David R. Henderson  

Krugman Talks Sense on Trade and Immigration

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On December 15, the Business Insider posted an excellent interview by Josh Barro of Paul Krugman. It's excellent in the sense that Josh kept the conversation going quickly, as did Paul, so that they managed to cover a lot of issues.

They started, of course, with the tax cut, and I don't know enough--and I think no one knows enough--to evaluate Krugman's claims about its effects. He, not surprisingly, minimizes the effect on growth and on real wages; I'm more optimistic, but we'll see.

There is one part, about why the economy is doing so well, where I disagree with Paul. He states:

The economy's pretty good. In fact, it looks like we're close to full employment, although we don't know why wages aren't rising more. Trump gets essentially zero ... First of all, there have been no actual policies. There hasn't really been any policy change. The convention, usually, when people try to assess the economic impact of administrations, is to assume that the first year reflects the policies of the previous administration, so no there's nothing, nothing that is Trumpian about what's going on.

That's actually not true. It seems that Paul has not been following the various moves on regulation: both to slow down new regulations and to repeal some others. When I was on Squawk Box earlier this year, I gave as an example of a regulation that would hamper productivity the one whereby the EPA says that a pond on a farm is not just a pond, but also a waterway. Trump and EPA head Scott Pruitt have moved to modify this rule: from what I can tell, it hasn't happened yet, but still it's likely that farmers and others are a little more likely to invest in their farms because of the anticipated deregulation. They have deregulated in other ways too. Each one is like removing a small boulder from a big stream. One doesn't do much. A few dozen can make a small but noticeable impact.

There are two problems with attributing the two quarters, and possibly three (we'll know soon), of strong growth this year to President Obama's policies, as Paul is inclined to do. First, it's hard to see which of his policies would account for that higher growth. What did Obama do in 2016 that would cause growth to rise from about 2% to about 3%? Second, when a new president is elected and his policies look to be very different from the old policies, even if he doesn't get many of them implemented right away, expectations of future policies can and do affect behavior.

Here are the parts I liked, not just because I agree with Paul's bottom line but because it shows someone looking carefully at microeconomic details of the U.S. economy.

Trade:

Barro: Let's talk about trade. Do you worry at all about Trump's rhetoric on trade? What if he follows through on threats to withdraw from NAFTA or to start a trade war with China? What's the effect of that in the US?

Krugman: The NAFTA issue I think is a really a huge issue, if it happens, which is probably why it probably won't happen. The thing about NAFTA is not so much who are the beneficiaries. I mean, I think United States benefits from NAFTA, but the main point there is that there's no such thing now as Mexican manufacturing and US manufacturing. There's North American manufacturing.

It's this tightly integrated complex of industries where stuff is shipped back and forth. Different pieces of an automobile are made all over the continent, and if you break that up, if you disrupt it, then we're talking about a lot of disruption at the industry level, we're talking about a lot of plants closing, new plants opening. It would be exactly the same sort of thing that people complained about from the growth of trade, except this time it's like the old joke about the motorist who runs over a pedestrian and says, "I'm sorry, let me fix it," so he backs off and runs over him again. That would be a hugely costly thing if we really disrupt NAFTA. That means that industry is horrified at the prospect. So in a way trade is going to be the test of whether there's any of that Trump orthodoxy left. Is he willing to block the big companies on that?


Immigration:
Barro: Regardless of whether there's a good remedy available to Trump, or whether the remedy that he's talking about makes any sense, is he right in his critique that free trade and relatively loose immigration policies have depressed the wages of native-born American workers over the last few decades?

Krugman: Trade a little bit. Most estimates do suggest that increased International Trade did have some depressing effect on blue-collar wages in the United States. We import labor-intensive products; that reduces the demand. It's probably not huge, and it's probably mostly in the past. It's not a continuing force of further downward pressure. Immigration, actually, the evidence suggests that immigrant workers are not for the most part competing with native-born workers. They're competing with immigrant workers who are already here, more than that. Even though you take somebody with 11 years of education from Mexico or Central America, compare them with somebody with 11 years of education born here, they're actually very different, the skill sets, the occupations are very different. The immigration thing, although it's the one that resonated most with with Trump voters, is probably in fact the place where his economics is just wrong. He has a better case on trade.




COMMENTS (15 to date)
Paul Zrimsek writes:

It would be an amusing exercise to go back and read Krugman's columns from 2001 in light of the convention that the first year reflects the policies of the previous administration.

Mark writes:

Is this the same Paul Krugman that blamed the stock market decline in late 2016 on Trump's election (before he'd even taken office) and speculated that the slump would last forever?
Sometimes I wonder if there aren't two of them out there and we all just keep getting them confused.

