Paul Krugman’s argument for protectionism to accompany fiscal stimulus strikes me - and, it now seems, US senators - as unconvincing. He says:
There are major policy externalities. My fiscal stimulus helps your economy, by increasing your exports — but you don’t share in my addition to government debt…this means that the bang per buck on stimulus for any one country is less than it is for the world as a whole.
And this in turn means that if macro policy isn’t coordinated internationally — and it isn’t — we’ll tend to end up with too little fiscal stimulus, everywhere.
And this in turn means that if macro policy isn’t coordinated internationally — and it isn’t — we’ll tend to end up with too little fiscal stimulus, everywhere.
Now, this might be true within the EU, where inter-country trade is large, and so one country‘s stimulus spills into another‘s exports. But it’s much less true for the US and its trading partners.
Last year, imports accounted for only 17.7% of US GDP. It’s unlikely that the marginal propensity to import out of the fiscal stimulus will be much larger than this, given that construction and government spending usually have low import contents. This means the “bang per dollar” of the US stimulus is likely to be closer to Krugman’s example of a co-ordinated European expansion than to his example of a single-country stimulus.
Equally, exports to the US account for only a small fraction of most countries’ GDP - 2.2% for the UK and 7.4% for Japan. This means they have very little incentive to free-ride off the US’s stimulus, as this has only a small effect upon their economies. I’ve heard no-one in England argue against expansionary policy here on the grounds that we can instead piggy-back off the US.
In fact, rather than spill-overs giving governments incentives to curb the scale of the fiscal stimulus, I suspect their incentives instead point to them over-stimulating. Governments have short time horizons - the next election - and so underweight the long-term costs of higher debt. And they have a desire to look as if they are doing something dramatic, and give boondoggles to their clients.
Don’t these motives more than offset any desire to free-ride off of what is, for many countries, a small externality, with the result that we get a big stimulus around the world?
Last year, imports accounted for only 17.7% of US GDP. It’s unlikely that the marginal propensity to import out of the fiscal stimulus will be much larger than this, given that construction and government spending usually have low import contents. This means the “bang per dollar” of the US stimulus is likely to be closer to Krugman’s example of a co-ordinated European expansion than to his example of a single-country stimulus.
Equally, exports to the US account for only a small fraction of most countries’ GDP - 2.2% for the UK and 7.4% for Japan. This means they have very little incentive to free-ride off the US’s stimulus, as this has only a small effect upon their economies. I’ve heard no-one in England argue against expansionary policy here on the grounds that we can instead piggy-back off the US.
In fact, rather than spill-overs giving governments incentives to curb the scale of the fiscal stimulus, I suspect their incentives instead point to them over-stimulating. Governments have short time horizons - the next election - and so underweight the long-term costs of higher debt. And they have a desire to look as if they are doing something dramatic, and give boondoggles to their clients.
Don’t these motives more than offset any desire to free-ride off of what is, for many countries, a small externality, with the result that we get a big stimulus around the world?
National Socialism seems to be winning the battle on the Left - just as it did in the 1920s-30s.
Posted by: Kit | February 05, 2009 at 12:46 PM
Paul Grugman is isolationist and doesn't even consider the threat and dangers of reciprocal action. Wasn't it Obama who said. or should have done
We shall extend the hand of free trade if you will unclench the fist of protectionism.
JKA
Posted by: JKA | February 05, 2009 at 01:03 PM
The people who have left comments clearly have no understanding of who Paul Krugman is and what his ideas really are.
But in this case Chris you are mistaking a hypothetical argument for a specific policy argument. Krugman only said that you could make such an argument, not that that was what he believed. Read the piece more carefully.
Posted by: reason | February 05, 2009 at 02:19 PM
I think you are also underestimating the thinking behind what Krugman is writing. There is a strong case to be made that the current very threatening environment is the consequence of long running trade imbalances. If the world is to emerge from the crisis to sustainable growth, then this imbalance will have to be corrected. A US that spends chronically more than it earns, can't restore its economy to health by spending even more relative to its earnings. It is important that US exports grow and grow faster than its economy as a whole. Krugman wants to point out that there is a potential free rider problem (Ireland comes to mind) and that to avoid it, we are best have international co-ordination.
