Krugman Admits He Was Wrong On Trade Wars – By Adam Ozimek (forbes.com) / June 24 2018
Way back in the good old days of 2016, Mitt Romney warned that Trump would send us into a trade war and that this could cause a recession. In response, Paul Krugman took Mitt to task, and decided to “call him out for bad international macroeconomics”. Krugman’s criticism was that a trade war was basically a supply and demand wash. He seems to have changed his tune.
(Photo by Arun Sharma/Hindustan Times via Getty Images)
When Krugman wrote his original piece, I argued that he was really being far to sanguine about a trade war:
A trade war would be something like a “reallocation shock”…. Will this lead to a recession? Maybe not. It depends on how big the trade war is, how long it lasts and how long people believe it will last, how well those who are hurt weather it, whether helped sectors increase output, and how smoothly resources can move from hurt sectors to helped sectors. As we have seen from the work of David Autor, reallocation of labor following trade shocks isn’t necessarily a fast, frictionless process.
About a week ago, Krugman wrote a long and interesting piece on trade wars that is much better than his earlier piece where he was so excited to knock down a conservative that his missed the forest for the trees. Now, instead of simply calling it a wash that will reduce efficiency, Krugman is emphasizing exactly this kind of disruptive shock, even citing the same work from Autor that I did:
And if we have the kind of trade war I’ve been envisaging, something like 70 percent of that part of the economy – say, 9 or 10 million workers – will have to start doing something else. And there would be a multiplier effect on many communities now built around export industries, which would lose service jobs too.
This is just the flip side of the “China shock” story: even if you believe that the rapid growth of Chinese exports didn’t cost the U.S. jobs on net, it changed the composition and location of employment, producing a lot of losers along the way. And the “Trump shock” that would come from a trade war would be an order of magnitude bigger.
He still doesn’t come out and say this would cause a recession, but it’s not hard to imagine a shock an order of magnitude larger than the China shock doing just that.
In any case I’m glad to see Krugman come around to writing about a trade war in a more useful way by focusing on the actual significant costs instead of just saying it would be a wash for demand, quickly acknowledging some efficiency costs, and really focusing the piece on how a political enemy is an idiot. Instead he should have written this piece in the first place. He could have told us that because of countervailing demand-side effects, it may not cause a recession, but could still be hugely disruptive and disastrous for a lot of communities and businesses. But no the lure of painting Mitt Romney as ignorant was too distracting of a distracting prize!
