Krugman vs. Krugman, Again

by Don Boudreaux on December 28, 2007

in Myths and Fallacies, The Hollow Middle, Trade

In today’s edition of the New York Times, Paul Krugman offers up the old pauper-labor “theory” for why trade with low-wage countries is likely to harm typical workers in high-wage countries.

Here’s a letter that I sent in response:

Paul Krugman worries that, although trade between high-wage countries is mutually beneficial, “trade between countries at very different levels of economic development tends to create large classes of losers as well as winners” – and so is suspect because it likely harms ordinary American workers (“Trouble With Trade,” December 28).

A famous trade economist argues that this concern is misplaced.  In a 1996 essay, this economist – responding to a protectionist who fretted that western trade with low-wage countries would harm workers in the west – wrote that this protectionist “offers us no more than the classic ‘pauper labor’ fallacy, the fallacy that Ricardo dealt with when he first stated the idea, and which is a staple of even first-year courses in economics. In fact, one never teaches the Ricardian model without emphasizing precisely the way that model refutes the claim that competition from low-wage countries is necessarily a bad thing, that it shows how trade can be mutually beneficial regardless of differences in wage rates.”

Oh – the economist who wisely warned against the pauper-labor fallacy is none other than Paul Krugman.

Sincerely,
Donald J. Boudreaux

It’s worth noting here also the apt and spot-on correct closing lines of this 1996 essay: “Ricardo’s idea is truly, madly, deeply difficult. But it is also utterly true, immensely sophisticated — and extremely relevant to the modern world.”

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{ 25 comments }

spencer December 28, 2007 at 9:39 am

In the original article Krugman explained how the facts have changed and that led him into changing his mind about the cost of trade.

AS Keynes is famous for saying, When the facts change, I change my mind. What do you do, sir.

Buzzcut December 28, 2007 at 10:30 am

The facts have not changed, Krugman only asserted that they changed.

More manufactured goods are imported, and the nations that they come from have changed. That is what Krugman asserted. How does that change Krugman's original conclusion? He never explains WHY the conclusion must change.

Isn't the last paragraph of the Krugman column simply laughable? He's asking people not to do… what he does on a daily basis.

Jon December 28, 2007 at 10:46 am

Circumstances don't necessitate a change in theory, merey the application of that theory.

I would argue that facts do not change, circumstances do.

Bruce December 28, 2007 at 10:51 am

I wonder which facts have changed? If we look back over the last 50 years there can be no question that our standard of living has improved substantially. Meanwhile, many of our "low wage" trading partners have seen their standard of living improve greatly too. Japan began as a low wage trading partner and is now a major economic power. We now see South Korea, Singapore and Thailand following along the same path. What's the problem if, as these economies mature and lose their comparative advantage in unskilled labor, manufacturing moves to Mexico or China? In 20 years, when China has lost its low wage advantage, Krugman will likely be complaining about the low wage manufacturing being done in Africa, but only if a republican is in the White House.

Also, it should be pointed out that Krugman does not flip flop in order to argue for restricted trade, but rather for an expanded welfare state. It seems to me that the facts have remained constant, it is Krugman that has changed. He is now little more than a political hack.

Randy December 28, 2007 at 11:02 am

In the world of alternative rock Krugman would be known as a sellout. He has literally sold his thinking and writing skills to the progressives and their tributaries the labor unions.

John V December 28, 2007 at 11:42 am

Krugman says that evidence now shows that wages are affected much more than previously thought. Where's this info? I've never seen it.

The recent info I've seen, if my memory serves me correctly, is that it drops wages for the bottom 10% somewhere between 1% and 8% but also warns that even these numbers may be exaggerated and open to scrutiny.

So where's this info? Krugman is more than welcome to say this but he has no license to assert such things without any evidence and then base his whole premise on it.

I will look for that link. I remember blogging on it a few months ago.

