Paul Krugman’s latest column is astoundingly at odds with mainstream economics. Either that or I’ve misunderstood everything I’ve learned. You be the judge.
By the middle years of the last decade, I used to joke that Americans made a living by selling each other houses, which they paid for with money borrowed from China. Manufacturing, once America’s greatest strength, seemed to be in terminal decline.
I’ve previously demonstrated (here) that although American manufacturing employment went down, manufacturing output increased dramatically during the past decade. Here’s the chart from that post. Look at the middle years of the last decade and explain to me how that looks like terminal decline, unless one disdains productivity increases. Or perhaps he’s indulging in the lump of labor fallacy?
Then, amazingly, he expresses concerns about trade deficits.
Crucially, the manufacturing trade deficit seems to be coming down.
Maybe I’ve been traveling in the wrong circles, but I thought the idea that the trade deficit mattered had been exploded long ago–a century or more before before Krugman was born. See here, for example. Russ Roberts has a nice little data presentation showing that the trade deficit is not correlated with bad economic times or high unemployment. Please tell me Krugman’s not turned into a mercantilist? And how on earth does his concern for trade deficits square with his widely reproduced commentary, ““What Do Undergrads Need to Know About Trade?”
Finally, Krugman repeats the popular wisdom about the alleged success in rescuing the auto industry.
And one potential disaster has been avoided: the U.S. auto industry, which many people were writing off just two years ago, has weathered the storm. In particular, General Motors has now had five consecutive profitable quarters.
There are two problems with this claim: 1) That GM has bee saved, and 2) that the “U.S. auto industry” was rescued.
The GM claim is easy to make if you don’t look beneath the surface. A company that has all its debts wiped out, is given a $40 billion cash infusion, and gets the government to waive a $14 billion tax bill damn well better be able to turn some short term profits. But exactly how does that demonstrate long-term viability? Investors aren’t clamoring for GM stock, which means the government is almost certain to lose money on its investment in GM when it gets around to selling the stock (I wonder what Krugman’s willing to pay for a few shares?). GM’s Volt sales are not doing too well despite a $7500 tax credit that knocks 18% off the price, and GM’s strength is still overwhelmingly in trucks, which may continue to be difficult given the trend in gas prices.
The second problem is claiming that the “U.S. auto industry” was saved. Krugman apparently fails to realize that the U.S. would, due to the size of its market and the car market worlwide, have a thriving auto industry even if GM poofed out of existence tonight. Does he really not know that in addition to Ford (forget Chrysler, which has had to be bailed out twice in my lifetime, suggesting that bailouts may be very limited success stories), Toyota, Honda, Subaru, BMW, and Mercedes?
Further, does he really not know that if the U.S. auto industry actually did disappear it would be because consumers were benefiting from buying less expensive cars built more efficiently elsewhere? Has Krugman fallen for believing that the purpose of the market is to provide jobs and protect industries, rather than benefit consumers?
This column is simply astonishing. Because one of my important teachers of economics was Krugman himself, in his excellent popular books. They still sit on my shelf, within reach of my desk, and I not infrequently pull one out to read a chapter or two. I don’t recognize this Krugman. I don’t recognize him at all.