"Pop internationalists" -- people who speak impressively about international trade while ignoring basic economics and misusing economic figures are the target of this collection of Paul Krugman's essays. In the clear, readable, entertaining style, Krugman explains what real economic analysis is. He discusses economic terms and measurements, like "value-added" and GDP, in simple language so that readers can understand how pop internationalists distort, and sometimes contradict, the most basic truths about world trade.
Paul R. Krugman
MIT Press, March 1996
From the Publisher
All but two of the essays have previously appeared in such publications as Foreign Affairs, Scientific American, and the Harvard Business Review. The first five essays take on exaggerations of foreign competition's effects on the U.S. economy and represent Krugman's central criticisms of public debate over world trade. The next three essays expose further distortions of economic theory and include the complete, unaltered, controversial review of Laura Tyson's Who's Bashing Whom. The third group of essays highlights misconceptions about competition from less industrialized countries. The concluding essays focus on interesting and legitimate economic questions, such as the effects of technological change on society.
Excerpts
International Competitiveness
Thinking in terms of competitiveness leads, directly and indirectly, to bad economic policies on a wide range of issues, domestic and foreign, whether it be in health care or trade.
On might suppose, naively, that the bottom line of a national economy is simply its trade balance, that competitiveness can be measured by the ability of a country to sell more abroad than it buys. But in both theory and practice a trade surplus may be a sign of national weakness, a deficit a sign of strength.
The Commerce Department (…) publishes something called “command GNP”. (…) Command GNP measures the volume of goods and services the U.S. economy can “command” –the nation’s purchasing power –rather than the volume it produces.
Even though world trade is larger than ever before, national living standards are overwhelmingly determined by domestic factors rather than by some competition for world markets.
International trade, then, is not a zero-sum game.
Competitiveness is a meaningless word when applied to national economies. And the obsession with competitiveness is both wrong and dangerous.
Both in theory and in practice, countries with lagging productivity are still able to balance their international trade, because what drives trade is comparative rather than absolute advantage.
The fact that an argument is intellectually respectable does not mean that it is right.
International trade is an economic activity like any other and can indeed be usefully be thought of as a kind of production process that transforms exports into imports.
Trade policy should be debated in terms of its impact on efficiency, not in terms of phony numbers about jobs created or lost.
The Fed’s actions are the most powerful determinants of job growth in America.
None of the growth in wage inequality in the United States since 1979 is due to international factors.
The Myth of Asia’s Miracle
Economic growth that is based on expansion of inputs, rather than on growth in output per unit of inputs, is inevitably subject to diminishing returns.
So few people now remember hoe impressive and terrifying the Soviet empire’s economic performance once seemed. (…) The most shocking thing about Soviet growth was its comprehensibility. (…) If the Soviet economy had a special strength, it was its ability to mobilize resources, not its ability to use them efficiently.
Japan, unlike the East Asian “tigers”, seems to have grown both trough high rates of input growth and trough high rates of efficiency growth.
Technology’s Revenge
The real reason for rising wage inequality is subtler: Technological change since 1970 has increased the premium paid to highly skilled workers.
If there is a single piece of knowledge that separates serious international economists from fashionable popularizers, it is a sense of “how big” the world economy is.
The growth of inequality in the United States has a striking “fractal” quality: Widening gaps between education levels and professions are mirrored by increased inequality of earnings within professions.
History teaches us, however, that merely assuming a continuation of recent trends is often very misleading.
In fact, I would make the argument that in the long run, technology will tend to devalue the work of “symbolic analysts” and favor the talents that are common to all human beings.
On the localization of the world economy
A century ago Chicago meatpackers were acutely aware of their competition with New Zealand. The railroads that converged on the city, bringing beef and wheat destined for European markets, were largely built with European capital (…) The chemical companies that provided Chicago with dyes for its fabrics and aspirin for its headaches were primarily multinational headquartered in Germany. And the Chicago futures market was every bit as sensitive to news of droughts in the Ukraine and frost in Brazil as it is today. (…) In terms of the serious substance of economic affairs, however, Chicago 1984 was arguably as much a part of a global market as Los Angeles today.
Incidentally, if this was true, why do we imagine that the global market is something new? Because politics killed that first global economy. Between 1914 and 1945 wars and protectionism tore up the dense web of trade, investment and often family ties that linked old Chicago to the rest of the world.
I would suggest that the most striking difference (between old Chicago and Los Angeles today) is what we might call the abstractness of the modern city’s economy-the way it seems disconnected from the physical world. (…) Again, it’s part of the growing abstractness of the economy.
Although we talk a lot these days about globalization, about a world grown small, when you look at the economies of modern cities what you see is a process of localization: A steadily rising share of the work force produces services that are sold only within that same metropolitan area.
While we ship manufactured goods back and forth with unprecedented abandon, such “tradeables” constitute a steadily shrinking share of our economy.
The kinds of jobs that grow over time are not the things we do well but the things we do badly. (…) we are getting better and better at producing goods (…) but not improving very much at providing services.
It is not a city where many people produce anything tangible; but that is precisely because its residents are so good at the tangible stuff that their energy is focused on the intangibles.
