Paul Krugman goes after Trump on his trade war agenda, which alas prompts
Dean Baker to go holier (more progressive) than thou on Krugman. While there are passages where Dean is making sense, some of this is bait and switch in my view.
This prospect has many folks, including Paul Krugman, terrified. I don’t share his fear.
Not only is Paul not terrified, Dean later notes that high tariffs on Chinese goods such bad policy that he might be terrified. Can we stop we these cheap shots? Here is the basic underlying premise of Dean’s substantive comments:
I should also say that tariffs are not my preferred way of dealing with the country’s trade deficit, which I do consider a problem. Anyone who thinks secular stagnation (i.e. not enough demand in the economy) is a problem should believe the trade deficit is a problem. If the trade deficit were 1.0 percent of GDP rather than 3.0 percent of GDP we would have been approaching full employment many years ago.
In other words, Dean is assuming we are not close to full employment so we can go all Keynesian here. Look, I agree we are not at full employment so I will go all Keynesian too. If Dean is suggesting Paul does not share this view when we are below full employment, he is not being honest with his audience. And yes I know some think we are at full employment right now. Can we simply say these folks are wrong? Dean continues:
But the normal mechanism for reducing a trade deficit is an adjustment in currency values. This means that the currency of the country (the United States) with the deficit falls and the country with surplus (much of the rest of the world) rises. When the dollar falls in value relative to other currencies, U.S. made goods and services become more competitive internationally. That will lead to more U.S. exports, and fewer imports, bringing trade closer to balance.
Not disagreement here or from Paul I would presume. But now Dean goes a bit off the rails:
This adjustment in currency values has not taken place primarily because foreign governments have bought up massive amounts of dollars. This is partly as a reserve currency to protect themselves against financial crises.
Does Dean really think we are in a world of pegged exchange rates? Maybe China was doing currency manipulation a decade ago but they are not now. The main reason that the dollar is too strong is that the ECB is adopting easier monetary policies than we are. Dean notes that Trump has finally abandoned this currency manipulation nonsense and is going for trade wars. Of course the folly of both trade wars or currency manipulation was exposed by
Joan Robinson in 1937 when at least some countries were under a pegged exchange rate regime. But I challenge Dean to think about tariffs under floating exchange rates. If we adopt Trumps tariffs, the dollar would further appreciate hurting export sectors even if it helps the favored import sectors. Dean to his credit wants to talk about the distributional aspects of all of this but he needs to address what Paul wrote:
the tariffs now being proposed would boost capital-intensive industries that employ relatively few workers per dollar of sales; these tariffs would, if anything, further tilt the distribution of income against labor.
I’m sure Dean has heard of the Stopler-Samuelson theorem which in this application would imply higher profits and lower wages. So explain to me – how is Dean being more progressive than Paul on this issue?
http://www.columbia.edu/~drd28/Stolper-Samuelson%20is%20Dead.pdf
ReplyDeleteEnjoy.
PGL, I suspect that Dean Baker notes the apparent failure of sustained trade deficits to correct themselves over time through currency adjustments. The last time the US ran even a minimal trade surplus was in 1981, I believe. About 36 years ago. So something is not right- either it is the theory is wrong or the currency has been prevented from adjusting. So if you have noticed, over the last nine years or so, that the US has suffered from a lack of aggregate demand, then this could be a bit of a problem for people who think unemployment is a really bad thing and a total waste of resources that hits US workers more than it hits US capitalists, rentiers, whatever you choose to call them.
ReplyDeleteOf course Dean Baker knows, and you know, and Krugman knows, that the government has the capability to provide that demand that is missing. But he realizes it has not and that it is not willing to do so, and that it politically unlikely to do so in the near future. And while he doesn't think tariffs would do much to solve the problem of unemployment if the system were likely to be operating according to theory, he notes that it hasn't been operating according to theory. So he points out that workers have been screwed, and that they still are being screwed in terms of their bargaining power- and that's why I admire Dean Baker.
Jerry - thanks for the comment. Workers have been disadvantaged for many reasons. And there is nothing about Trump's policies that will reverse this which was Krugman's point.
