Paul Krugman circa 1996 understood the point of this letter (below) that I sent yesterday to the New York Times. Paul Krugman circa 2007 apparently doesn’t:
Opposed to free trade,
David Raines asks "How can it be good for workers to be subjected to
competition from low-wage countries?" (Letters, December 27). This
question reveals a common misunderstanding.
Worker compensation
in America is high because American workers are made highly productive
by the great amounts of capital they work with. (And by the way,
America is rich in capital, in part, because she consistently runs
capital-account surpluses – i.e., "trade deficits.") Where wages are
low, it is because workers in those places have little capital to work
with and, therefore, are not very productive.
G.M. and Toyota
continue to sell cars even though bicycles – a competing means of
transportation, but one far less productive than cars – fetch much
lower prices. For the same reason, with free trade American workers
will continue to sell their labor for high wages even though many
workers abroad fetch much lower wages.
Sincerely,
Donald J. Boudreaux
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