The Problem of Liberal Elites Part 2 On Trade

Paul Krugman begins his 1993 defense of NAFTA by insulting its opponents gratuitously and wrongly. Then he offers the readers of Foreign Policy the defense of trade treaties they love.

The truth about NAFTA may be summarized in five propositions:

• NAFTA will have no effect on the number of jobs in the United States;
• NAFTA will not hurt and may help the environment;
• NAFTA will, however, produce only a small gain in overall U.S. real income;
• NAFTA will also probably lead to a slight fall in the real wages of unskilled U.S. workers;
• For the United States, NAFTA is essentially a foreign-policy rather than an economic issue.

NAFTA won’t affect the number of jobs, says Krugman, because the only important factor driving number of jobs is interest rates set by the Fed.

Moreover, it is a choice that responds to economic conditions; the decision to raise or lower interest rates represents a trade-off between the Fed’s desire to raise employment (drive somewhere) and its fear of inflation (a speeding ticket). …

Suppose that NAFTA really does lead to a rise in U.S. imports from Mexico, one that would, other things being the same, reduce U.S. employment by 500,000 over the next ten years. Will other things actually be the same? Of course not. The Fed, faced with the prospect of a weaker economy, will set interest rates lower than it otherwise would have. Conversely, other things being equal, if NAFTA would add half a million jobs, interest rates would be higher. The Fed will, without doubt, miss the target-but it is as likely to overshoot as to undershoot, and over the course of a decade there is no reason to suppose that the average level of employment will be any different with NAFTA than without.

How did that work out? It seems to be true that the overall impact of NAFTA on employment was neutral, though not necessarily for the reason Krugman gave. See, for example this chart showing all manufacturing (definition) jobs for the period 1987 to the present, from the Bureau of Labor Statistics:
Manufacturing jobs 1987 - present

Formulating the issue in terms of total employment, by sector or otherwise, fails to answer any of the crucial questions. What was the effect of NAFTA on communities where the factories were closed? What kinds of jobs are the new ones? How do those jobs meet the needs of workers for income, financial security and job satisfaction? What happened in specific areas? Were the results the same for Los Angeles and for Celina, Tennessee? What happened to the losers? Who profited? Aggregate studies hide the real impact of trade treaties in exactly the way that they miss the point of the farmers’ anger as I discussed in this post.

So, here’s a a story. My law partner was a Bankruptcy Trustee in Tennessee; he was assigned to handle all the cases from the area around Cookeville, TN. In the mid to late 1990s, he was called to deal with an emergency bankruptcy of a cut and sew plant in his area. This is a company that has machines to cut fabric to a pattern and sewing machines; the workers cut the cloth and sew it into clothes. In this case, it was blue jeans. One Friday after work, trucks pulled up to the factory, loaded all the machines and office equipment and moved them to Mexico. They left behind several pallets of completed jeans, which needed to be secured and sold. The workers were not paid. The jeans were “hot goods”, and became property of the US Department of Labor, which hired the Trustee to sell them and distribute the funds to the workers so they got partial payment. The secured creditors and general creditors got nothing. It was about that time my partner reported that one of his cases was a 35 year old guy with few teeth, which, his lawyer said privately, was the result of heavy meth use. That was only the first such case.

Perhaps Krugman would be surprised to learn that the Fed did not intervene to create new jobs in the Cookeville area. How exactly would that happen? Workers who lose their jobs burn up their savings or live off their friends and relations and churches, or on credit cards or the safety net until they get back on their feet. Many don’t. Trade economists like Krugman don’t count these and related losses when they run their computerized models. Most people don’t care because they get cheaper jeans. All the discussion, all the studies of NAFTA, ignore these and many more localized effects.

Krugman admits that if the job losses were very large, his model might not work. Even if the impact of NAFTA on manufacturing jobs was small, that isn’t so with China. Recent studies say that imports from China might have resulted in 2.4 million jobs lost between 1999 and 2011. Is that enough to upset Krugman’s certainty? How many millions of jobs never happened here because US corporate executives exported US-made knowledge, US-generated capital, and frequently entire US factories to other nations. Computer chips and other high-tech equipment weren’t invented in Taiwan or China or Japan, but they got the advanced manufacturing jobs, not the citizens of the US whose hard work laid the groundwork for creating those valuable assets. Worse, the corporate executives arranged to duck US taxes on their profits. Their refusal to pay taxes leads to the further deterioration of conditions in the US.