Pitt December 28, 2007 at 2:53 pm

Unfortunately, you've entirely misunderstood Krugman's argument. He's not saying that trade with low-wage nations is bad for America; he's saying it's bad for some Americans. He makes this very clear in the article:

"All this is textbook international economics: contrary to what people sometimes assert, economic theory says that free trade normally makes a country richer, but it doesn’t say that it’s normally good for everyone."

This is in perfect agreement with what he said in his 1996 essay:

"And even if national income rises as a result of trade, the distribution of income within a country may shift in a way that hurts large groups."

His 2007 argument is not in the slightest contradicting his 1996 argument – it's just focusing on a different point.

Nowhere does he say that American GDP suffers by trading with low-wage nations. All he's saying is that the benefits and drawbacks of trading with low-wage nations may be distributed less equally than the benefits and drawbacks of trading with high-wage nations, and that it's possible a large number of Americans may come out as net losers in trade with low-wage nations. He's not saying that's true, just possible, and worth considering.

M. Hodak December 28, 2007 at 7:33 pm

The more interesting question, Pitt, is: Why? Why is Krugman's point worth considering?

If economics is about cause and effect in a defined system, why select facts about particular components of the system to make a point? Why select facts from outside of the system to make a point about the system? Then it's not economics any more, is it? So if Krugman is no longer writing about economics, but is writing about policy in conscious ignorance of economic principles, then why is he any longer cited as an economist in his writings?

The answers to these questions are best put by Bruce above. Krugman is a political hack in economists clothing.

A. Murray December 28, 2007 at 9:28 pm

I still can't understand why some of you find Krugman's article so offensive. He has not said anything that is inconsistent with standard trade theory. It is universally acknowledged that a reduction in the real compensation of unskilled American workers as a result of trade liberalization is a theoretical possibility. Krugman's argument in the '90s was a subjective one; the effect did not seem to be very large, and so we should deal with it.

Now he suspects that the magnitude of the effect may be larger than it was. He did not provide much evidence, but he probably will eventually; I'm not sure why you would expect extensive and rigorous academic analysis in an NYT column. But at this blog, people immediately jumped to misrepresenting Krugman's argument and refuting assertions that he did not even make.

It seems to me that the issue here is that no one wants to pass up an opportunity to bash Krugman for his politics. (Yes, Krugman frequently does the same thing.) At the end of the column, he calls for an expansion of the social safety net to compensate for the potential distributional impacts of growing trade with the developing world. You may disagree with this on various grounds, and that's great. Perhaps Krugman is wrong to think that there is a serious problem here. But that doesn't mean that he is wrong on the analytical side of the issue.

And that is what is so confusing here. I say again: nothing Krugman has claimed has been inconsistent with economic theory. It is theoretically possible that freer trade may reduce the wages of unskilled American workers, all else being equal. It is quite possible to argue that this effect, even if true, would not justify the kinds of government intervention that Krugman desires. But no one at this blog has made that argument. Instead, Krugman has been attacked for getting the theory wrong (even though he got it right) and for failing to understand Ricardian comparative advantage (even though no such misunderstanding was evident in his column). So, who are the ones acting like political hacks here?

Whether Krugman is right or wrong on the analysis is an empirical question. Why should we be afraid to find out that, all else equal, trade reduces the compensation paid to the scarce factor in the US economy—a legitimate theoretical possibility?

Krugman may in any case be wrong in his prescription, but no one has even bothered to argue that.

G December 28, 2007 at 10:20 pm

Here is why I find Krugman's article so offensive:
It is a perfect example of the improper use of abstractions, which Don recently blogged about. In my opinion, he demonstrates an absurd methodology for making policy decisions. Should the ability to draw a line around some group of people and say "See? They aren't doing as well as they could be if we changed policy" mean that policy should be changed? Such lines could probably always be drawn in almost all cases, and doing so is a completely disingenuous use of abstractions. We could just as easily draw lines around individuals who do not take government handouts, and point to how they are hurt from an increase in welfare. Its absurd.

