Sensible words from Paul Krugman

Paul Krugman tries to locate a sensible middle ground between anti-globalists and knee-jerk free traders:

Those who think that globalization is always and everywhere a bad thing are wrong. On the contrary, keeping world markets relatively open is crucial to the hopes of billions of people.

But 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.

It’s often claimed that limits on trade benefit only a small number of Americans, while hurting the vast majority. That’s still true of things like the import quota on sugar. But when it comes to manufactured goods, it’s at least arguable that the reverse is true. The highly educated workers who clearly benefit from growing trade with third-world economies are a minority, greatly outnumbered by those who probably lose.

As I said, I’m not a protectionist. For the sake of the world as a whole, I hope that we respond to the trouble with trade not by shutting trade down, but by doing things like strengthening the social safety net. But those who are worried about trade have a point, and deserve some respect.

Well said!

UPDATE: Greg Mankiw appears to be saying, in response, that "those who are worried about trade" do not deserve respect, because they ARE protectionists. Hmmm. Perhaps we can make more progress here if we stopped using blanket terms to characterize where people stand, and used real words to describe what their views are.

Comments

[Per Kurowski]

Krugman first says “that import quota on sugar.. benefits only a small number of Americans, while hurting the vast majority” this sounds right but then with respect to manufactured goods he says “the highly educated workers who clearly benefit from growing trade with third-world economies are a minority, greatly outnumbered by those who probably lose” and I honestly don’t get it, not coming from an economist at least, because it seems to imply that the economic benefits from trade are dependant of the number of voters in the sector.

Though I have frequently proposed to developing countries to get rid of all protectionism voluntarily and on their own because it is so much less expensive than ending up having to do it through a trade agreement where your negotiators are bound to lose, I do defend some modest protectionism on two grounds.

The firsts is safety…like in food safety where if you have some agricultural possibilities you should not throw them all ways just because they are not competitive on the margin, but keep something of it alive… in case you need to scale it up rapidly. Something like a strategic reserve of seeds, fertilizers and knowledgeable farmers.

The second is professional biodiversity. Just because they are not competitive you do not want to exclude completely one sector, for instance manufacturing, because they really could be needed to guarantee the professional bio-diversity and the overall social fabric of a country. Sometimes the mind-set and professional qualifications in solving a manufacturing problem in a car line could be what provide you with an out of the box thinking in a totally different area, like for instance in finance.

With respect to the last point in another blog I recently made the comment that the current problems with our over-sophisticated financial sector might be a result of incestuous thinking… and so, to solve them, it might be time for the Fed, instead of asking more financial professionals what to do about it all, that they perhaps ask a GM plant manager and a GM line worker for some advice. Sometimes the experts are about the most useless people in the world since they keep chasing their own tail (like our bank regulators) when all what you really want and need is to get out of the vicious circle.

[Ken]

Are these words sensible? Don Boudreaux doesn't think so and offers evidence that Krugman doesn't think so either.

http://cafehayek.typepad.com/hayek/

[Robert Johnston]

Oy vey, Ken. Don Boudreaux clearly didn't read Krugman's column or anything else Krugman's recently written about trade. Krugman readily and explicitly admits that he used to argue that concern over free trade driving down wages was significantly overblown, so there's no "gotcha" in noting that he used to argue that.

Krugman's old argument was that trade generally didn't produce significant downward pressure on manufacturing wages. What Krugman's saying now is that his old argument doesn't apply any longer because trade for manufactured goods from low-wage economies--the kind of trade that can broadly exert downward pressure on U.S. wages--has dramatically increased in recent years, and the wages being paid in the low-wage economies from which we're importing manufactured goods are much lower, relative to our own, than they used to be, further increasing downward pressure on U.S. wages.

[arvidson]

If you want economic arguments that are empirically based and not arguments driven by ideologues who think they are the gatekeepers of what is 'true' economics, Cafe Hayek is the last place you should visit.

[Biomed Tim]

I don't think Mankiw is making a blanket statement. Here are his exact words:

"But what if those who are worried about trade are protectionists? Should we still respect them?"

He never suggests that all people who are worried about trade are protectionists, just like how Larry Summers never said girls are dumber than guys.

[Robert Johnston]

"I don't think Mankiw is making a blanket statement."

What; you think he was engaging in a meaningless rhetorical flourish?

How about--and I know this strains the mind--indulging in empirical arguments on trade rather than trying to dismiss arguments via ad-hominem labeling of those arguments' proponents?