ReplyDeleteAs far as why the US current account has been in deficit was 36 years (an excellent observation) can be explained by traditional considerations when one realizes how low the national savings rate has been since the 1981 tax cut.
But yea - the aggregate demand shortfall has been the central issue for us since 2008. Note it is also the central issue for much of Europe. Which is why the aggressive ECB monetary stimulus has been the right stance and the FED reversal of our stimulus was really dumb policy. And how did this play out with regard exchange rates? A Euro devaluation and $ appreciation.
Stolper was my senior thesis advisor and I always perk up when I see his namesake theorem mentioned, though I do think it was a bit more tendentious than is usually allowed in praising the "intuition" it allegedly cultivates.
ReplyDeleteEconomists, especially theorists like Krugman, labor under the delusion that their geometry produces a map of the world. Stolper, whose magnum opus was a highly detailed comparison of the economies of East and West Germany, did not share such a delusion. The paper linked in the first comment is a useful antidote to this fever dream, but too gentle an emetic to have the desired effect.
Geometry is essential to the work of the cartographer, the surveyor, the navigator, but hardly sufficient in itself to establish any useful fact. And, we need facts, we need to know the size, shape and location of actual things in the world, not the weightless, isolated shape of a platonic concept; we need to see things in their places in the messy system of the world. A geometrician does not map or navigate as he proves Pythagoras right once again. Krugman is a geometrician, who does not know or respect the limits of his art.
the normal mechanism for reducing a trade deficit is an adjustment in currency values. speaks to facts not in evidence. Krugman shows no acquaintance with mechanism; I doubt he has any knowledge of the mechanisms of international trade or finance. Oh look, "finance"! Krugman's usual method is to abstract away from money as anything but a harmless numeraire, where ever his intuition thinks he can. Well, he should not here, as currency values are driven by flows of funds that dwarf the volume of trade in actual goods and services, as any one with the slightest acquaintance with facts would know. Trade deficits are more plausibly explained by savings rates or borrowing or foreign investment than by the nominal price of traded goods. Krugman's main concession to fact is to acknowledge not finance, but trade in intermediates. China may not deserve the pejorative label of currency manipulator, but China deliberately manages the foreign exchange value of its currency and continues to use capital controls, even since it allowed current payments in renminbi, allowing the currency to become an international means of payment. The value of the yuan is controlled by policy, not "markets". I do not pretend to believe there is an ideal standard that could be applied to determine how much the dollar to yuan rate deviates, even in what direction. By ppp, the value remains low, reflecting China's domestic price level(s), a topic of considerable complexity and imperfect policy control. If China loosened its controls on the export of capital, I would expect huge movements in the foreign exchange value of its currency and that of the dollar as well, but these movements might be surprising in their direction, as surely the yuan is "too high", given the pressure for capital export. (Consider the Vancouver property market.)
My point is that theory is a poor guide. We need facts to make a map or navigate a terrain. The world is not made of abstractions and convenient aggregates. Keynes provided a great insight when he showed that a shortfall in aggregate demand could be abstracted from any particular opportunity to usefully produce, but we do not live in the abstract. We must argue the particular, and determine together what is the case, what is the state of the world.
The actual world is one where finance matters a great deal to the evolution of trade, investment and income distribution. We might want to pay attention. Your shortfall in demand might be indistinguishable from a skewed distribution of income, if we were to allow that the distribution of income is entangled with employment. (I think Krugman would be very reluctant to admit theoretically that the distribution of income is not independent of the unemployment rate.)
We should be having much better informed arguments.
I am more in agreement with pgl here and think this is one of Dean's more embarrassing posts. What is particularly bad is that he basically contradicts himself. He starts out looking like he is going to say tariffs (or protectionism more generally) is not something to be scared of, like Krugman supposedly is, and pgl is right that Krugman did not express anything like "fear," but then turns around and gets himself all tangled up in discussions of exchange rates. Dean may be right that Krugman got a bit too worked up about the issue, but I find it hard to nail down anything that Krugman said that was obviously wrong, even if he did not say much about exchange rate policies, and that probably has affected US-European trade balances recently with them having a looser monetary policy than the US.
