Krugman and the trade populists

Paul Krugman's column in today's NYT articulates what is becoming perhaps the dominant view among librals and centrist Democrats (if we can call them that). Krugman makes the following points:

1. One could have minimized the impact of trade on U.S. wages ten years ago (as Krugman among other economists did), but it is difficult to do so now in light of sharply expanded trade with developing countries.

2. Protectionism is not the right response, but primarily because it would have adverse effects on poor nations such as Bangladesh and India. (Krugman implies, but does not explicitly say, that raising trade barriers at home would move distribution in the "desired" direction.)

3. Including labor standards in trade agreements is OK, but it will do very little to improve labor incomes at home (in this Krugman echoes the points made by James Galbraith in his debate with Jeff Faux).

4. The solution to labor woes therefore lies not in trade, but in appropriate social policies, such as universal health insurance.

The point that trade policy cannot substitute for an adequate social policy is perfectly sensible. So is the argument that the need for social policy becomes greater when globalization exerts downward pressure on wages and creates new risks and anxieties. As a large and venerable literature has shown, countries that trade more have larger social programs and more generous safety nets.

It is also interesting that Krugman's main objection to protectionism is not that it would be bad for the U.S. (the usual economist's argument), but that it would be bad for others, particularly poor nations.

Krugman's argument leaves unclear what the right trade policy should be.  The questions of the day are not whether the U.S. should increase tariffs against Bangladesh, India, or Mexico (the three countries cited by Krugman), but whether it is a good idea for the U.S. to enter into new free trade agreements (with countries such as Panama and Peru), and whether Doha, with its current agenda, is worth the trouble.

Comments

[Torben]

Once also he said “The broad argument for free trade, to which many economists implicitly subscribe, is essentially political: free trade is a pretty good if not perfect policy, while an effort to deviate from it in a sophisticated way will probably end up doing more harm than good.” It is not clear where Krugman stands when it comes to whether the US should protect or not. He seems that he is not convinced by the economics so far.

[alphie]

Seems like the first step is to identify which professions are protected from foreign competition.

Then work to remove those barriers.

Third world wages wouldn't be a problem for American workers as long as American doctors, teachers, lawyers, etc. are also getting third world wages.

[Zathras]

Agreements with Panama and Peru are less important than agreements with larger countries like South Korea and (to some extent for reasons not directly related to trade) Colombia.

As for Doha, we need to accept the limitations of trade agreements when it comes to aiding the economies of some poor countries. Reducing European barriers to trade could well help some farmers in impoverished African countries, but many of those barriers weren't erected to keep Third World farm products out; they were erected to keep American farm products out. Similarly the most overtly protectionist American farm programs -- the ones for sugar and dairy, for example -- exist to protect American farmers from competition from a small number of countries, most of which (e.g. Australia and New Zealand) are not poor. Certain specific US export subsidies are another matter; the ones for cotton are frequently cited as depressing prices for small cotton producers in the West African nation of Mali. Even there, though, the loudest objections to American export subsidies is coming from not from Mali but from Brazil. Increase wealth is something ag. trade liberalization may do. We just shouldn't count on it to make that many impoverished Third World farmers less impoverished.

[wjd123]

"Paul Krugman's column in today's NYT articulates what is becoming perhaps the dominant view among liberals and centrist Democrats (if we can call them that). Krugman makes the following points":

Is Rodrik speaking for all liberal and centrists Democrats or just the ones that are economists?

If he is talking for Democrats in general and not just economist who happen to be Democrats, I don't see how his statement holds.

The logical consequences of such a general view would be that Democrats should accept free trade as practiced today for a shot at a stronger domestic social safety net.

That's a policy that allows trade to grow as fast or faster than it has grown in the last ten years.

According to Krugman growth in the last ten years has made changing trade policy harder to do.

So we are to go along with how trade is practiced today for the next ten years to make the problem even more intractable?

Krugman admits that he doesn't have a solution to labors plight over free trade except the domestic political solution of a stronger safety net.

His views would leave any leverage labor would have to turn international politics to it advantage, off limits.

International politics is the very leverage labor needs to change domestic policy that is anti-labor.

This is creative failure on economists part to use leverage. Especially when they have an existing model in the EU of how to combine trade policy with improvements in political economies.

There are no members of the EU that aren't democracies. All of them allow for the free association of labor. These changes were necessary to gain membership and the greater trade that came with it.

The EU has used the allure of greater trade to change the political economies of countries that want to become members. For instance Spain and now the countries of Eastern Europe had to become democracies to gain membership. Also, EU rules add to civil rights and labor rights. This allows for labors position to improve rapidly in the political economy as it gains political strength.

Hands-off international trade is a policy that ties one of labor's hands behind it's back in the fight to change political economies and domestic policies that effect the political economy. Changing domestic policies is what Krugman says he want to do. At the same time he is weakening those institutions--by removing international leverage-- that would fight for the very domestic changes he wants. I don't believe that is the dominate position among liberal and centrists democrats.

In the end a hands-off policy will be a losing position for labor because it gives up half the battle field--the international one--to corporate interests. Labor needs that battle field in order to bring about leverage for change.

[PJ]

@wjd123: I think Rodrik's point is that trade liberalism and subsidized social infrastructure are not inversely correlated, as is usually assumed. I can't speak to the effectiveness of trade policy as a "lever" for social change. But speaking personally (as a "centrist Democrat" who is coincidentally living and working in China), I'd fear trade liberalization a lot less if I knew that, should my IT-industry job move overseas, I could take a service sector job without fearing for the future of my family's [health care | education | retirement].

Interestingly, this is exactly the worry that keeps me (and others in my field) returning to regular employment when independent contracting is clearly the preferred way to operate. I'd love to mix a steady part-time service job with occasional freelancing (who wouldn't?) but the healthcare/education/retirement thing keeps dragging me back in.

In other words: a stronger social safety net would certainly sweeten the trade liberalization pot for a lot of worried Americans.

[wjd123]

P.J.

I agree with you that a stronger social safety net would make trade liberalization easier. My worry is how to get that stronger net.

In truth, I also have to admit that I'm not happy with the way we practice free trade. I perfer a way that aids society in strenghtening it checks and balances to bring about a society that everyone will find it easier to buy into.

What good does all the creative destruction of free trade do if it ends in a society that people see as not worth supporting?

[KY Choong]

"It is also interesting that Krugman's main objection to protectionism is not that it would be bad for the U.S. (the usual economist's argument), but that it would be bad for others, particularly poor nations."

I gather that economists are now divided over whether free trade is good for the US. Is there still a consensus that free trade with the US is unquestionably beneficial to developing economies? If so, is that a relevant consideration to a US based economist like Professor Rodrik?

Arguably, an admirable trait about economists is their capacity to look beyond the interests of a narrow group and reflect on the interests of society as a whole. I hope this trait continues. We have enough consultants happy to argue for the interests of the few. Arguing for the interests of others is, unfortunately, usually a thankless task.

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[Moncler]

The web of losses that you describe in NC are offset by a web of gains in Boston. Restrict trade, and I pay more for my socks, do not eat dinner in Boston, and the web of losses you described in NC happens in Boston

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