Quotation of the Day…

by Don Boudreaux on September 6, 2011

in Intervention, Subsidies, Trade

… is from Paul Krugman’s outstanding May 1993 American Economic Review essay “What Do Undergrads Need to Know about Trade?”, reprinted in Krugman, Pop Internationalism, pp. 117-125; this quotation is on page 124 of the latter:

Now there are reasons, such as external economies, why a preference for some industries over others may be justified.  But this would be true in a closed economy, too.  Students need to understand that the growth of world trade provides no additonal support for the proposition that our government should become an active friend to domestic industry.

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Dan H September 6, 2011 at 10:40 pm

(sigh) Oh where have you gone, Dr. Krugman?

Daniel Kuehn September 6, 2011 at 11:58 pm

Have his views on this changed?

Ken September 7, 2011 at 1:00 am

Have his column not endorsed protectionism in “support for the proposition that our government should become an active friend to domestic industry”?


dsylexic September 7, 2011 at 3:52 am

i am sure he can weasel about by saying ‘but we are at the zero bound’ and some such shiznit

Methinks1776 September 7, 2011 at 7:14 am

Oh, not under “normal” circumstances (that is, while government is distorting markets to create the illusion of prosperity and before the shit hits the fan). But, you see, he now argues, we no longer live in “normal” times and we’re not at full employment. It’s time to pay the piper (which is no fun at all) and to recreate the illusion of prosperity government has no choice but to replace private malinvestment and overspending with government malinvestment and overspending. This creates certain problems that can only be fixed by protectionism.

Krugman: “Let’s be clear: this isn’t an argument for beggaring thy neighbor, it’s an argument that protectionism can make the world as a whole better off. It’s a second-best argument — coordinated policy is the first-best answer. But it needs to be taken seriously.”

See, all that stimulus is raising aggregate demand for foreign products, but they foreigners don’t suffer the debt burden associated with the fiscal policy raising AD. So, if you can’t get everyone around the globe to goose step in the same direction, you can at least impose additional hardships on your own citizenry. Mind, only in the short term. He’s not an idiot. Long term (when we are all dead) protectionism is bad, but in a pinch, it’s awesome and will fool everyone into thinking that all is now back to “normal”. If stimulus has such bad unintended consequences, perhaps the problem is fiscal policy? NO way. The problem is not enough government distortion.

You don’t agree?

Krugman: “What’s the counter-argument? Don’t say that any theory which has good things to say about protectionism must be wrong: that’s theology, not economics.”

Ah. When you can’t justify your economics, redefine it.

Just one example.

You may also recall that since we don’t live in the halcyon days of normal times, he was all for the GM bailout because it preserved all those jobs. So, I guess when GM can’t compete against foreign auto makers, it’s okay for government to be an active friend of domestic industry.

Daniel Kuehn September 7, 2011 at 8:19 am

But how is that different from what he’s said here? Trade doesn’t add additional reasons for favoring domestic industries. Krugman’s new trade theory stuff about specialization and increasing returns was as true of a closed economy as an open economy – ergo, trade doesn’t add an extra reason to be concerned. Expansionary monetary policy is called for now in a closed economy or an open economy: whether that calls for Fed action or currency devaluation – ergo, trade doesn’t add an extra reason to be concerned. Your real beef is with his production theory (the increasing returns/specialization point) or with his macroeconomic theory (the monetary expansion point), but he’s still not arguing that the introduction of international trade changes things.

Methinks1776 September 7, 2011 at 8:55 am

So, it’s the presence of Keynesian stimulus that create the burning need for mercantilism, not trade. Of course, if we were a closed economy (no foreign trade), we could ostensibly engage in Keynesian shenanigans all we want and it would be fine because there’s no chance of exporting that AD boost to foreign economies. That foreign trade seems to be a real hindrance to stimulus. Or is it the other way around.

Perhaps he should have been more clear in his essay. “Students need to understand that the growth of world trade provides no additonal support for the proposition that our government should become an active friend to domestic industry, provided the government is not in the throes of fiscal stimulus mania .”