Now I think it is more serious than that, I think we need institutional reform, including international financial arrangements. But that is another story.
Posted by: reason | February 05, 2009 at 02:26 PM
Reason - it doesn't matter what Krugman believes. My point is merely that it's a weak argument, whether hypothetical or not.
And I'm not sure protectionism is a serious way of correcting trade imbalances, or that doing so is a pressing problem right now.
Posted by: chris | February 05, 2009 at 02:36 PM
Chris,
you misunderstand me.
First it may not matter to you that Krugman that was posing a hypothetical question, but as we have already seen it will mislead other people.
Secondly, I don't think protectionism is a serious way of correcting trade imbalances and I'm sure PK doesn't think that either. However, PK was arguing for international co-ordination in solving what is an international problem. And I don't think that is irrelevant.
Posted by: reason | February 05, 2009 at 03:36 PM
Paul Krugman’s argument for protectionism is just ludicrous. We don't make shirts and shoes anymore for one simple reason, there's no money in them. We make software and computer chips because there is money in them. So let's protect the items where there is not money to be made and have the other countries protect the items we are able to make money with. Sounds like a great idea to me. There is a reason we enjoy the best standard of living in the world. We are the best businessmen and the greatest forwards thinkers and creators of items that will be needed in the future. But, let's have other countries block those products so we can only sell them to ourselves. Sounds like a plan to me. A plan to disaster that is. Trading Forex Reviews.Com @ http://www.tradingforexreviews.com/ fully supports these statements.
Posted by: FX | February 05, 2009 at 06:08 PM
"National Socialism seems to be winning the battle on the Left - just as it did in the 1920s-30s"
Credit where it is properly due: Friedrich List (1789-1846):
http://en.wikipedia.org/wiki/Friedrich_List
The text of his magnus opus: The National System of Political Economy (first publication date: 1841), is here:
http://www.efm.bris.ac.uk/het/list/national.htm
Posted by: Bob B | February 05, 2009 at 10:08 PM
Reading comprehension seems to be a big problem these days.
Posted by: reason | February 06, 2009 at 08:55 AM
FX
You clearly have no idea at all what Paul Krugman was saying.
Posted by: reason | February 06, 2009 at 08:55 AM
Bob B
I wouldn't waste your time with such nonsense.
Posted by: reason | February 06, 2009 at 08:56 AM
"I wouldn't waste your time with such nonsense."
I made no mention of endorsing Friedrich List and what he wrote. The point was to show for readers what is, arguably, the main latterday basic source of nationalist economics and trade policy. Of course, before that there was Mercantilism, which I don't subscribe to either:
http://en.wikipedia.org/wiki/Mercantilism
However, JS Mill, a committed exponent of free trade, did concede two valid arguments for tariffs in trade policy:
- the infant-industry case in which a specific new industry merited protection until it achieved sufficient scale economies of production - or generated sufficient benign externalities - to withstand competition from imports.
- the optimal tariff argument where a country could shift its terms of trade in its own favour by imposing a tariff on a product it exported or imported - in other words, where the country had potential monopoly power in something it produced or bought.
And that isn't nonsense.
Posted by: Bob B | February 06, 2009 at 09:36 AM
Bob B
I thought you were treating a comment linking "the (generic) left" to NS with more respect than it deserved.
Posted by: reason | February 06, 2009 at 10:28 AM
"I thought you were treating a comment linking 'the (generic) left' to NS with more respect than it deserved."
There's a long previous history to this. I started posting on the (now acknowledged) roots of National Socialism in leftist politics in 1996 when I belonged to the now defunct(?) Compuserve network. This caused me no end of trouble as a result - I was regularly banned from Compuserve forums. For that and other heinous criticisms of New Labour and the Euro - I joke not - I was forced off Compuserve in the spring of 2001 shortly before the general election that year.
It was frequently suggested that anyone objecting then to Britain joining the Euro must be verging on demented or otherwise senile - that was how Europhiles debated online then and, amongst others, some of the debaters were EU Commission/Parliament staffers.
The hacking of my PC - by who knows? - escalated to the extent where I was having to reformat my H/D and reinstate my PC about once a week on average to clear off various malwear. Several changes of ISP and PCs later, and a switch to much better security S/W, I still get occasional bouts of malicious hacking as well as a steady, almost daily stream of phishing attacks.