Krugman knows this. His Nobel Prize was for his demonstration that “national location of specialized production is indeterminate; there will be specialization, but how it is distributed across countries cannot be determined ex ante”, as a correspondent explained it to me in a private email. The policy of Asian nations is to grab those manufacturing operations by nay means necessary. The US, dominated by single-minded free marketeers, doesn’t have an industrial policy, or a safety net, for that matter. It relies on some magic and undefined “market” to fix everything.

Congress won’t lift a finger to help the people of Cookeville. Liberal elites, like Krugman, tell us everything will work out fine. On average.

Index to prior posts in this series.

16 replies
  1. earlofhuntingdon says:

    Thanks for this.

    I would say the US does have an economic and industrial policy. It’s not set by govt but by the largest banks and corporations. It is, however, enabled by a govt which claims (in homage to F. Scott Fitzgerald), simultaneously to be feeble when asked to confront anonymous market priorities, but the most powerful on earth when asked to defend American banks and companies.

    • Ed Walker says:

      I think that’s right. The industrial policy is to enable the desires of corporate US. With legislative deadlock government isn’t able to provide directly, so it turns to corporate negotiated trade deals.

      • earlofhuntingdon says:

        Corporate-negotiated trade deals, secret from the people they would bind, with ominous legal constraints and substantial penalties orchestrated through semi-secret institutions dominated by those same corporations. Neoliberals and neoliberal-backed legislators get all they want while appearing to have no part in the process. What’s not to like? Thanks for all this work, Ed.

    • Bay State Librul says:

      Thanks for the reference

      I never heard of “GATTOPARDO ECONOMICS” but liked Palley’s conclusions on the way forward.

  2. Bay State Librul says:

    If you want economic change, elect leaders like Elizabeth Warren.

    Problem is, it ain’t going to happen any time soon.

  3. Alan says:

    I hadn’t come across it either but having done a little research I see it has been used to skewer Krugman and others and Krugman doesn’t like the accusation. For those who haven’t followed the link to Palley’s paper: the term is derived from a 1963 Burt Lancaster movie The Leopard (Il Gattopardo).

    This paper explores gattopardo economics as it applies to the issues of the macroeconomics of income distribution; the global financial imbalances and their role in fomenting the crisis; and inflation policy. Gattopardo economics takes on board ideas developed by critics of mainstream economics, but it does so in a way that ignores the thrust of the original critique and leaves mainstream analysis unchanged. Gattopardo economics makes change more difficult because it deceives people into thinking change has taken place. By masquerading as change, it crowds-out space for real change. That makes exposing gattopardo economics a matter of vital importance. Gattopardo economics works by incorporating ideas of critics –especially Keynesians into mainstream economics. However, it does so in a way that strips the ideas of their critical content. Moreover, it almost never acknowledges the critical paternity of the ideas.

    Palley, by the way, suspects Piketty of gattopardo economics. (See my earlier posts and links to Chris Gregory’s review of Piketty. Apart from the data, Piketty is a bit of a yawn if you are a cultural/social anthropologist: more of the same neoclassical nonsense.) You can read Krugman’s response to Palley’s suspicion here: On Gattopardo Economics. He’s quite defensive:

    And I have some sympathy for his point — although if the suggestion is that people like me are jumping on the inequality bandwagon late, that just isn’t true; I was talking about the one percent literally decades ago.

    Also see the Krugman’s The Frustrations of Heterodox.

    • Ed Walker says:

      This is the stuff that led me to pick Krugman as the example of the problem of the liberal elites. I don’t care if he supports HRC and uses his column to do it. It really bugs me that he attacks Sanders and on such flimsy grounds.

  4. orionATL says:

    among a group of “progressive” partisans specializing in economic commentary, paul krugman has been a bete noir and punching bag for some years.

    nothing written here by ed walker, nor anything at naked capitalism, should ever be evaluated without understanding this long-standing dislike of paul krugman. it needs to be said at the beginning that their criticism is NOT politically neutral, intellectually fair-minded economic evaluation.

    this partisan animosity toward krugman exactly parallels the partisan contempt of some “progressives” toward secretary clinton.

    in fact, the reason krugman is being singled out on this trade issue is precisely because he supports hillary clinton to the great irritation of those who support senator sanders. this is a backdoor :) criticism of pres bill clinton whose purpose is to tar current democratic presidential aspirant hillary clinton.

    with this background of animosity toward krugman and clinton firmly in mind, one can then proceed to criticize krugman for his policy stands, including an article he wrote in 1993, TWENTY-THREE long years ago. with this essay. hindsight is a wonderful thing for a political partisan.

