Kudos to Brad DeLong
Paul Krugman has recently written some incredibly critical things about free trade. Co-blogger Scott Sumner has responded admirably.
Now Brad DeLong weighs in also. Here is part of his excerpt of Krugman’s case (you can find the whole Krugman piece here):
That said… the elite case for ever-freer trade, the one that the public hears, is largely a scam…. [The] claims [are] that trade is an engine of job creation, that trade agreements will have big payoffs in terms of economic growth and that they are good for everyone. Yet… the models… used by real experts say… agreements that lead to more trade neither create nor destroy jobs… make countries more efficient and richer, but that the numbers aren’t huge….
False claims of inevitability, scare tactics (protectionism causes depressions!), vastly exaggerated claims for the benefits of trade liberalization and the costs of protection, hand-waving away the large distributional effects that are what standard models actually predict…. A back-of-the-envelope on the gains from hyperglobalization — only part of which can be attributed to policy — that is less than 5 percent of world GDP over a generation…. Furthermore, as Mark Kleiman sagely observes, the conventional case for trade liberalization relies on the assertion that the government could redistribute income to ensure that everyone wins–but we now have an ideology utterly opposed to such redistribution in full control of one party…. So the elite case for ever-freer trade is largely a scam, which voters probably sense even if they don’t know exactly what form it’s taking….
Here’s part of Brad’s reply:
So I guess it is time to say “I think Paul Krugman is wrong here!” and fly my neoliberal freak flag high…
On the analytics, the standard HOV [Heckscher-Ohlin-Vanek] models do indeed produce gains from trade by sorting production in countries to the industries in which they have comparative advantages. That leads to very large shifts in incomes toward those who owned the factors of production used intensively in the industries of comparative advantage: Big winners and big losers within a nation, with relatively small net gains.
But the map is not the territory. The model is not the reality. An older increasing-returns tradition sees productivity depend on the division of labor, the division of labor depends on the extent of the market, and free-trade greatly widens the market. Such factors can plausibly quadruple The Knick [?] gains from trade over those from HOV models alone, and so create many more winners.
Moreover, looking around the world we see a world in which income differentials across high civilizations were twofold three centuries ago and are tenfold today. The biggest factor in global economics behind the some twentyfold or more explosion of Global North productivity over the past three centuries has been the failure of the rest of the globe to keep pace with the Global North. And what are the best ways to diffuse Global North technology to the rest of the world? Free trade: both to maximize economic contact and opportunities for learning and imitation, and to make possible the export-led growth and industrialization strategy that is the royal and indeed the only reliable road to anything like convergence.
So I figure that, all in all, not 5% but more like 30% of net global prosperity–and considerable reduction in cross-national inequality–is due to globalization. That is a very big number indeed. But, remember, even the 5% number cited by Krugman is a big deal: $4 trillion a year, and perhaps $130 trillion in present value.
UPDATE: Krugman responds to DeLong.
Mar 13 2016 at 8:08pm
Brad Delong: “I think Paul Krugman is wrong here!”
Wow, those are the last words I never thought I’d read from him. Mutiny!
Mar 13 2016 at 8:47pm
A big flaw in anti-trade tirades is the view that cross-border trade is bad if it has some short-run, negative effects for people on one side of the border (the writer’s side, of course). The positive effects (e.g., lower prices for consumers) tend to get overlooked.
Another flaw in the anti-trade view is that the only kind of border that seems to matter is an international one. But a border is a border, so a lot of Ohioans (e.g., buggy makers) should have been upset because Henry Ford’s Michigan-made Model Ts put them out of business. But the same was true of a lot of Michiganders, so the problem wasn’t cross-border trade, it was creative destruction, which is what free trade fosters, whether the trade is international, interstate, or intercity. The anti-trade crowd would still be wallowing in horse manure if it weren’t for Henry Ford (and others like him), but that doesn’t seem to occur to them.
Mar 13 2016 at 10:30pm
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Mar 14 2016 at 10:41am
Infant industries argument is completely ignored in your reasoning. The infant industries perspectives can be taken too far, but should never be disregarded in discussing benefits of free trade to less advanced economies.
If one economy is ahead in all technologies, free trade might still benefit the backwards economy, but also virtually ensures that they will not be able to move up the value chain, where they are massively outcompeted by superior technology at every stage but the very lowest on the ladder.
