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.

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