DEBATING POLITICS, ECONOMICS AND OTHER TIMELY TOPICS WITH PAUL KRUGMAN OF THE NEW YORK TIMES

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80
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FRIDAY, SEPTEMBER 11, 2015

BACKSTORY

Trade in Canada and Mexico

An Enduring
Equation

Percentage
of G.D.P.

60
50
40

CANADA
MEXICO

30
20

1980

1984

1988

1992

1996

2000

Source: World Bank

2004

2008

2012

THE NEW YORK TIMES

PAUL KRUGMAN

How International
Trade Is Shaped
In a recent New York Times Magazine article Adam Davidson tells us
about trade as documented by archives found in Kanesh, an archaeological site in modern-day Turkey,
and reports that the volume of trade
between Kanesh and various trading partners seems to fit a gravity equation: Trade between any
two regional economies is roughly
proportional to the product of their
gross domestic products, and is inversely related to distance. Neat.
But what does the seemingly
universal applicability of the gravity equation tell us? Mr. Davidson
suggests in his piece (here: nyti.
ms/1KPW0pY) that its an indication
that policy cant do much to shape
trade. Thats not where I would have
gone, and its not where those who
have studied the issue closely have
gone.
Heres my take: Think about two
cities with the same G.D.P. per capita (we can relax that assumption in a
minute). The cities will trade if residents of City A find things being sold

by residents of City B that they want,

and vice versa.
So whats the probability that a
City A resident will find a City B
resident with something he or she
wants? Applying what one of my old
teachers used to call the principle
of insignificant reason, a good first
guess would be that the probability
is proportional to the number of potential sellers City Bs population.
And how many such desirous buyers will there be? Again, applying
insignificant reason, a good guess is
that its proportional to the number
of potential buyers City As population. So other things being equal,
we would expect exports from City
B to City A to be proportional to the
product of their populations.
But what if G.D.P. per capita isnt
the same? You can think of this as
increasing the effective population, both in terms of producers and
in terms of consumers. So the attraction is now the product of the G.D.P.s.
Is there anything surprising
about the fact that this relationship

AYMAN OGHANNA/THE NEW YORK TIMES

A street vendor in Istanbul sells simit, a wheel-like bread, at a market in the ancient Turkish city.
works pretty well? A bit. Before 1980,
standard trade theory envisioned
countries specializing in accord with
their comparative advantages for
example, Britain does cloth, Portugal wine. And these models suggest that how much countries trade
should have a lot to do with whether
they are similar or not. Cloth exporters should trade more with wine exporters and less with themselves. In
reality, however, theres basically no
sign of any such effect: Even seemingly similar countries trade about
as much as a gravity equation says
they should.
Calibrated models of trade have
long dealt with this reality, somewhat
awkwardly, with the so-called Armington assumption, which simply

READER COMMENTS FROM NYTIMES.COM

Global Commerce Can Have a Downside

Supermarkets are able to offer
bananas to customers throughout
the year by buying them from different countries according to seasonal availability.
For me, bananas are bananas, no
matter where they come from. I only
check to see whether they are fresh
and reasonably priced. And I can
say the same for almost all imported
produce.
But the availability of imported
produce raises larger questions. Do
we really require access to bananas
every day of the year in order to

have happy, fulfilled lives? Can we

not be satisfied with seasonal, locally grown produce, like countless
generations before us have been? A
holistic (rather than mechanistic)
look at trade would consider such
questions and their environmental
implications.
The oceans are dying not only
because of climate change, but also
because of pollution a significant
amount of which comes from giant
container ships plying the waters.
Chemical sludge, along with vast
gyres of plastic and garbage, cover

the oceans.
We are not yet paying the costs of
trade, but future generations will.

assumes that even the same good

from different countries is treated by
consumers as a differentiated product a banana isnt just a banana, for
instance, its an Ecuadorean banana
or a Saint Lucian banana, which are
imperfect substitutes. A new trade
theory that some of us introduced
around 1980 or as some now call it,
the old new trade theory did a bit
more, by introducing monopolistic
competition and increasing returns,
to explain why even similar countries
produce differentiated products.
And theres also a puzzle about
both the effect of distance and the
effect of borders, both of which seem
larger than concrete costs can explain. Work continues.
Does any of this suggest the irrel-

evance of trade policy? Not really.

Changes in trade policy do have obvious effects on how much countries
trade. Look at the chart to see what
happened when Mexico opened up
to trade starting in the late 1980s as
compared to what happened in Canada, which was fairly open all along
and which, like Mexico, mainly
trades with the United States.
So what does gravity tell us? That
simple Ricardian comparative advantage is clearly incomplete; and
that the process of international
trade is subtler, with invisible as well
as visible costs. This is not trivial,
but its not particularly unsettling
either. And gravity models are very
useful as benchmarks for assessing
other effects.

like to debate the merits of comparative advantage, but I consider that

phrase to be a euphemism for labor
exploitation.
Surely some nations enjoy a comparative advantage because they
treat workers harshly.

Economists tend to misunderstand the fundamental risks associated with free trade.
A cycle of trade liberalization,
temporary prosperity, growing
debts, financial crisis and economic
collapse is one that seems to repeat
itself quite often. In the end, if trade
is to be sustainable and beneficial,
it must be based on real goods, not
financial claims.