In this manner I do not think Krugman is commenting as an economist. He is supporting the political abstraction of groups of individuals, and so is commenting as a political hack. A scientist should see no distinction between the workers in Mexico and the ones in America.

Down with economic nationalism!

Mesa Econoguy December 28, 2007 at 10:59 pm

Pitt’s criticism of this post appears to be valid. The title of the piece, however, is misleading (as is the entire paper). Krugman doesn’t make the case that trade is bad, but there are about 18 other things wrong with what Krugman wrote.

Here are a few:

1) “But for American workers the story is much less positive.”

Oh, really, “professor” Krugman? Perhaps you are economically clairvoyant, in which case you can explain this, and please inform us which "knowledge worker" categories will be in most demand, by the government in future. I'm guessing anything endorsed by your next column.

2)" And lower prices at Wal-Mart aren’t sufficient compensation."

For what? Displacement of Pittsburgh foundry foremen jobs? Or do you also know the composition of every single "outsourced" position in this job market (like Lou Dobbs and Bob Reich claim to)? Prove that.

3) "And the biggest growth in imports has come from countries with very low wages."

So what? So people from other countries have lower labor input costs than we do? Professor Krugman, surely you must understand economic evolution [agrarian...industrial...service] enough to understand your own bullshit here.

When hasn't this ever been the case? What years, and how did we quantify "very low" wages? And in those years, what was PPP? Please, do explain, professor.

You're quite lucky that I'm not a Princeton alum. Just one of those other fancy "colleges." Complete and utter bullshit.

What Krugman is doing is laying a foundation for protectionist policies, which, as noted above, puts him squarely on big labor’s payroll.

New Year's Pledge: I promise not to waste my time reading The New Joke Times ever again, even if it's free content.

Sam Grove December 29, 2007 at 2:21 am

There probably wouldn't be very much to argue about if it weren't for all of our wealth that is wasted in unproductive endeavors such as the occupation of Iraq and maintenance of military bases in 130 other countries and corporate/agricultural subsidies.

Then we would be so much better off that few would mind trade with low wage countries, or immigration.

Gil December 29, 2007 at 2:42 am

In what way are the effects (in the US) of trade with low wage countries different from the effects of efficiency gains from technology improvements?

Is Krugman against those too?

Yes, the benefits aren't distributed equally, but why should they be?

Yes, some people will be worse off in the short term, but the increased wealth will provide more opportunities if they are willing to adapt to the changing world.

It seems wicked to insist that nobody should benefit from voluntary beneficial arrangements because other people want things to remain static.

Russ Nelson December 29, 2007 at 9:59 am

Sam Grove, so, are you going to vote for Ron Paul?

tim December 29, 2007 at 11:46 am

It was quite amusing to see Krugman spanked with his own words. Thanks for making me laugh Don!

Jasper December 29, 2007 at 3:31 pm

The more interesting question, Pitt, is: Why? Why is Krugman's point worth considering?

M. Hodak: I think Krugman is simply pondering the ramifications of trade with poorer nation in attempt to ascertain whether or not the number of Americans negatively impacted by such trade is larger than previously supposed. Most likely, Krugman is making this effort to martial support for strengthening the safety net. Libertarians don't seem to have much enthusiasm for such a project. But they might want to consider the fact that, if Krugman's hunch is correct, the failure of America to provide the same levels of social protection enjoyed by Europeans or Canadians might undermine public support for the free trade that most economists — including Krugman — agree is highly desirable. Indeed, a cursory glance at opinion polls tells me that, regrettably, public support in America for trade with other nations has already eroded to a significant degree.

Jasper December 29, 2007 at 3:40 pm

2)" And lower prices at Wal-Mart aren’t sufficient compensation."
For what? Displacement of Pittsburgh foundry foremen jobs? Or do you also know the composition of every single "outsourced" position in this job market (like Lou Dobbs and Bob Reich claim to)? Prove that.

