Tag Archives: paul krugman

Trump Proposes A Ring Around The Collar

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In a recent interview with Larry Kudlow, Donald J. Trump has proposed a 10% tariff on all goods and services produced by nonresident economic units which he calls “a ring around the collar”.

Trump has a chance to be reelected the President of the United States and it’s noteworthy not just because of that but because there is hardly anyone proposing the same. I think that the US balance of payments and hence its financial position is in an unsustainable path and it has to take such measures.

It is important to realise that Trump was using protectionist measures in his Presidency, he faced ridicule from supposed experts. But soon when Joe Biden became the President, Biden not only continued Trump’s policy but also did more to try to improve the US’s net international investment position.

But instead of acknowledging this, the expert class obviously has its narrative. It’s partly to do with the fact that they don’t want to acknowledge that they were wrong and the rest with the fact that they want to return to the old world order of free trade once the US presumably improves its economic/financial position.

Paul Krugman has a Twitter thread and an article in The New York Times on this. It’s a tribe defense, plus a plan to keep this as it is after a small change, with the assumption that it will succeed.

Economists On US Manufacturing And Trade

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Recently, Paul Krugman wrote two articles in The New York Times on recent surge in US manufacturing: Making Manufacturing Great Again (June 6, 2023) and Making Manufacturing Greater Again (April 20, 2023).

Post-Keynesians stress the importance of manufacturing and exports/international trade. Before the economic and financial crisis which started in 2007, Wynne Godley was worried about all this and proposed to improve exports and take measures such as imposing non-selective protectionism, as he thought—rightly—that a crisis would happen and fiscal policy should be used and would be used but that alone will not be sufficient. In other words, the market mechanism won’t do the trick.

The reason manufacturing is important is because of the potential for expansion of exports.

Economists however have been denying all this. Especially with the rise of Donald Trump when attempts to improve the US balance of payments/international investment position were looked upon as clownish. But now the establishment has accepted that it needs to be addressed. But they don’t want to accept that they were behind. At the same time, Joe Biden has gone beyond measures that Trump has taken.

However, there are many economists who still live with old dogmas. For example, see Adam Posen’s article America’s Zero-Sum Economics Doesn’t Add Up for Foreign Policy.

So we have two types of mainstream economists: a) those who grudgingly accept that they were wrong and b) who are still wedded to dogmas.

There’s of course a limit to this, so the solution to the problems lie in disbanding the system of free trade and move toward a system of balance-of-payments targets.

Paul Krugman And Free Trade As Mercantilism

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In a recent article How The West Is Strangling Putin’s Economy for The New York Times, Paul Krugman makes this point about international trade:

One final point: The effect of sanctions on Russia offers a graphic, if grisly, demonstration of a point economists often try to make, but rarely manage to get across: Imports, not exports, are the point of international trade.

That is, the benefits of trade shouldn’t be measured by the jobs and incomes created in export industries; those workers could, after all, be doing something else. The gains from trade come, instead, from the useful goods and services other countries provide to your citizens. And running a trade surplus isn’t a “win”; if anything, it means that you’re giving the world more than you get, receiving nothing but i.o.u.s in return.

That’s quite a deceit!

Now, he has some caveats but tries to minimise them. But the main point about imports, not exports being the point of international trade is something top corporations claim since they want to open markets in poor countries. This reminds of Joan Robinson’s quote that free trade is a subtle form of mercantilism. A poor country needs protection from foreign competition. In Post-Keynesian theory, exports/success of corporations in international markets is quite important. As Anthony Thirlwall in the paper Kaldor’s 1970 Regional Growth Model Revisited says about Nicholas Kaldor’s model (which I believe):

The first proposition of the model is that regional growth is driven by export growth. Kaldor regarded exports as the only true autonomous component of aggregate demand, not just at the regional level but also at the national level because consumption and investment demand are largely induced by the growth of output itself …

So that’s quite the opposite view from mainstream economics.