More particularly, how about acknowledging that worries about the effects of trade on the distributions of wealth and income are not inherently protectionist, but rather reflect the basic economic reality that, while, all other things being equal, total wealth of an economy is a good ordinal proxy for economic health, all other things are not equal when a trade policy significantly changes the distribution of wealth, even from a strict utilitarian viewpoint that holds that utility maximization across the economy should be the goal of government policy. How about acknowledging that economic arguments that reduce to "policy 'A' could produce a Pareto superior position to the economic status quo if we allowed for redistribution of wealth, so let's follow policy 'A' even though we're not going to allow discussion about redistribution of wealth because that would be socialist and bad" are, in fact, utterly vapid non-arguments?

In particular, bringing up protectionism in response to an argument that advocates that free trade be allowed but its negative effects tempered via strengthening of the social safety net is at best a complete and intentional failure to engage in reasoned argument. There's time enough for Mankiw to worry about the evil protectionists and evil protectionist arguments when he actually encounters them.

[Justin Rietz]

A policy that raises one or more trade barriers to protect a group of people is a protectionist policy by definition. Whether the policy is fair, moral, Pareto efficient, etc., is not relevant to the definition.

Dani, I apologize if you have answered this in the past, but what is your position regarding the long-term implementation of protectionist trade policies? For example, if a developing country raises trade barriers to protect its burgeoning manufacturing sector, should it's long term goal be to remove such barriers once the sector has matured? Asked from a slightly higher perspective, do you see it as the goal of a developing country (or any country, for that matter) to eventually do away with all protectionist trade policies and become a truly open, free market, or do you believe it is beneficial for a government to maintain (and presumingly tweak) its trade policies indefinitely?

[R Johnston]

"A policy that raises one or more trade barriers . . ."

has nothing to do with Krugman's column, which specifically disavows trade barriers in favor of a combination of free trade and strengthening the social safety net.

Next strawman?

[dale]

And of course our existing "free" trade regimes raise barriers. Let's drop the phrase "free trade" as well as the term "protectionist" and then we may start to make progress in thinking through these issues.

[Laurent GUERBY]

When the comment section was open at Greg Mankiw's blog I often called him an hypocrite on "free trade" as Greg is a strong supporter of "intellectual property" which is the strongest form of protectionism that ever existed. As Dean Baker often says "free-trader" economists scream at 10% tariffs on shirts but say nothing on 500% to infinite tariff on drugs.

I hope Paul Krugman or Dani Rodriks will bring intellectual property vs free trade and ask Greg Mankiw and the other "free traders" band to state why they support intellectual property and still call themselves free traders.

BTW, I could not find any exchange between economists on this, I wonder why.

As for Don Boutreau, he is also a strong supporter of intellectual property which is quite amusing on a blog named "Cafe Hayek" given Hayek views on intellectual property:

""" Just to illustrate how great out ignorance of the optimum forms of delimitation of various rights remains - despite our confidence in the indispensability of the general institution of several property - a few remarks about one particuilar form of property may be made. [...]

The difference between these and other kinds of property rights is this: while ownership of material goods guides the user of scarce means to their most important uses, in the case of immaterial goods such as literary productions and technological inventions the ability to produce them is also limited, yet once they have come into existence, they can be indefinitely multiplied and can be made scarce only by law in order to create an inducement to produce such ideas. Yet it is not obvious that such forced scarcity is the most effective way to stimulate the human creative process. I doubt whether there exists a single great work of literature which we would not possess had the author been unable to obtain an exclusive copyright for it; it seems to me that the case for copyright must rest almost entirely on the circumstance that such exceedingly useful works as encyclopaedias, dictionaries, textbooks and other works of reference could not be produced if, once they existed, they could freely be reproduced.

Similarly, recurrent re-examinations of the problem have not demonstrated that the obtainability of patents of invention actually enhances the flow of new technical knowledge rather than leading to wasteful concentration of research on problems whose solution in the near future can be foreseen and where, in consequence of the law, anyone who hits upon a solution a moment before the next gains the right to its exclusive use for a prolonged period."""

The Fatal Conceit: The Errors of Socialism, 1988 (p. 35) Friedrich von Hayek

[wjd123]

"Still, when the effects of third-world exports on U.S. wages first became an issue in the 1990s, a number of economists — myself included — looked at the data and concluded that any negative effects on U.S. wages were modest.

"The trouble now 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."--Paul Krugman

I don't understand Krugman. In the 1990s he couldn't reason that third world exports would increase and would become a problem for first world workers wages? Of course he could. Reasoning thus, wouldn't the proper response be to look at the way free trade is practiced.

Krugman seems to be saying that we should give those those candidates who want to reconsider our free trade practices a hearing, yet the type of advice he offers is a stronger social safety net. That advice doesn't pertain to the practice of free trade per se. Just where is the change Krugman indicates that he is open to now that the majority of Americans are becoming free trade loosers when it comes to decent paying jobs?

