DeLong vs. Krugman on globalization

I'm going to do the inadvisable, and argue with Brad DeLong. Hopefully this will turn out OK, since it's in response to Brad doing the inadvisable and arguing with Paul Krugman (thus breaking at least two of his own rules).

The topic is globalization. Krugman has a new essay in which he lays out what seems to be a rapidly crystallizing conventional wisdom on the recent history of globalization. Some excerpts:

[D]uring the 1990s a number of economists, myself included...tried to assess the role of Stolper-Samuelson-type effects in rising inequality...[these analyses] generally suggested that the effect [of factor price equalization from globalization] was relatively modest, and not the central factor in the widening income gap... 

[T]he basic fact in the mid 1990s was that imports of manufactured goods from developing countries [were only] around 2 percent of GDP....[T]his wasn’t enough to cause more than a few percent change in relative wages... 

In retrospect, however, trade flows in the early 1990s were just the start of something much bigger... 

Until the late 1990s employment in manufacturing, although steadily falling as a share of total employment, had remained more or less flat in absolute terms. But manufacturing employment fell off a cliff after 1997, and this decline corresponded to a sharp increase in the nonoil [trade] deficit, of around 2.5 percent of GDP. 

Does the surge in the trade deficit explain the fall in employment? Yes, to a significant extent...[A] reasonable estimate is that the [trade] deficit surge...explains more than half of the roughly 20 percent decline in manufacturing employment between 1997 and 2005...[S]oaring imports did impose a significant shock on some U.S. workers... 

The 90s consensus, however, focused almost entirely on asking how the growth of trade had affected the incomes of broad labor classes, as opposed to workers in particular industries and communities. This was, I now believe, a major mistake – one in which I shared... 

This is where the now-famous analysis of the “China shock” by Autor, Dorn, and Hanson (2013) comes in...[T]he effects of rapid import growth on local labor markets...were large and persistent...

So does this mean that...trade war would be in the interest of workers hurt by globalization? The answer is, as you might guess, no... rapid change appears to be largely behind us: many indicators suggest that hyperglobalization was a one-time event, and that trade has more or less stabilized relative to world GDP... 

So while the 90s consensus on the effects of globalization hasn’t stood the test of time very well, one can acknowledge that without accepting the case for protectionism now. We might have done things differently if we had known what was coming, but that’s not a good reason to try turning back the clock.

In other words, the new conventional wisdom on trade and globalization can be summed up as:

1. Trade was pretty much good until the late 90s or 00s,

2. The China Shock was unprecedented, and hurt lots of workers in America and other rich countries, and

3. Now the China Shock is over, and a trade war would be bad news.

This is a story I myself have told, in a series of Bloomberg posts.

DeLong is not having it. He has a long essay in which he claims that the supposed negative effects of globalization in the 2000s were, instead, entirely due to bad macroeconomic policy.

I sagree with much of what DeLong writes, but I also disagree with some of it. Here's a point-by-point breakdown of the parts that strike me either as questionable or as not completely to-the-point.

DeLong:

I think that from the early 1970s to the mid-1990s international trade, at least working through the Heckscher-Ohlin channels, put less than zero downward pressure on the wages of American "unskilled" and semi-skilled workers...From the early 1970s to the mid-1990s the relative wage levels of the then-current sources of America's manufacturing imports were rising more rapidly than new low-wage sources of manufacturing imports were being added. The typical American manufacturing worker faced less low-wage competition from imports in the mid-1990s than they had faced in the early 1970s.

DeLong thinks this contradicts Krugman, but I don't think it does. Krugman is considering only the latter part - the addition of new low-wage trading partners (and the effect of this, even considered in isolation, was small). I think Krugman would agree with DeLong that erecting trade barriers that prevented the entry of new low-wage trading partners into the global trading system in the 1970s, 1980s, and 1990s would have had net negative effects that far outweighed any positive Stolper-Samuelson effects.

DeLong:

[W]e could have protected Detroit and Pittsburgh from the consequences of their managerial and technological failings—but it would have been at immense cost for the rest of the economy, a very unfavorable benefit-cost tradeoff. 

In fact, the U.S did quite a lot to try to protect Detroit and Pittsburgh. We jawboned Japan into appreciating the yen and implementing Voluntary Export Restraints, and enacted all kinds of protectionist measures toward European steel. The protectionist measures probably failed to help U.S. steel or auto companies, or their workers, in the long run. But there is the possibility that it was these measures that prompted Japan to start building its car factories in the United States. Most Japanese cars sold in the United States are now also made in the United States, which has sustained quite a number of manufacturing jobs.

Meanwhile, DeLong overlooks the possibility that U.S. research spending, intended as a protectionist industrial policy measure, led to positive externalities that helped the U.S. technology industry become as successful as it is today. We tend to think of manufacturing's importance in terms of the good blue-collar semi-skilled jobs of the 1950s, but I think this perspective is severely limited. There are a number of reasons we might want high-value-added manufacturing to stay in the United States that have nothing to do with factory employment - it generates local multipliers, it creates products that are easy to export, and it may have a beneficial effect on the overall productivity growth of the economy.

DeLong:

[T]he coming of "hyperglobalization" strengthened opportunities for U.S. workers without formal education to find jobs where their skills, experience, and tacit knowledge could be deployed in ways that were highly productive.

