Wrong To Be Right: Krugman

Atrios is annoyed at David Wessel, and rightly so. I’d summarize Wessel’s column a bit differently: it’s roughly “Some people thought from the beginning that the stimulus should have been much bigger. Hahaha! Also, it turns out that the stimulus was too small, so we need some more.”

This is actually a fairly familiar thing from my years as a pundit: the surest way to get branded as not Serious is to figure things out too soon. To be considered credible on politics you have to have considered Bush a great leader, and not realized until Katrina that he was a disaster; to be considered credible on national security you have to have supported the Iraq War, and not realized until 2005 that it was a terrible mistake; to be credible on economics you have to have regarded Greenspan as a great mind, and not become disillusioned until 2007 or maybe 2008.

But something else struck me about Wessel’s piece: among the things he suggests to raise employment is passing more free trade agreements. Where did that come from?

The case for free trade is about microeconomics, about raising efficiency. There’s no particular reason to think that trade liberalization is good for fixing problems of inadequate demand. I mean, you learn in Econ 101 that aggregate spending is Y = C+I+G+X-M; that is, consumer spending, plus investment spending, plus government purchases, plus exports, minus imports. Trade liberalization raises X, but it also raises M. For any individual county it can go either way; for the world as a whole it’s a wash, since total exports equal total imports.

So why is trade liberalization an answer to our current problems? Because, says Wessel, it would shore up business confidence. Why, exactly?

The reason this struck me is that the need to reduce trade barriers is a central argument in that 1934 book by Lionel Robbins I blogged about the other day. And the same incoherence was present there.

For what it’s worth, by the way, the economies of Western Europe in the 1950s retained many of the protectionist measures introduced during the 1930s; capital controls, in particular, stayed in place for a long time. And they had full employment.

NYT