The Protectionist Non-Surge

Paul KrugmanNow for something completely different. OK, at least somewhat different. I’ve been remiss about posting class notes for WWS543, Trade Policy; I’ll do an omnibus catch-up post soon. But the class goes on; this is the final week. Today I’m talking about protectionism in Great Recession and after, which is mainly about the surprising absence of any major protectionist surge. Why isn’t 2008- playing like 1929, at least on this front? To extent that we have a standard answer, it lies in the macroeconomic diagnosis of protectionism the last time. Eichengreen and O’Rourke have showed, convincingly, the main driver of protectionism in the 1930s was the lack of perceived alternatives to boost employment. Countries that stayed on the gold standard couldn’t take any monetary or fiscal actions to reflate, so they turned to tariffs and import controls. So were we saved from a repeat by the fact we’re in a world of fiat currencies + floating exchange rates? Not so fast. You see, outside euro area countries are free to use monetary policy, but monetary policy isn’t very effective, because we’re up against zero lower bound. (You can argue there’s more scope for expansion than the central banks have used, but anyway they haven’t, so the perceived constraint is there). Countries are also free to use fiscal policy, but Reinhart-Rogoff-Bowles-Simpson-Rehn have scared them into worrying about the deficits instead. Overall, macroeconomic policy has ended up operating within constraints reminiscent of those imposed by gold standard cult. So why, exactly, aren’t we seeing more protection? Why aren’t politicians, even conservative politicians, looking at situation and saying, hmm, a tariff won’t increase the deficit, it won’t involve debasing the currency, but it could clearly help create jobs? One answer might be the “Smoot-Hawley caused the Depression” thing; this isn’t true at all, but it might be serving the purpose of a noble lie. Or maybe it’s the structure of trade agreements. Countries that arguably could really, really use some protection right now are inside the European Union, so no go. The countries outside still know that any protection they impose will lead to big problems at the WTO; the United States has to know that a protectionist response would break up the whole world trading system we’ve spent almost 80 years building. A thought: maybe the secret of our protectionist non-surge isn’t macroeconomics; it’s institutions. (source: Paul Krugman – NYTimes – 29/04/2013)


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14 Responses to The Protectionist Non-Surge

  1. Professor Uziel Nogueira says: I agree with Prof PK statement that ” the United States has to know that a protectionist response would break up the whole world trading system we’ve spent almost 80 years building.” However, the conclusion that institutions explain US non protectionism is simplistic and partial. The world trading system is a direct result of the US economic model. A model in which US based transnational corporations seek profit maximization anywhere in the world. The consequences of such model are more important than the simple conclusion mentioned at the beginning. Transnational corporations are protected — along with investors, bankers and CEOs — while US workers are left behind to fend foreign competition by themselves.

    Here is my thought: maybe the secret of US protectionist non-surge isn’t macroeconomics or institutions. Is it because capital wins and labor loses.

  2. The American public knows it’s downwardly mobile. What it doesn’t know is what it can do to arrest, much less reverse, that trend. The public’s awareness of its plight was evident in the Allstate/National Journal poll released last Thursday. Half of the respondents – 49 percent – said that only the upper class could realistically expect to be able to pay for their children’s college education. Another 46 percent said that only the upper class could realistically anticipate having enough money to cope with a health emergency or job loss, while 45 percent said that only the upper class should expect to be able to save enough to retire comfortably. Fully 59 percent said they were concerned about falling out of their current economic class over the next few years. Clearly, the expectations of economic security and mobility that were widely shared by Americans in the decades after World War II have vanished, replaced by a pervasive economic anxiety. Anxiety, however, won’t change anything. Neither will the majority of analyses of how we got into this fix, nor will most of the (relatively few) recommendations as to how we can get out of it. Consider, for instance, the twin problems of wage stagnation and declining household income.

    According to former private equity banker and Obama administration official Steven Rattner, writing in the New York Times, “the lack of wage growth owes much to the continuing effects of globalization, a trend that has benefited the United States as a whole while hurting many workers.” Good for America, apparently, but bad for Americans. Besides, he implies, who can do anything about globalization? It’s as inexorable as the sunrise. Not much grounds for anything but more anxiety in that kind of analysis.

