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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