me!

Update on Monday, December 31, 2007 at 02:14PM by Registered CommenterSkeptic

I submitted the following comment about this on Paul Krugman's blog:

If there were a prize for the economist most interested in testing his theories against real-world data, you would not have much competition. Still I don't see recognition of certain trade facts--of the 500 pound gorilla variety--that no theory addresses satisfactorily.

Most economists argue that balanced trade is good for a trading nation. Some argue that sometimes an export surplus is even better for a trading nation. But I have never heard it argued that a trading nation benefits from running a chronic trade deficit. So why has the fact of America's chronic large deficit not caused us to conclude that our trade policy is fouled up?

I guess New Trade Theory and Old Trade Theory and Every-Other Trade Theory predict that all trade deficits will eventually turn into balanced trade through market adjustments in currency exchange rates. But when "eventually" is so many years that the deficit becomes a substantial fraction of GDP and national wealth, how can we ignore the facts and patiently wait for equilibrium? While we wait, families are crushed, foreign affairs policy options are limited, and society is transformed--not necessarily in a good way. Furthermore, the theories predict only that the net outflow of wealth will eventually stop--not that it will reverse and restore the status quo ante.

Isn't it true that all theories about trade are too rudimentary to be useful because they do not account for the facts that real trade deals are characterized by cupidity, stupidity, and political distortion and that real currency markets are manipulated by governments and others who can?

I checked back today to see if it had been published.  It hasn't, but maybe he read it.  Krugman has a new post on his blog in which he acknowledges that trade theories all assume balanced trade, and he even provides a link to one his early papers in which he explicitly says that in the penultimate paragraph. 

Krugman's blog is worth following because he gives background on things that didn't fit in one of his columns, and on other things as well.  Recently, he has been posting several times a day.  I subscribe to his RSS feed and recommend it to my readers. 

Update on Tuesday, January 1, 2008 at 09:29AM by Registered CommenterSkeptic

And here's a link to Krugman's lecture at the London School of Economics in June 2007.  He says the same thing he did in his column--that extensive trade with a low-wage nation is likely to have big income distribution effects in a high-wage nation--but then he said it more wonkishly and at greater length. 

Update on Thursday, January 3, 2008 at 11:58AM by Registered CommenterSkeptic

Krugman got so many comments to his Bit of Background post that it took him several days to clear and post them.  If you go to his blog to read these 23 comments (includes mine), don't miss these three:  Discussing how China is managing trade while the USA just lets it happen to us, posted by Jim at 2:18pm on 12/28; an economic theory (not a social or political theory) why wealth concentration is bad, by sash at 2:26pm on 12/28; explaining why product design and manufacturing improvement/technology jobs tend to go where the manufacturing is, by Economic Pessimist at 7:29pm on 12/28.

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