    And there is yet another trade agreement, the Trans-Pacific Partnership, that the Obama administration is currently negotiating behind closed doors with nations whose wage rates are lower than ours. We’ll surely be told that it’s good for us, just as we were told during the selling of every other trade agreement that Congress ratified during the past two decades of wage stagnation. One way to move from anxiety to action might be to demand that the administration come up with projections of the proposed accord’s effect on domestic wages. If, as Rattner suggests and all evidence points to, globalization has led to a “lack of wage growth,” just why is our government continuing to promote such agreements?

    The terms on which we globalize — who benefits, who gets clobbered — aren’t as inexorable as the sunrise.

    The public might just alert Congress that it expects its representatives to look out for its interests. Most American workers, however, are not in competition with their counterparts in Mexico and China — not if they work at Wal-Mart or McDonald’s, on construction sites, at college campuses or behind the wheel of a truck. The downward pressure that globalization exerts on wages spills over to other sectors, but it’s no more than a secondary cause for pervasive income stagnation (…..)

  3. Joe Y: The US economy might be gaining some traction due to the trade issue. The Domestic energy Boom in the US is creating some good US jobs in North Dakota and elsewhere but the real story for the US economy is the reduction in imported energy. US energy companies estimate the US will be energy independent by the end of the decade. This is a huge boast to the US economy by cutting our imports and adding to our GDP with the below equation. GDP = C + I + G + ( X – M) The downside of this is the environmental effects. This can be offset with Tax reform i.e. raise the gas tax and tax domestic energy production more while exempting say the first $25K of income from FICA Taxes (while getting rid of the ridiculous FICA tax limit of $113,700).

  4. Professor Uziel Nogueira says: Joe, Y = C + I + G + ( X – M) is not an equation but an identity. As we know, an identity is true for all values of x while an equation is true for only certain values of x.

  5. Ever since the financial crisis struck, and the Federal Reserve began “printing money” in an attempt to contain the damage, there have been dire warnings about inflation — and not just from the Ron Paul/Glenn Beck types. Thus, in 2009, the influential conservative monetary economist Allan Meltzer warned that we would soon become “inflation nation.” (…..) And, at this point, inflation — at barely above 1 percent by the Fed’s favored measure — is dangerously low. Why is low inflation a problem? One answer is that it discourages borrowing and spending and encourages sitting on cash. Since our biggest economic problem is an overall lack of demand, falling inflation makes that problem worse. Low inflation also makes it harder to pay down debt, worsening the private-sector debt troubles that are a main reason overall demand is too low. So why is inflation falling? The answer is the economy’s persistent weakness, which keeps workers from bargaining for higher wages and forces many businesses to cut prices. And if you think about it for a minute, you realize that this is a vicious circle, in which a weak economy leads to too-low inflation, which perpetuates the economy’s weakness. And this brings us to a broader point: the utter folly of not acting to boost the economy, now. Whenever anyone talks about the need for more stimulus, monetary and fiscal, to reduce unemployment, the response from people who imagine themselves wise is always that we should focus on the long run, not on short-run fixes. The truth, however, is that by failing to deal with our short-run mess, we’re turning it into a long-run, chronic economic malaise. I wrote recently about how, by allowing long-term unemployment to persist, we’re creating a permanent class of unemployed Americans. The problem of too-low inflation is very different in detail, but similar in its implications: here, too, by letting short-run economic problems fester we’re setting ourselves up for a long-run, perhaps permanent, pattern of economic failure. The point is that we are failing miserably in responding to our economic challenge — and we will be paying for that failure for many years to come.

  6. (NYT GOLDEN PICK) Professor Uziel Nogueira says: Is Prof PK defending a thesis of jobs for inflation and high prices? If high rates of inflation were the solution for job creation and high purchasing power wages, Brazil would be the model. Is the Brazilian model in Prof PK’s mind?

  7. Patrick Duffy: Here in the USA, Gasoline is up 100% over the past 5 years, Food is up 50% Rents have skyrocketed (depending on your area) about 25%, Health Care is up about 50%. It is only in the contrived calculations of our government and Mr. Krugman’s office, where inflation is low. The difference this time is that there is no wage inflation. Wages are essentially the same over the last 10 years. Microscopic interest rates allow the big banks to borrow money and invest it in higher yielding bonds of other nations: Free Profit! For those of us who have to eat and work and sleep, life is much more expensive than even 3 years ago, and we can’t borrow money at Zero % rates!! Oh, yes, Taxes are higher too! If the government or the Fed, or Mr. Krugman really wanted stimulus, they should be screaming for Tax Cuts or a Tax Holiday for all taxpayers earning less than $1 million. That would create real consumption and perhaps recreate some lost jobs. The current problem is Too Much Debt! The answer cannot be More Debt.

