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CAFTA Continues to Crawl

Krugman Wins Nobel!

Paul Krugman, the famous NYT columnist and Princeton economics professor, has been awarded the Nobel Prize in Economics for his work on trade theory.

Krugman is an interesting character in the world of trade politics. In the late 1970s and 80s, he producedKrugman_2 rigorous academic work that indicated that trade could increase inequality, and that countries could benefit from adopting active competitiveness policies. But like all good mainstream economists, he thought that dwelling on these implications was a dangerous obsession. As Bob Kuttner wrote in 2002,

Having cautiously embraced this view, Krugman almost immediately (and prudently) distanced himself from its implications. His early writings warned that even though gains from industrial targeting and strategic trade policy were in principle possible, it was not at all clear that governments would act wisely in their pursuit of strategic advantage. And there was the usual risk that each nation's strategic efforts would degenerate into "beggar-my-neighbor trade policies" and even trade war... By the late 1980s, Krugman was railing against advocates of strategic trade and industrial policy, as dangerous opportunists and frauds.

 

Krugman's methodology, which yielded relatively low estimates of trade's effect on inequality, was later taken up by the pro-NAFTA Institute for International Economics for further estimations. They found that nearly 40 percent of the ballooning of U.S. inequality was attributable to U.S. trade policy. (The folks at CEPR have a useful 2001 summary of both Krugman and IIE.) The Economic Policy Institute used this work in 2007 to find that the average American family lost $2,000 a year from the burden of rising inequality due to trade - an amount that outweighs the median income tax.

In the 1990s through the early 00's, Krugman joined many Democratic Party-affiliated economists in taking every opportunity to ridicule a global-justice movement that had drawn inspiration from his work, for instance slamming my former CEPR and Public Citizen colleague Bob Naiman as "Seattle Man."

In recent years, Krugman has appeared to grow more comfortable with progressives, coauthoring some work with CEPR economist Dean Baker and showing up at EPI events. In an NYT column from last year, Krugman said that trade is now even “a bigger factor than it was” at the time of his early work in explaining skyrocketing inequality. And he noted that the easy fixes proposed by all too many in Washington are off the mark:

Realistically, however, labor standards won’t do all that much for American workers. No matter how free third-world workers are to organize, they’re still going to be paid very little, and trade will continue to place pressure on U.S. wages...

By all means, let’s have strong labor standards in our pending trade agreements, and let’s approach proposals for new agreements with an appropriate degree of skepticism. But if Democrats really want to help American workers, they’ll have to do it with a pro-labor policy that relies on better tools than trade policy. Universal health care, paid for by taxing the economy’s winners, would be a good place to start.

And that is where most economists - including many progressive ones - stop. As with the 1990s debate, too many policy wonks don't really care to engage with the main arguments advanced by the global-justice movement: that neoliberal institutions are harmful to democracy and are not really about trade promotion, but deregulation. That's why even health-care advocates should care about WTO rules that limit the kinds of domestic health-care reforms we can pursue, as we show in a recent report.

In closing, I was riveted by Krugman's academic work as a grad student (Harvard's Ed Glaeser even makes his students memorize his equations). His NYT columns provide biweekly grist for progressives. And more than many economists, he has been willing to entertain ideas and research outside of the accepted neoclassical dogmas. This is an exciting Nobel choice, and we look forward to seeing how Krugman's views on trade policy continue to evolve in the years to come.

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