Just one of the many problems with claiming that the Nazis were right-wing is a letter to The Times on 26 April 1968 by Sir Oswald Mosley, Nicholas Mosley's dad and founder of the British Union of Fascists in 1932:
"I am not and never have been a man of the right. My position was on the left and is now in the centre of politics."
Sir Oswald Mosley had been a cabinet minister in Ramsay MacDonald's Labour government 1929-31 until Mosley felt impelled to resign in 1930 saying the government was doing too little to tackle the mounting unemployment.
There is also the hugely embarrassing piece by Lloyd George in the Daily Express of 17 November 1936 on his return from Germany where he had met with Hitler:
http://www.history-of-the-holocaust.org/LIBARC/ARCHIVE/Chapters/Stabiliz/Foreign/LloydGeo.html
Posted by: Bob B | February 06, 2009 at 12:53 PM
Yet another embarrassment which New Labour members didn't like being reminded about was that soon after leaving Ramsay MacDonald's government and the Labour Party in 1930, Oswald Mosley set up the "New Party" with John Strachey, who later rejoined the Labour Party and went on to become a minister in Clement Attlee's government.
What was worse was that the "Third Way" - the brillaint new ideology of Tony Blair launched in 1998 - turned out to have an embarrassing provenance going back to Mussolini.
I couldn't believe this at first when someone posted that claim but thought to check. The second book I picked up for reference was Martin Clark's standard academic text on: Modern Italy 1871-1995 (Longman 2nd ed. (1996)), p.250, where he writes about the policies of Mussolini's fascist government : "They seemed to offer 'a third way', between capitalism and Bolshevism, which looked attractive in the Depression. ..."
You'd have thought Blair's advisers would have checked, wouldn't you, especially since the 2nd edition of the book was published before New Labour was elected to government?
Sadly, the Labour Party is otherwise directly implicated in fascist economics since WW2. Try this:
"However it was with the idea of a state planning agency that [Stuart] Holland [Labour MP for Lambeth, Vauxhall 1979-89, political assistant in Downing St to the PM 1967/8, and shadow Financial Secretary to the Treasury 1987-9] hoped to show the new possibilities open to a more just economy. He looked to the Italian example of the IRI (the Industrial Reconstruction Institute), set up by Mussolini and used by subsequent Italian governments to develop the economy. This had, of course, already been tried through the IRC (the Industrial Reorganization Corporation) set up as part of [Britain's] National Plan in 1966, but the IRC had been too small to have much effect on the British economy. A revamped IRC in the form of a National Enterprise Board would, however, have a major effect in stimulating the private sector through an active policy of state intervention and direction."
Geoffrey Foote: The Labour Party's Political Thought: A History (Palgrave 3rd edition (1997)) p.311.
I suspect experience with Labour's ill-starred National Enterprise Board has informed recent government initiatives for dealing with the credit crunch. Oddly, the Conservatives can arguably claim the outstanding example of the nationalisation of Rolls Royce Aero-engines in 1971 to salvage a failing company from collapse for restructuring and eventual relaunch through privatisation as a successful, viable company.
Posted by: Bob B | February 06, 2009 at 01:59 PM
For interest, readers may be interested in comparing Greg Mankiw's reflections on a fiscal stimulus with those of Paul Krugman.
By way of background for non-economists, Mankiw is prof of economics at Harvard, author of many popular textbooks, including: Macroeconomics, and he was Chairman of Pres. Bush's Council of Economic Advisers 2003-05.
"My Preferred Fiscal Stimulus" by Greg Mankiw:
http://gregmankiw.blogspot.com/2009/02/my-preferred-fiscal-stimulus.html
Posted by: Bob B | February 07, 2009 at 08:39 AM
Greg Mankiw is generally regarded with increasing scorn by other economists, not just because he worked in George W Bush's cabinet.
Posted by: reason | February 07, 2009 at 08:18 PM
I don't think I need to point out the fallacy in Bob B's argument. a B is A !=> an A is B.
For the rest look into Orcinus for a thorough discussion of the issues. (Of course it all depends on your definition of Left and Right - if you define Left as populist - even if racist - then I think we need whole new set of terminology.)