  8. Professor Uziel Nogueira says: Prof PK defense of jobs for inflation is purely academic. Not based on main street reality as many readers point out. I’m not sure he has visited a supermarket or paid bills in years. Otherwise, he’ll not going around saying inflation is too low. Prof PK is a well paid Nobel Prize economics professor making a bundle of money writing columns in the NYT, lectures and selling books on how to solve economic recession-unemployment in the US and Europe. The downside is decision makers in Washington not listening his advice, particularly inflation being too low.

  9. The American economy continues to add jobs in proportion to population growth. Nothing less, nothing more. The share of American adults with jobs has barely changed since 2010, hovering between 58.2 percent and 58.7 percent. This employment-to-population ratio stood at 58.6 percent in April. That is about four percentage points lower than the employment rate before the recession, a difference of roughly 10 million jobs. In other words, the United States economy is not getting any closer to recreating the jobs lost during the recession. This lack of progress has been obscured by the steady decline of the high-profile unemployment rate, which continued in April. But the unemployment rate is easily misunderstood. The government counts as unemployed only those who are actively looking for new jobs. As people have given up, the unemployment rate has declined – not because more people are working, but because more people have stopped looking for work. The share of adults looking for work peaked at 6.4 percent of the population in 2010. It fell to 4.7 percent in April. But recall that over the same period, the share of adults with jobs did not change. What grew instead is the share of adults no longer counted as part of the labor force. (The unemployment rate also uses a different denominator than the employment rate: Workers plus searchers, rather than the entire population. For the sake of consistency and clarity, the figures in the previous paragraph show “unemployment” as a share of the entire population.) And the decline of labor force participation – the technical term for the share of adults working or searching – is primarily the result of a bad economy. Baby boomers are aging into retirement. Even before the recession, the government projected in 2007 that participation would decline to 65.5 percent by 2016, from 66 percent. But the April rate of 63.3 percent means the labor force has lost roughly five million additional workers.

    Furthermore, the projections were wrong. Participation has actually risen among people older than 55. The decline is entirely driven by younger dropouts. The federal government counts 11.7 million Americans as unemployed. The real number, it follows, is more like 17 million.

    There is always some unemployment. Millions of Americans are out of work at any given moment even in the best of times. But the economy is still roughly 10 million jobs short of returning to normal levels of unemployment and labor force participation. That’s a lot of missing jobs. Some of those losses may be permanent. The number of Americans receiving disability benefits has increased by 1.8 million since the recession began, and people on disability rarely return to the work force, even if they would have preferred to keep working in the first place. And as the economy improves, it is likely that labor force participation among older workers will finally begin to decline. But the evidence suggests that the majority of the 10 million are just waiting for a decent chance.

  10. Professor Uziel Nogueira says: This time is different, really. Something has changed in the basic assumptions of the old FED recession/recovery macroeconomic model of last century. This time, job creation is lagging well behind other macro variables such as business activity and profit generation. Corporations are winners and workers losers. Apple is the best example of such dichotomy. US based transnational corporations are making huge profits in the zero interest rate financial environment while small businesses and main street surviving. The most troubling aspect is that economists are either divided on how to deal with the unemployment question or totally clueless for the most part. Starting with the big names such as Krugman or Summers, there is no consensus on a set of policies aimed at sustaining growth and creating enough jobs to lower down unemployment. One reason, in my view, is US economists are not trained to deal with jobless recoveries such as this one. In the past, the US economy worked quite predictably in a boom-bust situation. Economic recovery was always followed by strong job creation. For the first time, US economists have to go back to the board, or their computers, review the old macro models, start making new assumptions and coming up with some robust conclusions to assist policy makers in Washington. A country with so many Nobel Prize winners in economics, the task at hand should not be too complicated to be successfully achieved.

