Pop Internationalism by Paul Krugman
by Paul Krugman
MIT. 221 pp. $22.50
Paul Krugman—a self-described liberal, an adviser to the 1992 Clinton presidential campaign, and someone who was once thought to have the inside track to a job as head of the White House Council of Economic Advisers—ranks in the handful of top international economists in the world. He is also the author of works that have rubbed strongly against the grain of economic orthodoxy, questioning, for example, classical theories of trade that had gone unchallenged since the English economist David Ricardo formulated them in the second decade of the 19th century.
Iconoclast though he may be, Krugman is in one sense a straight-arrow traditionalist: he believes you cannot begin to question the laws of economics until you at least know the ABC’s. This is a test which, he has never been afraid to say, many within his profession, and many others around it, have consistently foiled, being caught up rather in self-promotion, power-seeking, and bald-faced intellectual dishonesty. The “pop internationalists,” Krugman’s designation for apostles of a variety of false nostrums about international trade, are particular offenders.
This is one of the more forceful attacks written by an academic in recent years. Krugman’s List of those peddling specious doctrines includes Secretary of Labor Robert Reich (formerly a lecturer at Harvard’s Kennedy School), Lester Thurow of MIT, the journalists James Fallows and Robert Kuttner, think-tank denizens like Clyde Prestowitz and Edward Luttwak, and presidential idea-man Ira Magaziner: for Krugman, phonies, con-artists, liars, and pseudo-intellectuals all. He trundles out their books, each with its ex-cathedra tone, its military metaphors, its hubristic policy prescriptions, and finds a common thread, or lack of thread:
a complete absence of anything that looks like the kind of international trade theory that academic economists teach. . . . It is not a matter of a lack of familiarity with the latest wrinkles in research. Rather, nothing of international trade theory as economists know it—from Ricardo on—is in these books.
One prominent theme of pop internationalism, according to Krugman, is “competitiveness,” a term that has gained wide currency but that is close to meaningless in Ricardian economics. Thus, Jacques Delors of the European Community gives long speeches on how “competition” from lower-wage economies has caused high French unemployment—it has not—in order to avoid confronting the wasteful French welfare state. And President Clinton characterizes the United States as akin to a corporation in a competitive marketplace—it is not—in order to justify a number of his own economic policies. “The growing obsession in most advanced nations with international competitiveness should be seen,” writes Krugman, “not as a well-founded concern but as a view held in the fece of overwhelming contrary evidence.”
Krugman is at his best in identifying dubious scenarios of disaster, which he then reduces to their underlying illogic. He starts with Lester Thurow’s claim that our trade deficit with Japan has been responsible for a 6-percent drop in real wages over the last two decades. Granting, for argument’s sake, Thurow’s wild assertion that a million manufacturing jobs have been lost and that the slots which replaced them pay 30 percent less, Krugman shows by simple arithmetic that even such a momentous shift would depress the wage rate not by 6 but by 0.3 percent—putting Thurow off by a factor of twenty.
Krugman similarly demolishes the widespread view (purveyed by Robert Kuttner, among others) that trade with low-wage countries like Mexico is responsible for American wage stagnation (shades of Jacques Delors in France). This may be possible in theory, Krugman allows, but practice is something else. For one thing, the average weighted wages of America’s trading partners (excluding oil producers) are now up to 88 percent of U.S. wages. For another, in 1990—a typical recent year—the industrial nations spent only 1.2 percent of their Gross Domestic Product (GDP) on manufactured goods from low-wage, newly industrializing countries. Writers like Kuttner are thus attempting to explain one economic phenomenon, in this case wage stagnation, by means of a factor that leaves 98.8 percent of the economy untouched.
Secretary Reich has pushed a similar line with a somewhat different spin: the U.S., he asserts, must now compete with low-wage countries for access to a limited investment capital pool. But Krugman knocks down this argument as well, noting that in the 1980’s, capital was flowing out of the third world, and since 1990 the industrialized world has invested a mere $100 billion in emerging markets out of $18 trillion in Western GDP and $60 trillion in capital stocks. A capital outflow of $100 billion could have depressed wages in the advanced countries by, at worst, 0.15 percent.
Pop internationalists who wail about nonproblems like these have, not surprisingly, developed solutions for the ills they misidentify, usually entailing one or another government program. Though in general open-minded on the subject of government intervention Krugman displays little patience with the particular policies advanced by the targets of his wrath. In particular, he issues a devastating attack on Reich’s and Magaziner’s call for government investment in “high-value-added” sectors of the economy. For them, “high-value-added” is a synonym for high-tech, but in fact high-tech industries like aerospace and electronics fall below the manufacturing-sector average in returns per worker, which is the true meaning of “high-value-added.” The highest value-added sectors of the American economy are petroleum refining and cigarettes, hardly industries which American taxpayers need to fund.
Krugman is slightly more sympathetic to the call by Laura D’Andrea Tyson, chairman of the Council of Economic Advisers, for subsidies to create a comparative advantage in international trade—his own work, after all, has helped create the intellectual underpinnings for such an approach. But he cautions that even the most successful of such programs, including Europe’s Airbus, will have only a negligible impact on economic performance. Even if the United States could design a program to increase the size of its high-tech sector by a third, and if that program were to work effectively, GDP would increase by a puny .07 percent before the costs of the program were factored in.
This is a frequent conclusion to Krugman’s arguments: when one crunches the numbers for the various disaster scenarios about which the pop internationalists have warned, the actual economic effects turn out to range from minimal to minuscule to nonexistent. As for Krugman’s own approach, its cornerstone is that economic productivity “is determined by a complex array of factors, most of them unreachable by any likely government policy.” In other words, the beginning of economic wisdom is recognition of the market’s complexity and intractability. As Krugman devastatingly shows in Pop Internationalism, this elementary and indispensable truth seems to have gone out of fashion among some of the most visible practitioners of the dismal science.