Sunday, March 16, 2008

Mankiw vs the Muggles

For those of you living on another planet, Muggles are the pathetic characters in the Harry Potter stories who have no magical powers. They are oblivious to the action going on around them. Mankiw, in his latest NYT column, contrasts Muggles to economists, who have magic to burn. The economists, it seems, understand the glories of free trade, while the uninformed Muggle-masses think that globalization is draining their wallet. This is reflected in politics, he says, where honest Republicans like McCain (to whom this column attempts a reposition) do battle with protectionist Democrats – who, with luck, are merely pandering.

I wish Mankiw all the best in his courtship of McCain, but the guy really doesn’t get it about trade. This is not a matter of free trade versus protectionism. OK, that archaic duality comes up periodically in a small way (like the recent spat over the Pentagon’s spurning of Boeing tankers), but it is not the main issue. There are two big facts that menace the US economy like twin Voldemorts, the long-term erosion of wages for most of the population and the buildup of massive current account deficits. These are almost surely related, though not in any simple way. Intensifying competition among the world’s workers has been great for investors, bad for wages, and poison for the US international position.

The question is not whether there should be trade or not, but under what rules it should take place. NAFTA was not a one-page flyer announcing free trade in North America. Renegotiating it to promote more equity and sustainability is not flat-earth economics. But above all, thinking that a trade deficit of 5+% of GDP, year after year, is rendered benign by the writings Smith, Ricardo, or for that matter Samuelson is to live in a world of magic, not reality. The Muggles are right.

1 comment:

juan said...

how does the story go?
absolute cost advantage becomes
currency adjustments take care of
full employment is assumed
and everyone everywhere
lives happily ever after
by doing what is
logically in the
best interest
of each

or at least so long as the evil 'protectionists' are held a bay