  11. THOUGH yesterday’s employment report revealed a slowly improving job market, the jobless rate is still elevated, at 7.5 percent, with 11.7 million people looking for work, including 4.4 million who have been doing so for at least half a year. About eight million more were stuck in underemployment (“involuntary” part-timers) last month, unable to find the hours of work they sought. These measures persist amid an economic expansion continuing since mid-2009, a roaring stock market and a housing market that’s now reliably in recovery. While the high jobless numbers are partly a legacy of the Great Recession, the fact is that our economy has generated too few jobs for most of the last 30 years and is likely to continue to do so. The only viable response is a return to an idea that once animated domestic policy making: full employment, the notion that everyone who wants to work should be able to find a job, and if the market isn’t up to the task, then the government must fill the gap. For decades in postwar America, the maintenance of full employment, defined as an unemployment rate below 5 percent, was enshrined in law, beginning with the Employment Act of 1946 and revisited in 1978 in the Humphrey-Hawkins Act. It was a central goal of the Democratic Party, labor unions and advocates of social and racial justice. And it usually worked. While conservatives and businesses pushed back — tight labor markets meant more worker bargaining power, higher wages and less profitability — between 1949 and 1979 the market was at full employment over two-thirds of the time. Since then, it has been at that level just a third of the time. How did this happen? Both the politics and economics are implicated. Politically, as union power declined, the concerns of Democratic policy makers shifted from working-class issues like jobs and toward the concerns of upper-income constituents, like inflation, taxes and budget balancing. Economically, a number of trends have created persistent, upward pressure on the jobless rate. Since 2000 — the last time the market was at full employment — productivity is up about 30 percent, while employment has been flat. And that’s not just because of the recession; the same pattern prevailed during the 2000s expansion. One explanation may be that capital investment has become, to put it politely, more “labor saving.” Yes, this process has been going on forever, but robotics and other ways of automating tasks may be accelerating it (…..)

  12. In analyzing the most recent financial crisis, we can benefit somewhat from the misfortune of recent decades. The approximately 100 crises that have occurred during the last 30 years—as liberalization policies became dominant—have given us a wealth of experience and mountains of data. If we look over a 150 year period, we have an even richer data set. With a century and half of clear, detailed information on crisis after crisis, the burning question is not How did this happen? but How did we ignore that long history, and think that we had solved the problems with the business cycle? Believing that we had made big economic fluctuations a thing of the past took a remarkable amount of hubris. The big lesson that this crisis forcibly brought home—one we should have long known—is that economies are not necessarily efficient, stable or self-correcting. There are two parts to this belated revelation. One is that standard models had focused on exogenous shocks, and yet it’s very clear that a very large fraction of the perturbations to our economy are endogenous. There are not only short‑run endogenous shocks; there are long‑run structural transformations and persistent shocks. The models that focused on exogenous shocks simply misled us—the majority of the really big shocks come from within the economy. Secondly, economies are not self-correcting. It’s clear that we have yet to fully take on aboard this crucial lesson that we should have learned from this crisis: even in its aftermath, the tepid attempts to fix the economies of the United States and Europe have been a failure. They certainly have not gone far enough. The result is that we continue to face significant risks of another crisis in the future.

    So too, the responses to the crisis have not brought our economies anywhere near back to full employment.

    The loss in GDP between our potential and our actual output is in the trillions of dollars. Of course, some will say that it could have been done worse, and that’s true. Considering that the people in charge of fixing the crisis included some of the same ones who created it in the first place, it is perhaps remarkable it hasn’t been a bigger catastrophe (…..)

  13. (…..) But even as the economy deleverages, there is every reason to believe that it will not return to full employment. We are not likely to return to the pre-crisis household savings rate of zero—nor would it be a good thing if we did. Even if manufacturing has a slight recovery, most of the jobs that have been lost in that sector will not be regained. Some have suggested that, looking at past data, we should resign ourselves to this unfortunate state of affairs. Economies that have had severe financial crises typically recover slowly. But the fact that things have often gone badly in the aftermath of a financial crisis doesn’t mean they must go badly. This is more than just a balance sheet crisis. There is a deeper cause: The United States and Europe are going through a structural transformation. There is a structural transformation associated with the move from manufacturing to a service sector economy. Additionally, changing comparative advantages requires massive adjustments in the structure of the North Atlantic countries (…..)

  14. (…..) It should be clear that we could have done much more to prevent this crisis and to mitigate its effects. It should be clear too that we can do much more to prevent the next one. Still, through this conference and others like it, we are at least beginning to clearly identify the really big market failures, the big macroeconomic externalities, and the best policy interventions for achieving high growth, greater stability, and a better distribution of income.

    To succeed, we must constantly remind ourselves that markets on their own are not going to solve these problems, and neither will a single intervention like short-term interest rates.

    Those facts have been proven time and again over the last century and a half. And as daunting as the economic problems we now face are, acknowledging this will allow us to take advantage of the one big opportunity this period of economic trauma has afforded: namely, the chance to revolutionize our flawed models, and perhaps even exit from an interminable cycle of crises.


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