Economists on the Run

Paul Krugman and other mainstream trade experts are now admitting that they were wrong about globalization: It hurt American workers far more than they thought it would.

Paul Krugman has never suffered fools gladly. The Nobel Prize-winning economist rose to international fame—and a coveted space on the New York Times op-ed page—by lacerating his intellectual opponents in the most withering way. In a series of books and articles beginning in the 1990s, Krugman branded just about everybody who questioned the rapid pace of globalization a fool who didn’t understand economics very well. “Silly” was a word Krugman used a lot to describe pundits who raised fears of economic competition from other nations, especially China. Don’t worry about it, he said: Free trade will have only minor impact on your prosperity.

Now Krugman has come out and admitted, offhandedly, that his own understanding of economics has been seriously deficient as well. In a recent essay titled “What Economists (Including Me) Got Wrong About Globalization,” adapted from a forthcoming book on inequality, Krugman writes that he and other mainstream economists “missed a crucial part of the story” in failing to realize that globalization would lead to “hyperglobalization” and huge economic and social upheaval, particularly of the industrial middle class in America. And many of these working-class communities have been hit hard by Chinese competition, which economists made a “major mistake” in underestimating, Krugman says. 

It was quite a “whoops” moment, considering all the ruined American communities and displaced millions of workers we’ve seen in the interim. And a newly humbled Krugman must consider an even more disturbing idea: Did he and other mainstream economists help put a protectionist populist, Donald Trump, in the White House with a lot of bad advice about free markets? 

To be fair, Krugman has been forthright in recent years in second-guessing his earlier assertions about the effects of open trade. He has also become a leading and sometimes harsh critic of his own profession, especially in the aftermath of the financial crisis and Great Recession, when he declared that much of the past 30 years of macroeconomics was “spectacularly useless at best, and positively harmful at worst.” He admirably held the Obama administration to account for its timid financial and economic reforms. He even had some kind things to say about proto-progressives such as Robert Reich, the former Clinton administration labor secretary who worried about global competition and sought better protections and retraining for American workers, and whom Krugman had once dismissed to me—back in his lacerating days in the ’90s—as an “offensive figure, a brilliant coiner of one-liners but not a serious thinker.” 

“I’m glad he’s finally seen the light on trade,” Reich told me in an email. Krugman, in another email, wrote: “I regret having said that about Reich, but if he foresaw hyperglobalization or the localized effects of the China shock, that’s news to me.” 

Yet it has taken an awful long time for economists to admit that their profession has been far too sure of itself—or, as a penitent Krugman put it himself in a 2009 article in the New York Times Magazine, that “economists, as a group, mistook beauty, clad in impressive-looking mathematics, for truth.” As the journalist Binyamin Appelbaum writes in his book, The Economists’ Hour: False Prophets, Free Markets, and the Fracture of Society, economists came to dominate policymaking in Washington in a way they never had before and, starting in the late 1960s, seriously misled the nation, helping to disrupt and divide it socially with a false sense of scientific certainty about the wonders of free markets. The economists pushed efficiency at all costs at the expense of social welfare and “subsumed the interests of Americans as producers to the interests of Americans as consumers, trading well-paid jobs for low-cost electronics.”  

David Autor, an economist at the Massachusetts Institute of Technology (MIT) whose documentation of the surprising effects of China’s rapid rise on the U.S. labor market is cited by Krugman in his essay, gives the Times columnist a lot of credit for admitting error. “How rare is that?!” Autor wrote via email. He said he doesn’t blame Krugman or other defenders of “the prior consensus” for making faulty predictions about trade. “I honestly think that getting this one right ex ante would have been akin to accurately forecasting the date, time and location of an earthquake.” The bigger problem was the pro-free trade zeitgeist, Autor said. “I think that the received wisdom inhibited economists from closely evaluating the evidence of what was underway. … One could say that there was something of a guild orthodoxy: The key dictum was that policymakers should be told that trade was good for everyone in all places and times.” 

Dani Rodrik, a Harvard University economist who in 1997 published a then-heretical book called Has Globalization Gone Too Far?, said last week that he wrote it precisely because he believed that “the profession was so blasé about globalization.” Now his views are mainstream, and Rodrik is president-elect of the International Economic Association. But the economists have barely begun to clean up the mess they left behind, as a recent conference on inequality at the Peterson Institute for International Economics in Washington, organized by Rodrik and former International Monetary Fund (IMF) chief economist Olivier Blanchard, made clear. And now in some ways it’s too late because, as Rodrik says, it’s not even possible to have a reasonable discussion under Trump. The U.S. president has effectively discarded modern economics, reembraced crude protectionism, and, like the mercantilists of the pre-Adam Smith era, appears to see trade as a zero-sum game in which surpluses are in effect profits and deficits are losses. His ignorance of basic economics “is without parallel among modern American presidents,” Appelbaum writes in The Economists’ Hour

Yet Trump has been able to launch an unprecedented trade war, exploiting the public’s mistrust and fear of China, thanks in part to the economists’ early misreadings—specifically of how swiftly China’s economic surge would displace so many U.S. industrial jobs. As Krugman now acknowledges, “manufacturing employment fell off a cliff after 2000, and this decline corresponded to a sharp increase” in the U.S. trade deficit, especially with China. Those numbers, in turn, have tended to lend credence to Trump’s mercantilist notions, no matter how spurious. 

“One of the most perverse effects of Trump was that it completely erased any reasonable discussion” about how to address trade, inequality, and the right degree of protection for workers, Rodrik said. And this, too, is a downstream effect of the bad advice economists delivered about free trade going back to the ’90s. 

Or as MIT’s Autor put it: “Ultimately this policy boosterism blinded policymakers to the potentially grave consequences of trade shocks and likely lulled us into underpreparing for these shocks (e.g., we had a paltry safety net and retraining policies on hand). It led us somewhat blithely into a non-negligible policy disaster (AKA the China Shock) and provoked a public backlash that has rendered free trade toxic in the U.S. policy debate. There’s an irony for you: trade boosterism has ultimately hurt the cause of free trade.” 

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Economists on the Run Economists on the Run Reviewed by PostDiscus on August 06, 2020 Rating: 5

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