Paul Krugman On “Economic Nationalism”

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Paul Krugman has a new article titled Wonking Out: Economic Nationalism, Biden-Style, in which he defends Biden’s economic policy which is a deviation from laissez-faire, in particular free trade.

The article has reference to a 250-page report by the White House titled Building Resilient Supply Chains, Revitalizing American Manufacturing, And Fostering Broad-Based Growth,

The United States’ balance of payment and international investment position is unsustainable and it needs to do something to reverse it. Weakness in international trade and offshoring have led to a lot of economic destruction which was exploited by Donald J. Trump. But the Democratic Party—led by Paul Krugman on economics—attacked Trump for deviating from free trade. But now that they are in power, they have learned a bit from their mistakes and economic realism has also taken over. Even during the Democratic Party primary election, the candidates all agreed that something has to be done on international trade and proposed policies to address it.

Elizabeth Warren, for example had a post on Medium titled A Plan For Economic Patriotism.

It’s a shame that the Democratic Party which has voters consisting of more educated people had to copy or at least follow Donald Trump.

Why is manufacturing important? Because (a) manufacturing is important to exports (b) rise in production leads to faster rise in productivity compared to other things. (c) a process of success leads to higher competitiveness of firms—not just price competitiveness but also non-price competitiveness.

The Biden administration has also not rolled back the tariffs imposed on China by Trump.

Instead, Paul Krugman has this spin:

In any case, however, we seem to be entering a new era of worries about the role of the United States in the world economy, this time driven by fears of China. And we’re hearing new calls for industrial policy. I have to admit that I’m not entirely persuaded by these calls. But the rationales for government action are a lot smarter this time around than they were in the 1980s — and, of course, immensely smarter than the economic nationalism of the Trump era, which they superficially resemble.

and:

As you might guess, then, a lot of the Biden-Harris report focuses on national security concerns. National security has always been recognized as a legitimate reason to deviate from free trade. It’s even enshrined in international agreements. Donald Trump gave the national security argument a bad name by abusing it. (Seriously, is America threatened by Canadian aluminum?) But you don’t have to be a Trumpist to worry about our dependence on Chinese rare earths.

Donald Trump is a shady person and so it’s ironic that the Democratic Party was behind. Paul Krugman in fact even spent the last 5 years or so denying that US trade is a problem. Now he is making it look like Biden and Co. are doing something original.

Many people present the recent changes as some kind of break from neoliberalism. In a sense it is but that way of presenting is misleading: finally the US policy makers are furthering US interests, which could be at the expense of the rest of the world. The United States needs policies to promote net exports—to make its international investment position sustainable—but there are various ways of doing it, such as moving to a system away from free trade or even expanding domestic demand to the point of full employment which won’t restrict total imports, and hence isn’t beggar-thy-neighbour and which is good for the whole world.

But it’s a bit like recent changes in fiscal policy: once the US is out of the woods, leaders and the academia will again go back to same old policies. So Krugman’s piece has a lot of praise for free trade which allows him to argue in the future that free trade is good. Another reason is while US deviates from free trade, politicians and pundits can continue to impose free trade on other countries. Finally the aim is to promote policies which are beneficial to oligarchies and oligarchs. Whatever works! Just like “liquidity trap” is used to argue that fiscal expansion can be done now but that neoclassical economics works otherwise, “national security” concern is used now in case of trade.

In summary, the United States needs policies to make net exports rise faster over imports, which Post-Keynesians have argued earlier than anyone, but the Democratic Party has only learned it by losing. They will try to spin this, impose more free trade on the world, while taking protectionist measures and running industrial policy themselves and create a narrative which makes it easier for them to go back to their old ideology.

Link

The Gatekeeper: Adam Tooze On Paul Krugman’s Evolution

Snip from a Paul Krugman article from the 90s.

