Krugman and Public Choice
A few readers have observed that Paul Krugman‘s general neglect of public choice problems is especially odd because it takes such problems very seriously in the area he knows best: trade policy. Here’s what Paul says in his 1993 AER piece, “The Narrow and Broad Arguments for Free Trade“:
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.
Now suppose that a new trade theorist comes along and informs the countries that markets are imperfect, and free trade is not really an efficient policy after all. There is, however, no simple and easily defined policy that can take its place, and the gains from optimal deviations from free trade will be small. What should the countries do?
It seems quite reasonable to argue that the countries should stick with free trade rather than try something complicated that could easily lead to a breakdown in cooperation. The perfect may be the enemy of the good: free trade may be a reasonable, rule-of-thumb way of avoiding what could otherwise degenerate into a prisoner’s dilemma, in which a seemingly more sophisticated
strategy might fail.
[Countries] seem to protect in order to redistribute income to selected producer groups. Although there have been some attempts to model this political process, notably the clever recent effort by Gene Grossman and Helpman (1992), it is not yet possible to offer as neat a story as that of optimal tariff warfare. Nonetheless, it is not too hard to imagine that setting trade policy also amounts to a kind of prisoner’s dilemma: in a country in which each interest group gets the protection it wants, the net effect may be to make even the interest groups themselves worse off than if there had been a prior commitment to free trade.
These examples suggest how one can be both a new trade theorist and a free-trader. That is, one can believe quite strongly that the international economy bears little resemblance to the perfectly competitive, constant-returns world of pre-1980 theory and yet at the same time continue to support free trade as the best policy we are likely to get. That is indeed the position that I personally hold.
My question: Why on Earth didn’t Paul say exactly the same thing when Tyler asked him about tech policy? How can Paul look at the endless triumphs of the tech industry over the last three decades and not say, “It would be a disaster if government started picking winners and losers based on political horse-trading and flowery rhetoric about fairness”? How can Paul look at the strangling of construction in high-wage areas over the same time frame and not say, “It would have been far better if government just pretended the negative externalities of construction didn’t exist”?
In all seriousness, Paul: How?!
P.S. I’m speaking in Laredo, Texas tomorrow on The Myth of the Rational Voter. If you attend, please say hi!
HT: Cameron Harwick.