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Richmans' Trade and Taxes Blog
Paul Krugman, a Nobel Prize winner and a former Princeton University Professor of Economics in an opinion piece entitled “Trade, Labor and Politics” in the New York Times (3/28/2016) and Alan Blinder, currently a Professor of Economics and Public Affairs at Princeton in an opinion piece entitled “Five Big Truths about Trade” in the Wall Street Journal (4/22/2016), urge doing nothing to eliminate the trade deficits the U.S. has been experiencing for over two decades. Princeton was the home of Woodrow Wilson, who created the League of Nations, the beginning of globalization, which is relevant because both are globalists which may explain why they wrote the nonsense we criticize. It is to be hoped that they are not representative of the economics faculty at Princeton.
Krugman begins by writing that the “Republicans, who claim to stand for free markets, are likely to nominate a crude protectionist…” Donald Trump is hardly a crude protectionist. He has said he wants to end the huge chronic trade surplus China has had with us for nearly two decades and will take action to prevent American firms moving their factories abroad. That makes him a wise protectionist because these are actions we need to take. Was Keynes a crude protectionist when he said decades ago that Britain should take retaliatory action against mercantilist “beggar-thy-neighbor” policies pursued by its trading partners? And am I, a University of Chicago Ph. D. in Economics, a crude protectionist for pointing out that economics as a science does not justify “free” trade at all. All that economics has to say is that balanced trade is always beneficial to trading partners. Trade does not need to be balanced with every country but a country’s trade should be balanced overall with its many trading partners. Free trade as a policy could only be recommended by economists when the trading partners 1) have a common currency, 2) there is free movement of labor and capital between them, and 3) neither partner can impose barriers to trade, restrictions imposed on the States by our Constitution. The European Union has similar conditions.
Krugman admits that “for the past few decades globalization has probably been, on net, a depressing force for the majority of U.S. workers.” What an understatement! Millions of American workers have lost good jobs in manufacturing which is the cause of the economic malaise afflicting this country. But Krugman talks about “globalization” as the cause. It was not globalization but the ideology of free trade and the trade treaties that accompanied globalization that produced the unintended consequence of U.S. trade deficits. The United Nations, the World Bank, the International Monetary Fund, the International Labor Organization, the World Health Organization, and hundreds of other agencies were created in the process of globalization but none of them have had a depressing effect on American workers. Only the trade deficits have done that. Krugman ought to stick to economics. Globalization is not economics, trade deficits are.
And what is his solution to the problem of workers made unemployed? Government intervention by creating “a much stronger safety net” and strengthening the unions, both of which are political, not economics, solutions. His solution is not balanced trade, which is an economic solution! And government does have a role in ensuring that trade is balanced. As author Tom Wolfe is quoted as saying, “An intellectual is a person who is knowledgeable in one field but speaks out only in others.” Krugman has become an intellectual. He ought to stay with what he is knowledgeable about. Economics does not support the idea that free trade and labor unions have helped workers in general other than the monopoly power that unions acquire that benefits only their members and forces other workers to pay higher prices. And the unions under the New Deal promoted the minimum wage to prevent non-union workers from competing with them, which turned out to be another economic calamity. Non-economists love the minimum wage; economists do not!
And his fellow Princetonian is not better. Blinder’s first truth is that “Most job losses are not due to international trade.” They are due to normal economic “churning”. But he ignores the fact that churning creates as well as costs jobs. Millions of jobs have been lost in manufacturing not because of the normal churning in the U.S. economy but because of the trade deficits. What does he say about that? What’s causing the downward pressure on wages and jobs?
His second truth is, “Trade is more about efficiency—and hence wages—than about the number of jobs.”. That is true of balanced trade. There is nothing in economics about how unbalanced trade makes for a more efficient use of labor. He writes, “But there is a catch: Whenever trade patterns change, some people will gain (either jobs or wages) but others will lose. The federal government could and should help them more, but it doesn’t.” It does not occur to him how few jobs would be lost if the federal government insisted on balanced trade. After WWII, Japan experiences a huge trade surplus with us, then Germany, which we permitted to prevent them for going socialist or communist, but then China, a communist nation, was permitted, even encouraged perhaps to induce her to become more capitalistic, to create the greatest trade surplus of all, now Korea and Mexico for no reason other than free trade.
His Third Truth, is “Bilateral trade imbalances are inevitable and uninteresting.” It is true enough that it is the overall trade imbalance that matters. But trade imbalances matter. The countries mentioned in the preceding paragraph are the principal causes of our overall trade imbalance and the loss of jobs in manufacturing. Neither inevitable nor uninteresting! And he does not mention that their trade surpluses may be due to mercantilist barriers to imports from us. Inevitable and uninteresting, what nonsense.
His Fourth Truth is that “Running an overall trade deficit does not make us “losers.” Foreigners trade us goods for our IOUs, “which means they wind up holding paper..That doesn’t sound so terrible for us, does it?” Not to anyone who has studied no economics, it doesn’t. But instead of buying our products, they end up buying existing assets, like American corporations, real estate, etc., which creates no jobs as exports would. What kind of amateurish economics is he espousing? He seems not to recognize that trade deficits cause loss of jobs and wages.
Fifth Truth is “Trade Agreements barely affect a nation’s trade balance.” He admits that “Some U.S. jobs were indeed destroyed when Nafta liberalized trade with Mexico—and those people deserved better treatment from the government than they got. But Nafta also created a number of new jobs in the U.S.” Nonsense. The ensuing trade deficit costs us jobs. He writes, “our trade with China has burgeoned in recent decades without a succession of trade agreements.” He is right, it did not require a succession of trade agreements, one trade agreement was enough! Nor does he mention the fact that the trade agreement meant American companies could move to China without fearing retaliatory U.S. tariffs when those goods were exported to the U.S.
He asks, “Now, would someone please tell this to Bernie Sanders and Donald Trump? No, Prof. Blinder. Your truths are worse than half-truths. Trump’s and Sanders’ economic advisors seem to know more economics than your essay indicates you do.
Comment by Bruce Bishop, 4/28/2016:
Great article. Would love to see more of you guys in American Thinker.
A few years back, Blinder said that another 28 to 40 million U.S. jobs were at risk. Such jobs as radiologists (people who read X-rays), insurance back-office paper shufflers, and, of course, call center employees, can be done in India, at one-tenth the cost. There is ample evidence that this is happening.
When the jobs of journalists, college professors/administrators, politicians and economists, are outsourced or taken by H-1B guest workers, there will be a sudden interest in the downside of globalization. Since it is mostly former manufacturing workers who are impacted, there is little interest in addressing the problem.
Thanks to you guys for getting it and for speaking out about it.
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