Adam Tooze has a nice essay on evolution on Paul Krugman’s views. It’s decent although I would critique much more if I were to write it.

There was one part which was quite amusing to me:

The hour and a half Krugman spent laying out his new trade theory at the National Bureau of Economic Research in July 1979 was, he later wrote, ‘the best ninety minutes of my life. There’s a corny scene in the movie Coal Miner’s Daughter in which the young Loretta Lynn performs for the first time in a noisy bar, and little by little everyone gets quiet and starts to listen to her singing. Well, that’s what it felt like: I had, all at once, made it.’

Imagine being so wrong but feeling this way.

Paul Krugman has shifted his views but it’s not as if he has changed for the better to benefit mankind. He is still doing whatever as an establishment hack, trying to preserve power for top corporations.

Paul Krugman, Empire Man

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Paul Krugman’s article, Trump The Intimidator Fails Again, published Jan 6th in The New York Times a few days ago, shows how he is a rank imperialist.

Consider the following quote:

America did many terrible things during its reign as global hegemon. But we clearly stood for global rule of law, for a system that imposed common rules on everyone, ourselves included. The United States may have been the dominant partner in alliances like NATO and bodies like the World Trade Organization, but we always tried to behave as no more than first among equals.

“But”? 🤯

He’s openly confessing that the United States imposes an economic order on all countries but tries to justify it as some good thing.

It’s important for Post-Keynesians to highlight how imperialism works. To not start economics with imperialism is a huge disservice to the subject. The “liberal international order” is hugely constraining to poorer countries and instead of achieving economic convergence, leads to polarisation.

Imperialism works by controlling the narrative and getting countries to adopt neoliberal policies. Some countries agree to it while others are arm-twisted to do so. If they still don’t obey, the US government tries to intervene in the countries’ democratic process, such as by funding their opposition, and/or rigging elections. Or they face sanctions and isolation. In the extreme case, the US uses military to achieve its objectives—providing new markets for the US producers.

The role of economists such as Paul Krugman is to promote economic propaganda, to deceive the world into thinking that neoliberal policies achieve the best outcomes.

Back to the quote, notice the extreme language manipulation. Paul Krugman calls himself a “liberal” and calls a coerced system “rule of law”. Double-speak! No first among equals, as the rules of global trade are unfair, benefiting advanced countries, who have themselves enriched themselves with different rules such as import tariffs, quotas and direct imperialism, for example, the British occupation of India. Moreover, even currently, the rules of international trade are highly protectionist in many ways.

Paul Krugman’s Mea Culpa On Globalisation

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Last year, Paul Krugman had an article on globalisation and how he got it wrong. Of course, typically, the ones doing mea culpa rarely admit it that they were totally wrong and spin it the way which is most opportunistic. I had a post on it.

Recently Bloomberg published an excerpt from it.

Noam Chomsky wrote a book Profit Over People in 1999 with an Introduction by Robert McChesney who had a fanstastic description of globalisation:

And nowhere is the centrality of governments and policymaking more apparent than in the emergence of the global market economy. What is presented by pro-business ideologues as the natural expanson of free markets across borders is, in fact, quite the opposite. Globalization is the result of powerful governments, especially that of the United States, pushing trade deals and other accords down the throats of the world’s people to make it easier for corporations and the wealthy to dominate the economies of nations around the world without having obligatons to the peoples of those nations. Nowhere is the process more apparent than in the creation of the World Trade Organization in the early 1990s, and, now, in the secret deliberations on behalf of Multilateral Agreement on Investment (MAI).