How do we ensure that the theoretical gains of trade in fact come to pass for countries where this line of thinking is highly relevant?
Mar 14 2016 at 3:20pm
Krugman’s presumably right that trade liberalization leaves some people worse off, particularly the American working poor, but I’d wish he’d spell it out and follow the policy implications.
1) Does it benefit the foreign poor? If so, has Krugman become a nationalist?
2) How does Krugman feel about immigration? Are there any existing American groups who lose when we liberalize immigration, and if so, has that affected Krugman’s view of whether we should continue liberalizing immigration?
Mar 14 2016 at 9:01pm
Krugman’s presumably right that trade liberalization leaves some people worse off, particularly the American working poor,
Why are the working poor made worse off by trade? They receive tremendous advantage from lowered prices of manufactured goods, and most are in retail, fast food, etc. which are largely non-traded. In fact Walmart, largely a success because of trade, employs 1.4 million low-skilled people in the US.
The people I believe have been made worse off by (recent) trade are vocationally trained manufacturing workers with some skills (but not highly skilled). In auto manufacturing, they lost jobs when more efficient Japanese competition was allowed to sell into the US, and US auto manufacturers had to become leaner and move to states with more flexible labor situation, as well as Mexico after NAFTA. In textiles, many jobs like “sock toe sewer” were lost to south east Asia.
Mar 14 2016 at 9:12pm
So Krugman responds with a graph of Mexico exports as a percent of GDP versus the ratio of GDP per capita of Mexico to GDP per capita of the US.
What a lame move, Mr. Krugman!
While the graph does show that US GDP per capita grew faster than Mexican GDP per capita, real Mexican GDP per capita has risen by 150% since 1960!
Perhaps with respect to Mr. Trump, Mr. Krugman should exclaim “WE’RE WINNING” with regards to trade with Mexico if our GDP per capita is rising faster?
Mar 15 2016 at 9:30am
Mr. Econotarian – you’re right, I should have been more precise.
Most of the poor are made better off by trade, but to give Krugman as much credit as possible, I think he’s right that most of the people who are made substantially worse off by trade are unskilled workers. (According to David Auteur, if you look at industries that have trade shocks, the top third of income earners in those industries readjust with little or no loss, but the bottom third often suffer long term and substantial losses that they don’t recover from, which isn’t IMHO surprising).
Still, I think my follow up questions for Krugman stand – if he’s cooling on trade out of concern for those made worse off, (1) has he considered the effects of trade on the foreign poor, and (2) how does he feel about future immigration and its effect on non-high school or non-college workes in the US?
Mar 15 2016 at 1:37pm
“Furthermore, as Mark Kleiman sagely observes, the conventional case for trade liberalization relies on the assertion that the government could redistribute income to ensure that everyone wins–but we now have an ideology utterly opposed to such redistribution in full control of one party”
This comment by Krugman is bizarre. Unless I’m missing his meaning, redistribution would completely negate the value of trade liberalization, not enhance it.
The whole point of free trade and the marvels of comparative advantage is that people working in less productive industries move to more productive ones. That’s where the actual gains arise. But what would “redistribution” do? Subsidize workers in less productive industries? Pay them not to work at all? Pay people more than their productivity merits? Whatever form it would take, it would reduce the movement of people from less to more productive activities, thereby reducing or even negating the gains from trade.
Why does it seem like Krugman understands less about economics with each passing year?
Mar 16 2016 at 4:02pm
If one economy is ahead in all technologies, free trade might still benefit the backwards economy, but also virtually ensures that they will not be able to move up the value chain
I think Brad Delong’s argument is precisely that trade helps disseminate technology more rapidly.
It strikes me that a protected industry would tend to advance less rapidly and fall behind the larger outside market. Like banning Google in some small country and having a group of coders painstakingly trying to reinvent the modern internet starting from 1996 HTML code. They would be constantly behind and off in technological dead ends. You need that kind of intellectual interaction to stay in the game that you can only get by competing in a global market.
Mar 21 2016 at 11:53pm
According to Krugman, it doesn’t matter what HOV models show because Mexico tried trade liberalization and failed to be come the Asian tiger he expected it to become (#facepalm). Rule #1, never, ever disappoint Paul.
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