Mesa: Krugman doesn't have to prove that trade negatively impacts "every single 'outsourced' position." Because he's not making such a claim. He's simply making the utterly uncontroversial observation that competition with foreign workers hurts some American workers (ie., their lost jobs or lower wages are not equalized by lower retail prices). He's furthermore raising the possibility that the number of such workers in the United States may be larger than was once commonly thought. Again, he's just raising the possibility. He's not claiming it's true. I find it a little counterintuitive myself, but I wouldn't brush such a line of thought aside as if it were theoretically impossible, because it' not.

M. Hodak December 29, 2007 at 4:25 pm

Jasper,

I understand that Krugman was making a point about the economic impact of dislocations. I also agree that he's looking toward the political impact as something to be reckoned with. But my point was that the latter is distinct from the former. One can say "we have to care about the dislocations because they are visible and they may effect electoral outcomes." But that's a policy issue that looks at only part of the whole system.

What's missing, what a true economist would consider, is what is not so visible, i.e., that government policy can only deal with dislocations in one of two ways (or a combination of both)

(a) limit trade in order to limit the dislocations
(b) tax away the gains of trade to provide for those who are dislocated

Either of these policies have economic implications. I believe that Krugman is a good enough economist to understand that funneling money through the government to support certain dislocated persons is bound to create some privation elsewhere in the system. Certain people will have less to spend; certain businesses will make less money; certain employees will be laid off; etc. I also believe that Krugman is a good enough political writer to ignore those latter effects for the sake of sounding like a "concerned economist" knowing that those less visible effects are of no political consequence. That's why I call him a hack.

Jasper December 29, 2007 at 4:56 pm

I believe that Krugman is a good enough economist to understand that funneling money through the government to support certain dislocated persons is bound to create some privation elsewhere in the system….I also believe that Krugman is a good enough political writer to ignore those latter effects for the sake of sounding like a "concerned economist" knowing that those less visible effects are of no political consequence. That's why I call him a hack.

Um, we're talking about, what, a 500 word column? It hardly seems reasonable to call him a hack for failing to observe the banality that paying for more social insurance is going to raise somebody's tax bill. I'm not an expert on his work, but I reckon Krugman has on numerous ocassionas openly called for a more progressive tax code. By definition that means making rich people pay more. You may not agree with the merits of such a policy, but Krugman's not a dodger on this issue, and calling him a "hack" is lame. Far more honest to just call him a "liberal" and leave it at that.

vidyohs December 29, 2007 at 8:00 pm

Krugman is a good little socialist.

Being a good socialist means never having to state a truth or be held accountable when what you said turns out to be wrong. Shift of direction, change of position, denial of previos ideas…..don't matter to the socialist world. A socialist evangelical can be wrong on everything and be forgiven if it is in direct opposition to capitalism and free markets.

Am I wrong….check out Paul Erhlich the prophet of doom a la "The population bomb."

I don't even think he can get his address right but he is still a "go to" guy for the looney left.

vidyohs December 29, 2007 at 8:07 pm

Jasper,
"Krugman's not a dodger on this issue, and calling him a "hack" is lame. Far more honest to just call him a "liberal" and leave it at that.

Posted by: Jasper | Dec 29, 2007 4:56:39 PM"

A liberal is a progressive is a democrat is a socialist is a communist and there is no evidence in history that their ideas, policies, and dreams of "magic wand land" will ever come true. So if one is a liberal who willingly and voluntarily shills for a idea, policy or dream that has universally failed humanity and always eventually delivered its captives into poverty, demoralization, and degradation…..why wouldn't the word "hack" at a minimum be appropriate?

M. Hodak December 30, 2007 at 12:07 am

"By definition that means making rich people pay more."

You're still missing the distinction. Even in a two sentence column, an economist would understand that making rich people pay more taxes has an impact on poor people. A liberal doesn't believe that secondary effect exists or is significant. A hack understands the significance of that secondary effect–they would remember the infamous "luxury tax" of 1991–and spouts liberal dogma anyway.