Posted by: reason | February 07, 2009 at 08:26 PM
"Greg Mankiw is generally regarded with increasing scorn by other economists, not just because he worked in George W Bush's cabinet."
If so, this is very worrying since: (a) Greg Mankiw is a Harvard prof of economics; and (b) author of many popular student texts on economics as well as papers in reference collections. Readers will have noticed that, whatever else, Mankiw was endorsing the need for a fiscal stimulus, specifically, cuts in payroll taxes paid by employers in America.
"I don't think I need to point out the fallacy in Bob B's argument. a B is A !=> an A is B."
Not only did Oswald Mosley, the founder of the British Union of Fascists in 1932, claim leftist credentials - and he was a cabinet minister in Ramsay MacDonald's Labour government - but Lloyd George endorsed Hitler as a wonderful leader of the German people.
Besides that we have Orwell's research diary for the book that was to become: The Road to Wigan Pier. The entry for 16 March 1936 reads:
"Last night to hear Mosley [founder of the British Union of Fascists in 1932] speak at the Public Hall [in Barnsley], which is in structure a theatre. It was quite full – about 700 people I should say. About 100 Blackshirts on duty, with two or three exceptions weedy looking specimens, and girls selling Action etc. Mosley spoke for an hour and a half and to my dismay seemed to have the meeting mainly with him. He was booed at the start but loudly clapped at the end. Several men who tried to interject with questions were thrown out . . . one with quite unnecessary violence. . . . M. is a very good speaker. His speech was the usual clap-trap – Empire free trade, down with the Jew and the foreigner, higher wages and shorter hours all round etc. After the preliminary booing the (mainly) working class audience was easily bamboozled by M speaking as it were from a Socialist angle, condemning the treachery of successive governments towards the workers. The blame for everything was put upon mysterious international gangs of Jews who were said to be financing, among other things the British Labour Party and the Soviet. . . . M. kept extolling Italy and Germany but when questioned about concentration camps etc always replied 'We have no foreign models; what happens in Germany need not happen here.' . . . "
George Orwell: The Collected Essays, Journalism and Letters, Vol. 1 An Age Like This 1920-1940 (Penguin Books) p.230.
Note references in that entry to "a Socialist angle" as well as "concentration camps". Orwell was an independent observer at that meeting and thoroughly familiar with regular leftist rhetoric. After completeing the text for Wigan Pier in 1936 for publication by the Left Book Club, he set off for Spain to fight for the International Brigade in the Spanish civil war about which he wrote another book: Homage to Catalonia.
Hitler frequently denounced Bolshevism but not Socialism - after all, the formal name of the Nazi Party was: National Socialist German Workers Party. We also have this:
"The tax department chief of the Association of Industrialists (Reichsgruppe Industrie) emphasized that it was useless to attempt precise comparisons between the new and old tax regulations because the important issue was 'the new spirit of the reform, the spirit of National Socialism. The principle of the common good precedes the good of the individual stands above everything else. In the interests of the whole nation, everyone has to pay the taxes he owes according to the new tax law'."
Source: Avraham Barkai: Nazi Economics (Berg Publisher Ltd (1990)) p. 183. Mr Barkai is a research fellow at the Institute of German History, Tel Aviv.
I'm reminded of the New Labour battle cry: " . . and not just the few."
QED, I think.
Posted by: Bob B | February 07, 2009 at 09:53 PM
No you still haven't addressed the falacy of composition.
Posted by: reason | February 09, 2009 at 08:59 AM
http://dneiwert.blogspot.com/2008/01/responding-to-jonah.html
Basically, I not a friend of the labels and left and right, but the only way you can think of fascists as left wing is that you have a different understanding of left and right as almost everybody else. What label people choose for themselves (for reasons of political convenience), I regard here as pretty irrelevant.
Posted by: reason | February 09, 2009 at 09:05 AM
Besides which this discussion of Fascism has nothing to do with the topic at hand, which is Paul Krugman arguing that it is possible in certain special circumstances to argue that protectionism makes fiscal policy more effective.
Posted by: reason | February 09, 2009 at 09:28 AM
P.S.
My own view is that the chief difference between the left and right is egalitarianism as against indifference to inequality (or even support for it). I can't see how regarding a subset of the population as "untermenschen" can be considered egalitarian.
Posted by: reason | February 10, 2009 at 09:14 AM