    the fundamental problem never tackled head-on by this nation is that economic change is extremely painful to individuals and to their communities because both are more or less “immobile”.

    corporate producing behavior, on the other hand, is extremely mobile. the corporation takes the patents, the skills knowledge, the money and puts them wherever in the world it chooses. the individuals, their families, and thrir community are left with little except severance pay and hope for another corporate intervention in their lives.

    the american mill town deserted by the producer/corporation, dates from at least the 1800’s. labor songs by the score have been written about this tragedy.

    the same for the mining town.

    zeroing in on paul krugman as the responsible spokesperson for this long-standing destruction is just satisfying the itch for a scapegoat.

    one can ask of senator sanders and his intellectual pretorian guard here, where are the specific, detailed programs, laws, policies to deal with this tragedy? one can ask the same of sec. clinton.

    one can ask the same of this same batch of hyper-moral “progressives” about the policies of their previous political enamorati, then senator obama. where were the obama policies to help these individuals and communities? what did any of you have to say about the 1996 nafta legislation in 2008, eh? not so relevant then, was it. why? because it could not then be used as a political cudgel against senator clinton.

    this is political opportunism of the worst sort. political opportunism disguised as an intellectually “fair and balanced” critique.

    still, given an understanding of the emotion underpinnings of this critique of krugman, there will likely be much we can all learn again or learn anew.

    but let’s not pretend this is anything other than politically induced reasoning.

    and let’s not pretend that anyone has a sound, effective policy for dealing with this tragedy.

    just as no one, senator sanders in particular given his recent comments has any serious detailed policy for dealing with poverty in the u. s. other than

    a rising tide, i mean a rising decrease in income inequality, …. oh, fuck those political platitudes.


    • Alan says:

      ….one can then proceed to criticize Krugman for his policy stands, including an article he wrote in 1993, TWENTY-THREE long years ago. with this essay. hindsight is a wonderful thing…

      Just want to point out that if you follow the link to Palley’s “Self-Protectionist Moment” in my first post above you will find that he links to a couple of papers he wrote in 1994:

      As regards my own work, here are links to two 1994 articles, “The Free Trade Debate: A Left Keynesian Gaze”and Capital Mobility and the Threat to American Prosperity, which I think got the analytical and policy issues substantially right.

      • orionATL says:


        i can’t get your second link to work..

        i like the feel of palley’s writing while skimming, but have’t really read it.

        there is this though at summary that seems very outdated (not at all surprisingly for something written 22 yrs ago) :

        “… The general worsening of income distribution in the United States is attributable to both domestic market forces and unbridled international wage competition; the former are difficult to counter, which makes it all the more important to embrace other opportunities…. ”

        in todays’ u. s. i thought the extraordinarily large gap in income distribution was due to a large increase of wealthy individuals and families like gates, ellison, walton, bloomberg, trump :), zuckerman, brin, etc., etc.,

        • Alan says:

          Here’s the second link again: Capital Mobility and the Threat to American Prosperity. Hopefully got it right this time.

          I don’t have a problem with anyone having a go at Krugman or Clinton. They deserve it. Point taken about Sanders but he doesn’t appear to be going anywhere. I voted for him in my state’s primary not because I thought he had a solution but as a protest again Clinton and her pals.

  5. orionATL says:

    adam smith to polanyi to arendt is an intellectual journey.

    paul krugman at this point in time is a political attack.

  6. orionATL says:

    and again, where are sen sanders’ specific detailed policies, programs, laws. i cannot find any. but there is plenty of criticism of nafta and of trade in general as inimical to the financial security of many american workers. but the other side of the coin, good jobs created, is never mentioned. sanders has had years in congress to address this issue (and so have many democrats).

    despite his lack of any substantial policy, sanders’ criticism of tpp and similar agreements is on the mark in my view.

    i make this criticism of sanders about trade policy based on what i learned after sanders’ comments about race and poverty in michigan.

    what i found is that sanders had no welfare policy, program, or law tackling poverty. he had lots of criticism of past policies, but nothing substantial of his own had been offered.

    there is a reason for this. the american public and politicsl system do not like to talk about or deal with poverty. one of the reasons president bill clinton put the welfare bill (which he called at the time “a good bill wrapped in a sack of republican shit”) in part to get welfare off the backs of democratic candidates. he succeeded.

  7. Anon says:

    You can find a list of Bernie Sanders’ issue positions here:
    The one at the bottom: “How Bernie Pays for His Proposals” is perhaps the most specific but most if not all of them involve multi-point statements of what he will do.

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