Contrasting Joan Robinson And Paul Krugman’s Views On The Global Rules Of Trade

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Paul Krugman has a new article, Why A Trade War With China Isn’t ‘Easy To Win’ (Slightly Wonkish), in The New York Times, in which he rightly points out Donald Trump’s switching positions on trade with China. Krugman however has a generic point about international trade as some kind of mercantilism:

Admittedly, the political economy of trade is kind of mercantilist, because it’s driven largely by producer interests. Long ago I wrote about “GATT-think”, the view of trade, enshrined in international negotiations, that sees exports as good, imports as bad, so that letting someone sell us stuff, even if it’s better and cheaper than we could make ourselves, is a “concession.” The genius of the postwar international trading system was that it harnessed this special-interest reality, using the ambitions of exporters to offset the protectionism of those competing with imports, to engineer a kind of enlightened mercantilism that vastly expanded world trade.

[italics: mine]

So Krugman is admitting that it is in the interest of big producers, but claiming that his interests aren’t aligned with them and that the rules of trading were made such that it somehow offset them.

The reality is of course different. More successful countries do not need protection at home. At least we can say that they’re are willing to forgo protectionism as the advantage from selling more easily in markets abroad is immense. As Joan Robinson pointed out in a 1977 article (and even before), What Are The Questions?

From a long-run point of view, export-led growth is the basis of success. A country that has a competitive advantage in industrial production can maintain a high level of home investment, without fear of being checked by a balance-of-payments crisis. Capital accumulation and technical improvements then progressively enhance its competitive advantage. Employment is high and real-wage rates rising so that “labour trouble” is kept at bay. Its financial position is strong. If it prefers an extra rise of home consumption to acquiring foreign assets, it can allow its exchange rate to appreciate and turn the terms of trade in its own favor. In all these respects, a country in a weak competitive position suffers the corresponding disadvantages.

When Ricardo set out the case against protection, he was supporting British economic interests. Free trade ruined Portuguese industry. Free trade for others is in the interests of the strongest competitor in world markets, and a sufficiently strong competitor has no need for protection at home. Free trade doctrine, in practice, is a more subtle form of Mercantilism. When Britain was the workshop of the world, universal free trade suited her interests. When (with the aid of protection) rival industries developed in Germany and the United States, she was still able to preserve free trade for her own exports in the Empire. The historical tradition of attachment to free trade doctrine is so strong in England that even now, in her weakness, the idea of protectionism is considered shocking.

[italics: mine]

The last sentence is also important when discussing Krugman. The United States’ balance of payments has deteriorated and needs some protectionism. But economists are attached to the idea of free trade like it’s some dogma.

Paul Krugman’s Shifting Views On International Trade And Globalisation

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Recently Paul Krugman wrote up an article, Globalization: What Did We Miss? for the IMF globalisation conference last fall. The paper is a large concession to the points some economists have been making on international trade and globalisation. Krugman concedes that:

soaring imports did impose a significant shock on some U.S. workers, which may have helped cause the globalization backlash.

He also draws this chart, coming to the view that the US trade has led to a weakness of manufacturing.

The New Consensus narrative is that loss of employment is due to productivity rises and not due to international trade. Now Krugman has accepted the view that it is the latter.

Further, he also says:

Until the late 1990s employment in manufacturing, although steadily falling as a share of total employment, had remained more or less flat in absolute terms. But manufacturing employment fell off a cliff after 1997, and this decline corresponded to a sharp increase in the nonoil deficit, of around 2.5 percent of GDP.

Does the surge in the trade deficit explain the fall in employment? Yes, to a significant extent. A trade deficit doesn’t produce a one-for-one decline in manufacturing value added, since a significant share of both exports and imports of goods include embodied services. But a reasonable estimate is that the deficit surge reduced the share of manufacturing in GDP by around 1.5 percentage points, or more than 10 percent, which means that it explains more than half of the roughly 20 percent decline in manufacturing employment between 1997 and 2005.

Again, this is over a relatively short time period and focuses on absolute employment, not the employment share. Trade deficits explain only a small part of the long-term shift toward a service economy. But soaring imports did impose a significant shock on some U.S. workers, which may have helped cause the globalization backlash.

And trade deficits are, as I said, part of a broader story of adjustment issues.