I don't see anything new here except a recognition that enough chickens has come home to roost that free trade is in trouble.

[Doroteo Aranjuez]

It's not clear to me that the conventional advocates of specialization to exploit a perceived comparative advantage in a developing economy (especially if small) take into account the risk involved in putting their eggs in one (or a few) basket(s) -- and here I include the risk of clashing with Washington. I'd think that there's a reasonable argument in favor of import substitution as a way to diversify trade and reduce this risk.

[save_the_rustbelt]

The unemployment rates in Ohio and Michigan continue to be high (and would be higher if the long-term unemployed were counted honestly).

Foreclosures started here 5 years ago, old news.

Personal bankruptcies setting records, again.

The manufacturing offshoring continues (toys, ladders, sweepers, auto parts, tv components, bicycles, toilets, etc, etc, etc.)

Does anyone lose from trade? wow.

[paine]

dani and paul

paul sees emerging market wages effecting us wages
how ??

look at the volume
of products now flowing from cheap labor asia guys

its rising and already very big

dani

"I never quite understood why these volume indicators are important in a world where prices and competition get determined at the margin"

more dani if earler dani:
after obama man
ghhouls -bee waved
away the whole
open trade borders
equals belower
domestic skill free wage rates hustle
as way off base
empirics and showable wise

dani pointed out
using a few sharp points
from his quiver full
of
neoclassical trade theory spears

"What is wrong with this reasoning "

" it neglects a key insight from economics: you need to think at the margin, not in terms of averages. "

why ??

"... domestic wages are strongly influenced by wages abroad when you have the ability to import the labor services of other countries through the labor-intensive goods that they sell you--even if a large part of your labor force is employed in non-tradables."

how can these two bright souls paul and dani
be shown to sing harmony

if the state of trade is for ever slowly
price and volume adjusting

even to potentially huge
marginal changes
only after serious time elapses will the impact
reach its climax

marginal price implied location of production changes ie cross border trade volume change
and of course job volume
change will show itself over a protracted period

on the dry side
of a dyke its mostly still dry for a while
even after a series of holes
get punched in so long as
the holes start small
enough.....
but
as time passes and the holes aren't plugged
and maybe the wholes are ever wider
and the absorption drainage rate
no longer exceeds the in flows ....
eventually both sides of the dyke will look alike

for a while
some can suggest the puddles forming near the dyke
are just from rain fall
like other rain puddles ...

end of over extended figure

so rough and ready observation of the flow rate
might well indicate
the direction of
serious impact
from a comp stat result
knowable by theory
well in advance

[paine]

greg mephisto btw
carries water for dani's
"narrow elites"

my solution

cheaper dollars make foreign wages higher

bust the asian pegs
even if wall street
and company
screams "no" at us
thru its
GREAT AND POWERFUL WTO MASK

also
let in as many foreign workers as can find a job in six weeks

i say to rebuild america
the right way
we balanced shrinking trade volume
and about
100 million new jobs
and foreign workers to fill em

any vickrey-lerner type set
of super macro policy paths
could lead us there
to keep it going

[Per Kurowski]

paine says: “also let in as many foreign workers as can find a job in six weeks… i say to rebuild america”

Sounds like an extremely sensible thing to do when you are faced with the bills from an extremely high indebtedness and have to otherwise use the family silver to pay it with.

Who on earth allows the guests to leave the table just when the maitre brings the bill?

[gordon]

Could it be that Stiglitz is taking up my recommendation (of a few months ago) that anybody who wants to see a better "safety net" should adopt a protectionist stance as a strategic ploy? Then he/she can negotiate away tariffs for the safety net that he/she really wants.

[pgl]

I at 1st had the same read of Greg's comment as Biomed Tim had. But read earlier how Greg did some Paul bashing to the effect that much of Paul's NY oped writing is GOP bashing. And then I remembered Greg's habit of dismissing the concerns over income inequality, which appear on his blog quite regularly. OK, Greg might be hoping to be Romney's CEA chair if Romney wins the White House - but I think our host gets it exactly right here. We are economists and not paid political hacks - right?

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[keepall 50]

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[keepall 50]

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[Vikrantsays]

hmm well it makes sense what krugman says. with the US economy in recession partly due to global financial crisis and then due to billions spent on war, we need to ensure that we are not leaving any opportunity for generating extra revenue via trade to other countries. it might drive prices locally but keeping trade globalized is a good strategy for long term.
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[Jimmy Jam]

the highly educated workers who clearly benefit from growing trade with third-world economies are a minority, greatly outnumbered by those who probably lose.China outsourcing