For manufacturing workers, this seems to be directly contradicted by Autor et al.'s "China Shock" paper, which shows that workers exposed to Chinese imports tended to experience greatly reduced lifetime incomes. (Autor et al. also claim that the China shock had negative aggregate employment effects, though this claim is heavily model-dependent and the model is kind of iffy.) In any case, DeLong's claim that globalization in the 2000s improved productivity for U.S. workers overall is in need of some empirical support. There are papers that do say that Chinese import competition spurred U.S. innovation, but this doesn't necessarily support a story about beneficial worker reallocation.

DeLong:

What "hyperglobalization" did do was provide the top 1% and the top 0.1% with another lever to break apart the Dunlopian labor relations order, break the Treaty of Detroit, and redistribute the shared joint product from highly productive mass production backed by valuable communities of engineering practice upward in the income distribution. But there were many such levers in the U.S. from the 1970s to today. And "hyperglobalization" was, as I see it, one of the weakest and shortest of them.

This is another claim in need of evidence. It's true that unionization started declining in the U.S. since before globalization or hyperglobalization really got underway. But it's also possible that the U.S. weakened its pro-union laws and law enforcement because of fear that union wage demands would kill American competitiveness in the face of increasing import competition.

More importantly, in absolving globalization of the blame for rising inequality, DeLong ignores the cross-country evidence. Here are some graphs of the Gini coefficient of disposable income in various rich countries.

Graph 1:

Graph 2:

It seems highly unlikely that market fundamentalism and plutocracy were such a potent mind-virus or political movement that they simultaneously prevailed not only in the United States, but in Sweden, Denmark, France, Germany, and Japan.

The global nature of the runup in inequality across countries with very different policy regimes implies that it was something global - some combination of trade and technology - that did the trick. To write trade out of the equation and to blame technology mostly or entirely seems suspect, at least without solid empirical evidence. Having read a lot of papers on this topic, I'd say there's very little consensus.

DeLong:

Moreover, from the perspective of the country as a whole and from the perspective of many of the communities affected, the China shock was not a big deal for local labor markets. Yes, people are no longer buying as many of the products of American factories as Chinese imports flood in. But those selling the imports are turning around and spending their dollars investing in America: financing government purchases, infrastructure, some corporate investment, and housing. The circular flow will it: the dollars are of no use outside the U.S. and so the dollar flow has to go somewhere, and as long as the Federal Reserve does its job and makes Say's Law roughly true in practice, it is a redistribution of demand for labor and not a fall in the demand for labor.

The idea here is that trade deficits involve increased foreign financial investment into the United States, because a trade deficit is matched by a current account deficit. But an increase in foreign portfolio investment does not imply an increase in business or government investment (in things like infrastructure, housing, or whatever). In fact, if a trade deficit corresponds to a decrease in national savings - as it did in the 2000s, during "hyperglobalization" - then U.S. business/government investment goes down, not up. More generally, the idea that real investment is sensitive to the cost of capital is pretty suspect. Some people claim that cost of capital matters a lot, but the evidence for this is very iffy. 

DeLong:

And here is the kicker, as I see it: the types of people and the types of jobs funded by the imports of the China shock looks very much like the types of people and the types of jobs displaced from the tradeable manufacturing sector. Yes, some local labor markets got a substantial and persistent negative shock to manufacturing, often substantially cushioned by a boost to construction. Other local local labor markets got a substantial and persistent positive shock to construction. And on the level of the country as a whole the factor of production that is (truly) semiskilled blue collar labor does not look to me to have been adversely affected.

Again, the idea that displaced manufacturing workers got just-about-as-good jobs in other sectors (like construction) is directly contradicted by the Autor paper. In fact, job displacement of any kind seems to hurt lifetime income. 

As for semiskilled blue collar labor being adversely affected or not, it's certainly true that wages and income for the lower quintiles of the distribution stagnated during the 2000s, before taking transfers into account. Autor et al. haven't proven that China was the big culprit behind this stagnation, but others haven't disproven it either. Krugman, for his part, seems only to claim that it was one nontrivial factor. It doesn't make sense to dismiss it quantitatively until better evidence is in. 

DeLong:

And this gets me to my fifth quarrel with Paul Krugman here. As I see it, the most important thing we missed about globalization was how much it required support from stable and continuous full employment.

If globalization increases the costs of fiscal austerity and tight money, that seems to be a mark against it, even if you're totally against austerity and tight money. Policy is stochastic. Bad leaders get elected, foolish officials get appointed, and humans make mistakes. Anything which makes the economy more fragile in the face of random bad policy draws seems like it's imposing a cost on the economy, since we can't always count on getting good draws. 

So I agree with DeLong on a number of issues here. It's important to have good countercyclical fiscal and monetary policy. Deregulation-fueled financial crises, and bad policy responses to these crises, are scarier than globalization. We should think about globalization's hard-to-measure positive effects in addition to its easier-to-see negative effects. 

But in his zeal to defend globalization from the Trumpists, I think Brad has overstated the case against the new conventional wisdom articulated in Krugman's essay, and overstated the case for not worrying about China Shock type cases. And thinking of the alternative to free trade as being base, crude, Trumpist protectionism rather than research-heavy industrial policy aimed at boosting high-value-added exports - certainly not a way of thinking unique to Brad, but rather a false dichotomy that is endemic throughout the economics commentariat - seems like a failure of our collective vision.