Krugman Talks Sense on Trade and Immigration
By David Henderson
On December 15, the Business Insider posted an excellent interview by Josh Barro of Paul Krugman. It’s excellent in the sense that Josh kept the conversation going quickly, as did Paul, so that they managed to cover a lot of issues.
They started, of course, with the tax cut, and I don’t know enough–and I think no one knows enough–to evaluate Krugman’s claims about its effects. He, not surprisingly, minimizes the effect on growth and on real wages; I’m more optimistic, but we’ll see.
There is one part, about why the economy is doing so well, where I disagree with Paul. He states:
The economy’s pretty good. In fact, it looks like we’re close to full employment, although we don’t know why wages aren’t rising more. Trump gets essentially zero … First of all, there have been no actual policies. There hasn’t really been any policy change. The convention, usually, when people try to assess the economic impact of administrations, is to assume that the first year reflects the policies of the previous administration, so no there’s nothing, nothing that is Trumpian about what’s going on.
That’s actually not true. It seems that Paul has not been following the various moves on regulation: both to slow down new regulations and to repeal some others. When I was on Squawk Box earlier this year, I gave as an example of a regulation that would hamper productivity the one whereby the EPA says that a pond on a farm is not just a pond, but also a waterway. Trump and EPA head Scott Pruitt have moved to modify this rule: from what I can tell, it hasn’t happened yet, but still it’s likely that farmers and others are a little more likely to invest in their farms because of the anticipated deregulation. They have deregulated in other ways too. Each one is like removing a small boulder from a big stream. One doesn’t do much. A few dozen can make a small but noticeable impact.
There are two problems with attributing the two quarters, and possibly three (we’ll know soon), of strong growth this year to President Obama’s policies, as Paul is inclined to do. First, it’s hard to see which of his policies would account for that higher growth. What did Obama do in 2016 that would cause growth to rise from about 2% to about 3%? Second, when a new president is elected and his policies look to be very different from the old policies, even if he doesn’t get many of them implemented right away, expectations of future policies can and do affect behavior.
Here are the parts I liked, not just because I agree with Paul’s bottom line but because it shows someone looking carefully at microeconomic details of the U.S. economy.
Barro: Let’s talk about trade. Do you worry at all about Trump’s rhetoric on trade? What if he follows through on threats to withdraw from NAFTA or to start a trade war with China? What’s the effect of that in the US?
Krugman: The NAFTA issue I think is a really a huge issue, if it happens, which is probably why it probably won’t happen. The thing about NAFTA is not so much who are the beneficiaries. I mean, I think United States benefits from NAFTA, but the main point there is that there’s no such thing now as Mexican manufacturing and US manufacturing. There’s North American manufacturing.
It’s this tightly integrated complex of industries where stuff is shipped back and forth. Different pieces of an automobile are made all over the continent, and if you break that up, if you disrupt it, then we’re talking about a lot of disruption at the industry level, we’re talking about a lot of plants closing, new plants opening. It would be exactly the same sort of thing that people complained about from the growth of trade, except this time it’s like the old joke about the motorist who runs over a pedestrian and says, “I’m sorry, let me fix it,” so he backs off and runs over him again. That would be a hugely costly thing if we really disrupt NAFTA. That means that industry is horrified at the prospect. So in a way trade is going to be the test of whether there’s any of that Trump orthodoxy left. Is he willing to block the big companies on that?
Barro: Regardless of whether there’s a good remedy available to Trump, or whether the remedy that he’s talking about makes any sense, is he right in his critique that free trade and relatively loose immigration policies have depressed the wages of native-born American workers over the last few decades?
Krugman: Trade a little bit. Most estimates do suggest that increased International Trade did have some depressing effect on blue-collar wages in the United States. We import labor-intensive products; that reduces the demand. It’s probably not huge, and it’s probably mostly in the past. It’s not a continuing force of further downward pressure. Immigration, actually, the evidence suggests that immigrant workers are not for the most part competing with native-born workers. They’re competing with immigrant workers who are already here, more than that. Even though you take somebody with 11 years of education from Mexico or Central America, compare them with somebody with 11 years of education born here, they’re actually very different, the skill sets, the occupations are very different. The immigration thing, although it’s the one that resonated most with with Trump voters, is probably in fact the place where his economics is just wrong. He has a better case on trade.