Manufacturing is important partly because of increasing returns to scale and partly because it’s easier to export manufactures, although services are catching up.

Further, he quotes the work of Autor, et. al.:

This is where the now-famous analysis of the “China shock” by Autor, Dorn, and Hanson (2013) comes in. What ADH mainly did was to shift focus from broad questions of income distribution to the effects of rapid import growth on local labor markets, showing that these effects were large and persistent. This represented a new and important insight.

To make partial excuses for those of us who failed to consider these issues 25 years ago, at the time we had no way of knowing that either the hyperglobalization shown in Figure 1 or the trade deficit surge shown in Figure 2 were going to happen. And without the combination of these developments the “China shock” would have been much smaller. Still, we missed an important part of the story.

But concessions of previous held orthodox views are hardly straightforward. Despite this large concession, Krugman still wants to defend free trade and is against any tariffs. One may critique selective protectionism but there is also the option of imposing tariffs non-discriminately, i.e., non-selective protectionism.

More importantly, as Joan Robinson often stressed the thesis of free trade ought to also come with the answer to the question: what is the mechanism for resolving imbalances? Free traders always avoid this question, sometimes claiming—as Milton Friedman did—that floating exchange rates does the trick. But we know that it’s hardly the case. In the absence of any market mechanism, we need an official mechanism.

Paul Krugman, Twin Deficits And Centrism

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Paul Krugman has a new article, Trump’s Twin Deficits (Wonkish), for The New York Times. The main point of the article is that Donald Trump doesn’t like trade deficits but ironically his policies (tax cuts with a rise in government expenditure) will cause more trade deficits.

Now, needless to say, Trump has to be resisted and we need an alternative. Apart from his xenophobia and racist attitude, he has also done a lot of economic damage by shifting an already unfair distribution of the national income in billionaires’ favour.

But the discussion shouldn’t end there because for one thing, economies always need a fiscal stimulus, despite the fact that economists such as Krugman make us believe that the US is at full employment and are telling us that expansionary fiscal policy is illegitimate. But Krugman and others are actually a bit late about the twin deficit part.

Before discussing twin deficits, it should be clarified what the casualties are. It’s not surprising that the two deficits are related. It is because of the national accounts identity:

NL = DEF + CAB

where NL is the net lending of the private sector as a whole, DEF is the government deficit and CAB is the current account balance of payments.

The current account balance is in deficit if it is negative and the trade in goods and services is part of the current account. That the two deficits are related by an accounting identity doesn’t imply that the budget deficit causes trade deficits. The right causality between the balances is (for given trade elasticities) from demand, income and output at home and abroad. So it’s not necessary that the two deficits move together. Even the economic and financial crisis hit, some ten years ago, US output fell and this raised the budget deficit because of a fall in income and hence taxes and also reduced the trade deficit. Over the next many years, and going forward, we can say the two deficits move together, although remembering the causality above—which is not: budget deficits cause trade deficits.

Now coming back to Krugman and Trump, what’s needed is an alternative to Trump but just the “centrist” attitude of not doing anything isn’t the solution. Paul Krugman had been advocating expansion of fiscal policy till as late as before the US elections, i.e., November 2016 but when the administration changed, he is no longer a fan of fiscal policy. It’s surprising (or maybe not!) that Republicans are advocating an expansionary fiscal policy while opposing it when not in power. Ironically, the same is true of Democrats such as Paul Krugman!

Krugman could have instead suggested that Trump asks other governments to expand fiscal policy, so that their imports also rise and the US trade deficit isn’t affected because of the change in fiscal stance, which he is unlikely to do.

The important point is that there is always the case for fiscal stimulus. The really big constraint is the capacity to produce. But this requires not just coordination of fiscal policy between governments but also agreements via planned trade to reach balance of payments targets instead of orthodox beliefs like free trade, the existence of market mechanisms to resolve imbalances and the belief that the fortunes of nations will converge.