Pitt December 30, 2007 at 8:50 am

Oh, really, “professor” Krugman? Perhaps you are economically clairvoyant, in which case you can explain this

There's not much to explain – it's another case of misunderstanding the argument. He's not saying "where the jobs will come from" in the "which particular industries" sense, he's saying it in the "prospects look bleak" sense. The point is that people no longer expect their children to have a better life than they did, which is a sea change from the last few generations.

2)" And lower prices at Wal-Mart aren’t sufficient compensation."

For what?

For the lower wages caused by the secondary effects of trade. I don't see why this is even a question you need to ask – he spelled it out pretty clearly in his column. If you're trying to ask for details, simply go read one of his papers on the topic – he linked to a 1996 paper of his on this precise topic a couple days ago.

3) "And the biggest growth in imports has come from countries with very low wages."

So what?

So the effects of trade with low-wage countries will be different than the effects of trade with high-wage countries. In particular, low-wage countries tend to overwhelmingly export goods made with unskilled or semi-skilled labour, meaning that any negative wage pressures in the US will be overwhelmingly felt by unskilled or semi-skilled workers, as opposed to the more broad-based effects one would expect to see due to trade with a high-wage nation whose pool of skilled and unskilled workers was of similar ratio to the US's.

It's really not a tricky concept, and I thought he was fairly clear about that.

What Krugman is doing is laying a foundation for protectionist policies, which, as noted above, puts him squarely on big labor’s payroll.

While I realize that you're mad keen on criticizing Krugman for whatever you can find because you disagree with his politics, you shouldn't let that desire make you grossly misread what he writes.

He's not advocating protectionism; indeed, he explicitly states that he's not in favour of protectionism, and has made that clear for years. What he is advocating is a stronger social safety net – as, again, he's been doing for years.

That's very clearly stated in his column, so ranting about things he's not only not saying but is saying the opposite of just makes you look a little…out of touch with reality. Is it that hard to respond to what people actually write?

Mesa Econoguy December 31, 2007 at 6:45 pm

Sorry, busy weekend.

"So the effects of trade with low-wage countries will be different than the effects of trade with high-wage countries."

Ok, so what? And?

As Don reprises here, that's nearly irrelevant; the overall benefit to the economy is what matters, and not some nebulous equally-distributed equal outcome benefit. That is a fundamental misunderstanding of trade, which Krugman misunderstands as well.

Krugman is most definitely building the case for protectionism (Lou Dobbs and others have carried that water for him), but here’s a New Years Prediction:

If the Republicans somehow miraculously retain Congress & the presidency, sometime in 2008, Paul Krugman will say “economic conditions have significantly deteriorated enough such that we must now consider using instruments such as tariffs (he’ll probably come up with a different term like import fees, jurisdictional redirection trade fees, or something) . We now must reexamine the fundamental underlying tenets of comparative advantage (and everything he previously wrote), and utilize the forces of government to level the playing field.”

But that's the beauty of selective memory, and a biased press, including Paul Krugman, telling everyone things are awful, when they aren't.

I didn’t even touch on the most laughable part of Krugman’s entire “column”:

“I hope that we respond to the trouble with trade not by shutting trade down, but by doing things like strengthening the social safety net.”

The history of the 20th century, especially the second half, is a history of the failure of the (government sponsored) social safety net which makes Krugman (and you) seem, well, like you have no clue.

If I have to explain this, you clearly don’t understand political economy, nor Krugman’s warped economic worldview (and his directionally evolving “thoughts”, such as they are), nor why Krugman continues to be an economic fraud. That is called knowing your customer/author/source.

As far as “gross misreadings” goes, here’s a little clue: most everything Krugman writes is a gross distortion of economics heavily shaded by an incredibly myopic economic and political lens.

Mesa Econoguy January 1, 2008 at 12:04 am

Doubly sorry, signed,

Alternative Minimum Tax

P.S. Merry New Year!

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