Saturday, 29 December 2007

Krugman vs Krugman

Paul Krugman has a column in the New York Times in which he argues that while trade makes the US wealthier overall it will reduce the incomes of a majority of workers. On his blog Greg Mankiw makes two points in response to Krugman. The first being that the numbers underlying Krugman's argument are omitted from the column, leaving a critical reader to wonder about the magnitude of the claimed negative effects and the size of the affected worker population. The second being that Krugman seems to be struggling with the implications of this outlook.
It seems to me that Paul is still struggling with the implications of this view. He concludes the column by saying, twice, that he is not a protectionist, but he also says that we should respect "those who are worried about trade." But what if those who are worried about trade are protectionists? Should we still respect them?
The response from the Free Exchange blog is here, while at Cafe Hayek Don Boudreaux makes the point that back in the mid-90s a famous trade economist argued that concern with the pauper-labour theory for why trade with low-wage countries is likely to harm typical workers in high-wage countries, which Krugman's column restates, is misplaced,
In a 1996 essay, this economist - responding to a protectionist who fretted that western trade with low-wage countries would harm workers in the west - wrote that this protectionist "offers us no more than the classic 'pauper labor' fallacy, the fallacy that Ricardo dealt with when he first stated the idea, and which is a staple of even first-year courses in economics. In fact, one never teaches the Ricardian model without emphasizing precisely the way that model refutes the claim that competition from low-wage countries is necessarily a bad thing, that it shows how trade can be mutually beneficial regardless of differences in wage rates."
The famous trade economist is none other than Paul Krugman. Krugman could give the Keynes reply, "When the facts change, I change my mind. What do you do, sir?". But, as Mankiw states, we are not given the facts; so how do we know they have changed?

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