In this previous post I wrote that “[t]here is yet a deeper economic fallacy that infects Mr. Krugman’s recent defense of mercantilism – a problem that I hope to blog on soon.” What follows is that promised blog post.
Mr. Krugman’s most-recent defense of mercantilism boils down to the assertion that the case for free trade does not apply in an economy with deficient aggregate demand (that is, does not apply in an economy with lots of involuntarily unemployed workers and other resources). While I agree with Scott Sumner that today’s U.S. economy empirically does not fit the description that Krugman paints of it, I assume for the whole of this post – for the sake of argument – that the economy is indeed suffused with lots of involuntarily unemployed resources.
So the question is: do lots of involuntarily unemployed resources nullify the case for free trade and strengthen the case for protectionism?
No. Or, at least, the existence of lots of involuntarily unemployed resources justifies no government-imposed restrictions that apply uniquely to international trade. Put differently, if we take seriously Mr. Krugman’s case for protectionism in an economy with lots of involuntarily unemployed resources, then we logically must – as Mr. Krugman logically must – go much, much further than simply calling for restrictions on international trade. By this logic, restrictions are justified on all trade – international and domestic. The reason is that there is nothing unique about international trade that causes it to diminish (or to fail to adequately promote) aggregate demand in the domestic economy.
Most obviously, government should strip income earners of the right to spend less on current consumption (that is, government should strip income earners of the right to increase their savings). In “normal times,” when aggregate demand is adequate, government can allow people to increase their savings. But clearly (or so must say Mr. Krugman) the case for such freedom to save does not apply in an economy with lots of involuntarily unemployed resources.
Ditto for the freedom to innovate. In “normal times” such freedom is not only acceptable, but even one that promotes general economic well-being. But when (to quote Mr. Krugman) “we already have more desired savings than we are managing to invest,” labor-saving innovations might destroy jobs without simultaneously leading to the creation of an offsetting number of new jobs.
Indeed, economic competition itself (Mr. Krugman must aver) is desirable only “in normal times” when there are only ‘normal’ amounts of involuntarily unemployed workers and other resources. In an abnormal economy, such as Mr. Krugman alleges ours is today, government must put a stop to economic competition. Competition, after all, causes prices and profit rates to fall, thus spooking those animal spirits ad, in turn, further discouraging investment spending. And competition even directly destroys the jobs of workers who suffer the misfortune of working for employers who cannot compete well enough against their rivals to remain in business. With inadequate aggregate demand, these workers (Mr. Krugman must conclude) are unlikely to find new employment.
Finally, only in ‘normal’ times should people be free to increase not only their monetary saving but also their in-kind savings. In ‘abnormal’ times, even the freedom to increase in-kind savings must be sacrificed for the greater good. For example, only in ‘normal’ times should automobile owners be free to choose to keep their current automobiles longer than – or even as long as – they kept them in the past. In ‘abnormal’ times, such as we are allegedly now suffering through, freedom to choose how long to keep one’s automobile might well result in many people keeping their current cars too long – and, hence, reducing the rates at which they purchase new cars. This reduced demand for new cars cannot be tolerated in an economy with lots of involuntarily unemployed resources. (Nor, by the way, should people in ‘abnormal’ times be free to choose between buying used and new cars, for such freedom might result in people buying too many used – and, hence, too few new – cars.)
Of course, what’s true for cars is true for all other goods and services. In abnormal times, such as these times apparently are, government must not allow people the freedom to choose how long they keep their household (and office) appliances or their household (and office) furniture. Indeed, even freedom to choose how long people keep their clothing is a danger, as people might extend the average number of times they wear neckties, blouses, and pairs of jeans – and, thereby, reduce the demand for the services of clothing retailers.
In summary, according to Mr. Krugman’s ‘logic,’ only in ‘normal’ times is their a solid economic justification for consumer sovereignty and economic competition – and, indeed, for many other ways in which consumers and producers ‘normally’ are free to choose. In ‘abnormal’ times, we must give enormous power to the state to guide all of our consumption, savings, and production decisions – foreign and domestic – lest we suffer endlessly from inadequate aggregate demand.