On What We Missed About Globalization
Paul Krugman is characteristically and very admirably willing to discuss in this pdf what he got wrong. In particular, he now thinks that in the 1990s he underestimated the medium costs to the USA of globalization. This is especially striking, because his debate with Bill Clinton et al on this topic was uh rather heated.
Brad DeLong uncharacteristically disagrees with Krugman.
Uncharacteristically, I don’t agree entirely with Paul Krugman. It is almost extraordinary that I found myself disagreeing with Krugman in more or less the opposite direction as Brad. Brad wrote of the globalization revolution and the renegade Krugman — he asserted that Krugman ascribes to globalization the costs of bad management and bad macroeconomic policy.
I object to Krugman’s confidence that 1990s Krugman was right about the long run “It’s possible, and probably even correct, to think of specific factors as representing the short run while Heckscher-Ohlin represents the long run. ” Krugman makes no argument that it is “probably correct” to think of Heckscher-Ohlin representing the long run. He also presents no evidence, and it is hard to get many independent observations on long run effects.
In this he is conventional. Macroeconomists have many disagreements about the short and medium runs, but are almost all willing to assume that a flexible price model describes the long run.
I think it is very alarming that there is the most consensus and the highest confindence in exactly the case where there is the least evidence.
In particular, I note that the word “hysteresis” appeared recently in Brad’s blog. If recessions have permanent negative effects, then why would one not expect sectoral disruption due to shifts in trade patterns to have permanent effects ? The fact that something is not true in the short run doesn’t mean it is true in the long run.
I discuss DeLong discussing Krugman at great length after the jump.
Briefly, Krugman praises “the now-famous analysis of the “China shock” by Autor, Dorn, and Hanson (2013) … What ADH mainly did was to shift focus from broad questions of income distribution to the effects of rapid import growth on local labor markets, showing that these effects were large and persistent. This represented a new and important insight.”
I note the word “persistent”. Krugman remains convinced that his 1990s analysis works in the long run, because he is convinced that workers don’t remain in depressed local labor markets indefinitely. Krugman also notes that he assumed and assumes that countries can’t run current account deficits forever, so he assumes that the effects of currently huge US trade deficits are temporary. The US trade deficit has been huge for almost 40 years now, which seems fairly long term to me.
I think Krugman is a bit hard on his 1990s self. Back then he noted some people are hurt by trade & that they might need relocation and retraining assistance. But mainly, I think he just assumes that shifts in shared rents due to specific factors are temporary. This more plausible for quasi rents than for genuine ex ante rents. I’m not going to try to explain what I just tried to write — I think Krugman explains his thoughts.
Brad argues that globalization is as good for the USA as Krugman thought in the 1990s. He has three key arguments. One is that the manufacturing employment which has been off shored is unskilled assembly and such boring jobs are not good jobs. The second is that the problems faced by US manufacturing workers are mostly due to electing Reagan and W Bush and not trade. Finally he notes that local economic decline is not new at all and that trade with South Carolina did it to Massachusetts long before China entered the picture. The third point works against his general argument and is partly personal. I won’t discuss it except to note that Brad is right.
I have criticisms of Brad’s first two arguments. The first is that the boring easy manufacturing jobs were well paid. They are bad jobs in that thinking of doing them terrifies me even more than work in general terrifies me, but they are (or mostly were) well paid jobs. There are still strong forces that make wages paid to people who work near each other at the same firm similar. As very much noted by Dennis Drew, unions used to be very strong and used that strenth to help all employees of unionized firms (and employess of non-union firms whose managers were afraid of unions). I think that, like Krugman, Brad assumes that wages are based on skills importantly including ones acquired on the job. I think this leaves a lot out.
The second argument is based on decomposing the effects of two factors as if the total change is the sum of two effects. It just isn’t true (and Brad doesn’t mean to argue) that the effect of bad macroeconomic policy is the same whether shipping costs are huge or tiny. The decline of US manufacturing employment in the 1980s had a lot to do with the over-valued dollar caused by the combination of tight monetary policy and huge budget deficits. But this effect would have been much smaller if shipping costs were much higher or if there had been trade barriers. I think this is partly a semantic disagreement about when effects of trade are due to globalization — Krugman uses the word simply to mean effects of trade, Brad to refer to outsourcing low skilled work.
An argument no one mentions is about comparative advantage. The US had a comparative advantage in manufacturing. It had the engineers, the technicians, the labor, the venture capital and so on. When transportation costs are low and barriers minimal, comparative advantage is something a nation creates, not some natural attribute. The US sacrificed that comparative advantage on the altar of ideological purity. Manufacturing advantage is an especially useful type of advantage since it can permeate the remaining economy. We sacrificed it, and we have been paying for it. Odds are, we will continue to pay.
The problem here is that neoliberalism and globalization are two sides of the same coin.
If you reject globalization, you need to reject neoliberalism as a social system. You just can’t sit between two chairs (as Trump attempts to do propagating “bastard neoliberalism” — neoliberal doctrine is still fully applicable within the country, but neoliberal globalization is rejected)
Rejection of neoliberal globalization also implicitly suggests that Reagan quit coup that restored the power of financial oligarchy and subsequent dismantling of the New Deal Capitalism a was a disaster for common people in the USA.
While this is true, that’s a very tough call. That explains DeLong behavior.