ReplyDeleteOne thing I would more or less disagree with almost everybody about, including both Dean and pgl, and a place where maybe Krugman looks less bad by downplaying the matter, involves exchange rates. Most of the people talking about exchange rates here, including pgl arguing that putting on tariffs would lead to an appreciation of the dollar, are not on solid ground. The hard fact is that actual exchange rates do not and have not followed what they are supposed to do in theoretical models at all. Meese and Rogoff about 40 years ago showed that a random walk does better than any of the theoretical models in forecasting floating exchange rates (which is what the US has), and even that does not do well. It is not even a random walk, although I have seen Menzie Chinn argue recently that some sort of lagged PPP model may not be too awful, but at best just barely beating the random walk. Hard fact is that anybody making forecasts about what exchange rates will do in response to anything should be very cautious.
A general point where Krugman and pgl are both right is that the issue is more one of the composition of what gets produced. So, Trump proposing tariffs on steel and aluminum, which is the immediate issue, is proposing to shift more of US production into those industries and away from others, including ones that use higher priced steel and aluminum as inputs, which would include automobiles, another industry that supposedly Trump is all for. Needless to say there is plenty of hypocrisy in this, with one set of semi-unionized workers getting gains at the expense of another set of unionized workers, and at least part of why many on the Left sort of like protectionism is the accurate sense that the sectors in the US economy that have declined from import competition in recent decades have been in the heavily unionized auto and steel industries, where workers have become pro-protectionist, and the decline of unions in general has hurt the Left in the US more generally.
Regarding the US trade deficit, I do not have the answer, but it runs deeper than stated by many. The last year of US trade surplus was not 1981, but 1975. Now it is true that the balance does move in response to exchange rates, and the US deficit soared in response to the rising dollar in the mid-80s, and has gone up and down with the dollar since, even as we have maintained a deficit. On that point, Dean is at least partly right, that a weaker dollar will reduce the trade deficit.
But it is not just the US that has run a chronic trade deficit for a long time. So has UK, with it mostly in deficit for many decades, although it had three years of surpluses in the 90s, the last year being 1998. But they also have floating rates, and not obvious manipulation of their currency, and here we are with nearly 20 years of trade deficits, although that might turn around with their currently deeply devalued pound since the Brexit vote.
OTOH, Germany has run trade surpluses since 1983, although with a near balance in 1992 when it was dealing with unification issues. There are other nations that have run chronic trade surpluses or deficits over long periods of time. Differences in savings rates can explain part of this, but not all of this.
My broader concern here, which I suspect Krugman and pgl share, is not specifically a steel tariff or even some more general protectionist push. It is Trump simply deciding to overturn or ignore international agreements more generally, such as the Paris climate accord. If pushed too far and more generally, this can lead to the Joan Robinson world of "beggar thy neighbor," which will not end up with us getting a bigger piece of a fixed pie, but a general descent into not only smaller pies, but possibly what followed the 1930s, a general breakdown into things much worse both internally and externally, including war.
ReplyDelete"The hard fact is that actual exchange rates do not and have not followed what they are supposed to do in theoretical models at all. Meese and Rogoff about 40 years ago".
ReplyDeleteGlad you brought this up as indeed exchange rates are hard to predict. Rogoff's recent tribute to the Dornbusch overshooting paper made an important distinction between what he calls monetary shocks versus real shocks. Macroeconomists focus on the former but the movement of exchange rates is also heavily driven by changes in the underlying macroeconomics.
Yet we can have periods like the early 1980's when macroeconomic shocks dominate. I think this is what Dani Rodrik meant by "navigating models".
Barkley hits the nail on the head, in my opinion, when he points to the persistence of trade positions in the major trading countries. (This is a staple of IPE, and I made a big deal of it in my macro textbook.) It's also quite true that xrate movements are not determinate, except when coordinated action by states determines them a la Plaza.
ReplyDeleteThe way I like to think of it is that chronic deficit countries like the US have structural features that predispose them to trade deficits, in areas like productivity and quality in tradables, and the opposite holds for surplus countries like Germany and China. These features can be moderated or even offset by xrate movements, but the burden is placed on xrates by structural factors. There is a significant IPE literature on these factors, as some readers may know.