EB writes:

I stopped reading when at the very beginning of the interview PK asserted

"Advanced economies like the United States, at the technological frontier, with not completely crazy economic policies, there's almost nothing the government could do, the most ideal policy in the world isn't going to boost GDP by 7%. This is crazy.”

and Josh Barro didn't have any comment on PK's assertion.

Jon Murphy writes:

@Mark:

To be fair, Krugman was always great on trade (just this man's opinion, but I think his book Pop Internationalism is one of the best out there on the matter).

Zeke5123 writes:

The so-called BEAT imposes a tax on the supply chain Krugman mentions. There is an exception for COGS but would think most wouldn’t fall under BEAT. So tax reform intersects heavily with trade!

Alan Goldhammer writes:

@David - Krugman is correct that the Trump policies have not had an impact on the economy but for the wrong reason.a lot of the deregulatory efforts will not be seen for some time. In some cases, new rules will have to be proposed and go through notice and comment before they can be put into place. It's not like regulation can be switched off over night (the lone exception is the late stage regulations promulgated under the Obama administration that are subject to the Congressional review act but those are a small number).

Jay writes:

@ Alan

One of David's points is that yes it can take years to get this stuff through the machine, but when farmers, for example, know the deregulation is coming, they may choose to invest more now in anticipation.

Alan Goldhammer writes:

@Jay - over the course of my working career I worked on comments to well over 150 Federal regulations and rewrites of outdated ones. It's very difficult to get things done fast and without legal challenge. You can bet that every single regulation rewrite undertaken by this administration will elicit loads of comments that have to be responded to and a lot of litigation from affected parties. this is really not a simple task and anyone investing right now in anticipation of a regulatory change is not doing due diligence.

We had a no brainer proposal to FDA to eliminate paper drug labels that have to accompany all packaging sold to pharmacies. This was something that all the stakeholders and the FDA wanted to see done and it only took 12 years.

Hazel Meade writes:

Personally, I suspect the economy is in a bit of a bubble right now, and that the bubble has at least a little bit to do with Trump voters irrational expectations about Trump's economic policies.
The stock market definitely seems to be in bubble territory given the recent run-up. And the stock market rise may drive other psychological factors - people may spend and borrow more because they have "made" money in the stock market (unrealized gains).

Mark writes:

Hazel, I’m not sure I buy that changes in people’s political sentiments influence their spending habits. Plenty of presidents have enjoyed enthusiastic support from larger fractions of the country than Trump enjoys without it boosting the economy.

It’s possible there’s a bubble, but I’d blame chronic issues in the housing sector first and foremost if so, since many of the problems of 10 years ago remain unfixed.

David R Henderson writes:

@Jay,
One of David's points is that yes it can take years to get this stuff through the machine, but when farmers, for example, know the deregulation is coming, they may choose to invest more now in anticipation.
Correct. That is one of the things I was saying.
@Alan Goldhammer,
We had a no brainer proposal to FDA to eliminate paper drug labels that have to accompany all packaging sold to pharmacies. This was something that all the stakeholders and the FDA wanted to see done and it only took 12 years.
This is a good counterexample and could put a bound on the point I’m making.
Here’s what I find more interesting, though. Are the same Alan Goldhammer who, in various comments on my posts on the FDA, defends FDA regulation and argues that regulation does not slow down very much the introduction of new drugs? That Alan Goldhammer?

john hare writes:

Responding to EB, sorta.
My read on that was that he said nothing could raise GDP by 7% in 10 years. Not that 7% per year wouldn't happen, but 7% per decade couldn't happen. I must live in another universe because 7% per decade seems very low to me.

David R Henderson writes:

@john hare,
My read on that was that he said nothing could raise GDP by 7% in 10 years. Not that 7% per year wouldn't happen, but 7% per decade couldn't happen. I must live in another universe because 7% per decade seems very low to me.
Yes, you read it correctly. So that would mean an increase in the annual growth rate by just shy of 0.7 percentage points. (Why just shy and not exactly? Because of compounding.) It’s not low, but it’s not high either. If the normal growth rate is 2%, then this means 2.7% for the next 10 years.

EB writes:

john hare, of course I was very aware that he was talking about 7% per 10 years not per year. And that is why I was surprised that Josh Barro didn't comment on it. And that is why I laugh whenever I hear about PK's excellence.

Hazel Meade writes:

@Mark, maybe it has something to do with the combination of enthusiastic support and those supporters believing the President is going to improve their personal economic fortunes. The working class white voters who form Trump's base might really believe that he's going to pull out of NAFTA and all those factory job will come back. They might really think that economic nationalism is good for the economic. And they're the same sort of people who buy lottery tickets, so they might really think that now is a good time to invest in the stock market.

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