Much more accurate picture of his views, no? When not in the midst of fiscal stimulus, trade provides no support for protectionism. When in the midst of fiscal stimulus, trading with foreigners becomes a problem and does, in fact, provide nothing but support for our government becoming a friend to domestic cronies….er industry. According to Krugman, that is.

Methinks1776 September 7, 2011 at 9:02 am

It appears that there are times when, according to Krugman, foreign trade, by virtue of being foreign trade, does necessitate protectionism.

Either his views have not changed and he was being disingenuous in his 1993 essay or his stated views have changed.

Although….I’m not at all sure that this is what Dan H was implying in his post. You might have been mistaken there.

John Papola September 6, 2011 at 11:29 pm

Dr. Krugman has been replaced by his bomb-throwing Virgin Islands beach club buddy Mr. Hack.

kyle8 September 7, 2011 at 6:41 am

No, he was replaced by his infamous space aliens. They are trying to weaken us economically so they can later invade.

Dan H September 7, 2011 at 7:09 am


Great idea for your next video!

“The Strange Case of Dr. Krugman and Mr. Hack”

michael September 7, 2011 at 7:31 am

This is a great idea.

Brazilian September 6, 2011 at 11:49 pm

Not surprised, Krungman can’t discredit his main academic work – which inclusive gave him a Nobel prize. Economies can mutually benefit from free trade because of the gain of diversification.

Dan J September 6, 2011 at 11:56 pm

‘… No additional support for The proposition that our govt should be an active friend to domestic industry.’.

But, it should not be the mortal enemy, either. And, we have seen how the federal govt and state govts, as in the case of Cali., they actively participate in being the Adversary of businesses and crony capitalism.

JS September 7, 2011 at 8:02 am

I saw a clip of Krugman last night on Fox saying ‘mumbling’ something quickly that he knows what our country needs, but, alas, sigh, the people don’t agree with him, or don’t want it, or to be helped, etc. ad nauseam.

It reminded me of a few times when Obama had fire side chats with 9 yr olds telling them that he knows what’s good for the country but for the Institution of Democracy stands in his way from saving us.

Here is a Keynesian correlation that we should learn: The rate at which Paul Krugman has discarded his principles is equal to the rate upon which he has approached celebrity status. Clearly, he wants to be the Czar of something.

Dan H September 7, 2011 at 8:12 am

Krugman reminds me of Dr. Robert Stadler from Atlas Shrugged… a once brilliant professor who sold out to the bureaucrats in his desire for social approval.

JS September 7, 2011 at 8:35 am

Dan, off topic, but outside of the decathlon, I always considered the pole vault to require the most ‘overall’ athleticism. Would you agree, or would pick another event?

Dan H September 7, 2011 at 8:56 am

Pole vault and hurdles, which are both part of the decath, required the most athleticism. Hurdles require that you maintain an unbelievable level of balance, coordination, and timing. The thing about hurdles is that you only had one shot. You only raced it once in the meet. But in pole vault, you were given multiple attempts. I’d say the event that required the most overall athleticism is pole vault followed closely by the high hurdles.

JS September 7, 2011 at 9:37 am

On the Krugman quote, when he says that there is justifcation for preferring some industries over others, one needs to pause and think of what is entailed by that. He is asserting that consumer sovereignty is not optimum for consumer welfare; that consumers shouldn’t be free to determine how industries evolve to service their needs, such that some other ‘intelligence’, hopefully his own, should be sovereign instead.

The problem with protectionism, in open or closed economies, is that it always reverses the division of labor to the degree of the intervention. The consumer is always taxed by it. Logic holds that the end result of forcing consumers to pay higher prices for things will reduce the wealth available for new things. The creation of wealth is about ‘new’ things being made available to an economy. Weath/prosperity is abundance of consumer goods available within an economy made possible only by the division of labor made possible only by resources constantly being saved so they can be invested in new things.

JS September 7, 2011 at 10:40 am

If I am responding to a different Krugman, it doesn’t change anything.

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