Krugman — self-protectionist free trader

11 March, 2016 at 14:51 | Posted in Economics | 5 Comments

Krugman has been a booster of trade and globalization for thirty years: marginally more restrained than other elite economists, but still a booster.

Now, the political establishment has what it wanted and the effects have been disastrous for those not in the top 20 percent of the income distribution.

At this stage, as exemplified by Krugman, the economics elite is moving to reinvent itself with a combination of minor backpedaling and its own studies that belatedly acknowledge the damage wrought by globalization.

free-tradeThere is no professional cost to be paid for the grievous injuries it has helped inflict; no mention is made of the fact that outsider critical economists have long predicted and written about these injuries; and the policy recommendation is we must stay the course because we are now locked-in and have few options …

Krugman’s self-protectionist moment is another example of gattopardo economics, whereby the mainstream economics profession changes to keep things the same. Even as he tries to slip in to a new skin, the politics remains unchanged. Senator Sanders, the longtime opponent of neoliberalism, is described as irresponsible and feckless: Hillary Clinton, the longtime advocate of neoliberalism, is portrayed as a model of trade policy responsibility.

Thomas Palley

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  1. I don’t agree with everything Palley says he, but I do on this:

    ” the mainstream economics profession changes to keep things the same”.

    Krugman says in his latest posts that standard models have predicted distributional effects from trade liberalisation. But he fails to point out that on the basis that these models have been used to push the free trade agenda. Critics of gung-ho free trade policies were basically dismissed as reactionary crack-pots. That included economic historians who have known for a very long time how very liberal trading regimes can end and how protectionist regimes have been the way out of poverty. They know the real question is not whether trade protection can work, but why has it worked in some countries and not in others. The answer to that question cannot possibly be answered by neo-classical theory or mathematical modelling.

    Krugman is being disingenuous about the causes of the Depression (of which he is now on opposing sides to the neo-liberals). Protectionism in the 1930s was not a cause, but a response to the Great Depression (which actually in many countries, together with Keynesian policy responses, was part of recovery). What he fails to consider is that the Great Depression in many parts of the world followed tumult and volatility in the 1920s which was linked to the growth of trading blocs that started before WWI. All this attests to the distractions of models in economics, and what is required is clearly documented historical analysis.

    However, Palley should be careful. Clinton in fact called for a ‘pause’ to globalisation in her battle with Obama 8 years ago.

    Now we are getting some honesty on trade, and recently we have got this on international capital flows (IMF recently did a big u-turn here), the next subject will be labour flows – immigration. The lesson will be, if learned, that models are useless.

    On trade, and Krugman does clearly see this, the danger is confusing scepticism about free trade with the advocation of autarky. That would be dangerous and very harmful. Heterodox economist must be careful that they are not misrepresented as
    pushing the latter. THe right policy is to slow down the pace of trade liberalisation, not to reverse it.

  2. One thing I forgot to add. Mainstream economists will say that “there will be distributional effects, but the winners must compensate the losers”. In fact Krugman says exactly that. That is in fact true neoliberalism – they want what they see as the efficiency of markets with socially liberal policies – the so-called “third way”. This was very much Clinton/Blair during the neo-liberal heyday of the 1990s and early 2000s. Well we have had that. We got free trade and globalisation with welfare states.

    But unemployment benefit is clearly not for many an adequate substitute for a job.

  3. Krugman lays down a marker:

    . . . the elite defense of globalization is basically dishonest: 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.

    The tone will reinforce Krugman’s bona fides with his fans, as he declares himself a champion of truth and his own integrity.
    .
    But, even as he acknowledges that claims of “inevitability” are false, he comes very close to reinforcing the neoliberal “there is no alternative”. As Palley notes, he cleverly libels Sanders and praises Clinton. But, he also offers no substantive concession on the basic economics, beyond the acknowledgment that already liberalized trade offers only small opportunities for gains from further liberalization.
    .
    The damage done by globalization isn’t conceded at all, only the income distribution effects Krugman asserts are accounted for by the standard models. Those often highly stylized models are crap at explaining the patterns of actual trade, let alone the course taken by the distribution of income. Any sentient being, other than an economist, would be aware of the role of financialization in driving globalization, shaping the politics of trade agreements, and producing rapid change in income distribution.
    .
    Krugman’s first rhetorical move in his op-ed was quietly subtle, as he speculated on the reasons for Sanders’ appeal: ” . . . a widespread guess is that his attacks on trade agreements resonated with a broader audience than his attacks on Wall Street; and this message was especially powerful in Michigan, the former auto superpower. . . . “ It is a clever distinction, to imply that Sanders’ critique of trade policy is divorced from his attack on Wall Street, and thereby to slip past the financial links that join the prosperous rise of New York to the devastating decline of Detroit and Akron.
    .
    For neoclassical economists, there is no money. Not in macroeconomics, not in trade. Not anywhere in the money economy they falsely call, a “market economy”.
    .
    Palley does no one any good with references to prescient papers from 1994. This isn’t about academic primacy. It is about telling the plain truth. This is about talking about the economy in frames and terms of reference that recognize the reality of lived experience. The first decade of the 21st century witnessed appalling maldistribution of investment. Disinvestment from manufacturing in the American midwest wasn’t a market response to efficient price signals. The system is rigged, as Sanders says and Clinton denies. Model that, Paul!

  4. Trade is in general a positive sum game. Thus the winners can make up the losses of the losers and still have something to spare. That is far from what has happened.

  5. One thing interesting about Krugman’s column is at last his recognition that trade policy is connected to foreign policy. There is irony here all over the place. He often criticised historians and others (I am not talking about Ferguson here – I am not a fan of him) for not having a ‘model’ and just having ‘ stories’. The first irony is of course that he makes up stories to get his models! The second is he pontificates about foreign policy issues – without a model. Does he use a game theoretic model? Well, such models were rightly rejected by political scientists in the 1970s.

    But moving on from that, there is something even more problematic for Krugman. The relationship between foreign policy and trade policy is part of the fundamental link between neo-classical economics and neo-liberalism, even if economists claim that neo-classical economics is not ideologically based. Neo-classical economics is rooted in the notion of neo-liberal universal values. Countries and societies develop the same way, and basically develop towards industrialised democracies that look western. (Reconciling this with their claims to diversity and cosmopolitanism is a big problem for them.) Of course with universal values you cannot explain why some societies have been more successful economically in lifting their populations out of poverty than others.

    Both free trade and protectionist policies has been successful and unsuccessful depending on the country. To understand why some have been more successful and others you need to understand historical and social context. In other words it is precisely the things that are not in neo-classical models you need to know.

    Fundamentally according to neo-liberalism, the spread of capitalism and democracy are linked (although there is little evidence of this). The spread of both arguably act to reduce the potential of conflict (again historical evidence of this is weak). That is one reason why foreign ministries heavily push free trade agreements

    Anyway if Krugman is going to start sounding convincing he is going to have to do some serious political science and history. He won’t though. His identity and whole raison d’etre has been about defending the use of models in economics and the MIT Walrasianisation of economics.


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