It’s a very easy call for Brad DeLong who said that to me back in 1981. He detested and detests Reagan. In general, he is the mirror image of Trump favoring regulation and redistribution within the USA and also favoring free trade.
The actual ideological motivation is pretty clear in his post. It is also my motivation and (explicitly confessed from time to time) Krugman’s. The terms of the political debate are what serves interests and especially the interests of US workers. The standard stated priorities, also of leftists, liberals and (by both completely different definitions) neoliberals are nationalistic, and, I would say racist.
I?m going to explain my views, but I am quite sure that the description fits Brad (a friend of mine) and Krugman (who explained the view much better than I will somewhere once).
I reject US protection because protectionists aim to help the US at the expense of other countries about which I care. I argue (and Brad argues with more confidence) that it will fail on those nationalist terms, but we makes that argument because we reject the protectionists’ values.
The position that the interests of Chinese workers are as important as those of US workers (because we are all equally human) is too extreme to confess if one wishes to influence the actual debate. I am willing to confess it.
The idea that all men are created equal (and of equal importance) is also so far from the mainstream that people honestly can’t believe we believe it. Some (Jeff Faux, HTML Mencken (a blogger the T and M are not typos) just assume that expressed concerns for the interests of third world workers are hypocrisy and the real aim is to serve capital. Others believe that trade is bad for third world workers because neoimperialism or expoitation or profit is theft.
The contortions result from having views on right and wrong too extreme to state (while also in other contests universally asserted) . I think the key passage in Brad’s post is the one accusing others of wishing to blame dark skinned people.
“The position that the interests of Chinese workers are as important as those of US workers (because we are all equally human) is too extreme to confess if one wishes to influence the actual debate. I am willing to confess it.”
Your complaint is in the interests of Chinese labor as well as that of Filipino, Thai, Malaysian, Vietnamese, etc. labor because they are there and we are here is not as important as US Labor? Have you ever walked their streets? I was in Shanghai when it had the worst pollution day ever in recorded history. In Manila and unless something has changed, the waterways are polluted and children play on garbage heaps. In Bangkok, the beggars, children and old, are rampant outside of The Landmark Hotel at 138 Sukhumvit Rd. Old white men walk hand in hand with young women. I will walk with you from The Landmark hotel to Cheap Charlies a street bar which turned up on Diners, Drive-Ins and Dives. You can see what I saw then. Compare my description to what you see in Italy and where I live in the US.
One of my trips into China was an eye opener too as you could see the amount of infrastructural work being done there. Acres of malls going up around Shenzhen, China built to keep Labor busy and who never will shop there and will remain empty. Around the city of Jinan, China roll upon roll of apartments being built which Labor will never occupy (if occupied) because they are too expensive and again it keeps Labor busy. Digging holes and filling them in again appears to be the mode China is in with little to benefit Labor besides wages. Little are the productivity gains coming to Labor.
I have always argued the Direct Labor involved in manufacturing is the smallest portion of cost once the burden applied to it is removed. I would call much of it operational Overhead of which I may have impact or no impact to dependent upon many things such as the law. Recently one commenter (Richard Smith) posted to us who also writes on China and whose travels in China are not quite as extensive as mine. Writing:
Another Love Canal? If I had not witnessed much of the pollution in Asia, I would be hard pressed to believe this was happening. In the US, a company would not get away with this dumping. If a company did do such, it would not last for long. This is Overhead assigned to the a US business and also US Labor or the cost of operation and is inescapable in the US and not so hard to escape in China.
I am not a highly intelligent Macro Economist like yourself or Brad DeLong. I do read your words as well as Brad’s and find them enlightening. I am a micro-guy who fixes the individual bricks in the macro economic wall with such things as factory throughput analysis, lean six sigma projects, and planning improvements to lower the costs of operations and subsequently Materials and Overhead. I agree that punishing China with tariffs on the product they build punishes China Labor; however, there still must be a solution applied to the overall waste and pollution created which goes well beyond carbon dioxide and the quality of air. We do need to be involved.
Run thanks for the thorough and excellent comment. I think we agree.
I certainly don’t think that free trade is the solution to the problems of social injustice and pollution. I very much agree that China should spend on pollution controls and not on building.
In answer to your question, I have never been in Asia.
Robert:
I was fortunate to have done so having fallen by chance into a Consulting Engineer position learning my trade. It was shortly there after I started to work for international companies for the Germans, Japanese, and finally the Koreans today. China makes much noise on correcting pollution and increased economic growth through its leadership. In its attempts to make China an economic giant, it chooses between the two to keep its population happy and improve the environment the latter taking a secondary position. The air is acrid on many days, the water terrible, etc.
Free trade could be a solution to the issue if the government would begin to position an improved environment as important. What appears to be a central government role in doing so ends up being challenged at the local levels amongst the Chinese officials and entrepreneurs. Something gives and leadership backs away from its dictates in favor of growth.
For all the years I have worked in Germany, I never ventured into Italy. My grandmother migrated from Potenza and my wife’s family from the Naples area. We have talked about making the trip and kicking off from Stuttgart an area I know well down through northern Switzerland. Did my Hapsburg/Prussian/Eastern European history studies. It was interesting to see the land I had read about. Anyhoo, one of these years.
Thank you for your return comment. I always wonder if my words make sense.