DAVE, WISCONSIN

R., MASSACHUSETTS

It is probably time to come up

with a new new trade theory. A lot
has happened in recent years with
regard to globalization that cant
be accounted for by your old new
trade theory.
For instance, many consumer
products are not created in a single
country these days.
Also, politicians and economists

I am not an economist, but

based on the introductory economics courses that I have taken,
I have always thought that the
theory of comparative advantage
was too simple to tell us anything
about the real world.
For example, what happens if you
try to analyze 10 products instead of
just two?
A., THAILAND

S., NORTH CAROLINA

ONLINE: COMMENTS
Comments have been edited for clarity
and length. For Paul Krugmans latest
thoughts and to join the debate online,
visit his blog at krugman.blogs.
nytimes.com.

PAUL KRUGMAN

When Media Balance Fails

Almost 15 years have passed since
I warned about media balance
that involved journalists systematically abdicating their duty to inform
readers about simple matters of fact.
As I wrote in a New York Times column in 2000: If a presidential candidate were to declare that the earth is
flat, you would be sure to see a news
analysis under the headline Shape
of the Planet: Both Sides Have a
Point. After all, the earth isnt perfectly spherical. (Read the column
here: nyti.ms/VIGRjV)
Have things improved since then?
In some ways, they have gotten even
worse: These days, media balance
often seems to involve retroactively
rewriting history to avoid telling
readers that supporters on one side
of a policy debate got things completely wrong.

Paul Krugman
joined The New
York Times in 1999
as a columnist on
the Op-Ed page
and continues
as a professor of
economics and
international
affairs at Princeton
University. He was awarded the
Nobel in economic science in 2008.
Mr. Krugman is the author or editor
of 21 books and more than 200
papers in professional journals and
edited volumes. His latest book is
End This Depression Now!

In particular, when you see reports on monetary disputes, you often see characterizations of what the
Federal Reserves right-wing critics
have been saying that go something
like this, from a recent Washington
Post article: Among the criticisms:
The Fed was keeping interest rates
artificially low and fueling speculative bubbles. The helicopter-drop of
money known as quantitative easing did little more than inflate stock
markets and fund Washingtons
deficit spending. The bailout of big
banks left them bigger than ever.
Um, no.
The conservatives who gathered
at the Jackson Hole Summit earlier
this month werent warning about
bubbles and too-big-to-fail banks.
They were warning, in apocalyptic
terms, that runaway inflation was

just around the corner.

Why would a reporter credit the
Feds critics with warnings they
didnt give, and fail to mention what
they actually said? The answer is
that if you wrote, for instance, that
Ron Paul has been predicting runaway inflation ever since the Fed began its expansionary policies, you
would make it clear that the former
Republican congressman and presidential candidate has been utterly
wrong the whole time. And conveying that truth even as a matter of
simple factual reporting is apparently considered taking a side.
So what we get instead is a whitewashing of the intellectual history,
in which Fed critics are portrayed
as making arguments that havent
been shown to be ridiculous. Its a
pretty sorry spectacle.

MICHAEL APPLETON/THE NEW YORK TIMES

Donald Trump, a Republican presidential candidate, pledged that he

would forgo a third-party run if he fails to win the nomination.
The Reactionary Soul
In a recent Times column, Frank
Bruni marveled at polls that indicate
that Donald Trump, with his multiple
marriages and casinos, is the pre-

ferred presidential candidate among

Republican evangelical Christians.
Other commentators are shocked
to see a crude mercantilist make so
much headway in the alleged party

How Misinformation Leads to Complacency

force, even though it has abandoned real-world policies in favor of

propaganda based on distortions,
half-truths, oversimplifications and
outright lies.

READER COMMENTS FROM NYTIMES.COM

The mainstream press cares

very little, if at all, for facts or
evidence. Actually, it seems that
evidence bores journalists, and
they believe that it bores readers
as well.
What the press craves is drama,
disagreements and hysteria, since
these are what sell to complacent
consumers waiting impatiently for
their next dose of stimulation.
CHRISTOPHER BONNETT, TEXAS

Republicans have a well-oiled

propaganda machine in place. And
while Democrats have tried sev-

eral small-scale efforts to combat

this behemoth, they seem to lack
the will or the means to follow
through.
Meanwhile, the faux sense of balance that many journalists aim for
when reporting the news is maddening.
But what is the use of complaining
about misinformation over and over
again without offering any concrete
suggestions about how to change
things? The time and energy consumed by all the bickering diverts
us from the really big issue: how to
close the partisan information gap.

The sad truth is that most liberal

bloggers and their readers have
no real interest in closing that gap.
They prefer to complain. They
prefer the safe, walled-off world of
ideas and debate. Many of them feel
that the messy world of politics is
beneath them. So they do nothing,
while conservatives close in on their
prize: total control of the government.
RON COHEN, MASSACHUSETTS

The balanced reporting that

you cite sustains the Republican
Party as a competitive political

JACK HUGHES, TEXAS

The medias misstatements

support the corporate domination
of government by restricting the
information that the public has access to. And this is no accident.
STEVE, NEW ZEALAND

Voters need to understand that

American conservatism isnt
about principles its about
power and white privilege.
A few people control an enormous
proportion of wealth in the United
States, and they are using their

In 1962, the economist Jan Tinbergen developed the gravity

model of trade after noticing that
trade between markets seemed to
follow a simple mathematical formula.
Named after its resemblance to
the equation for determining gravitational pull in physics, Mr. Tinbergens theorem stated that the
amount of trade between two economies equals the multiplied size of
their markets divided by the physical distance separating them.
In the years since the model was
developed, it has largely withstood
the scrutiny of economists who
have tested it against historical examples.
In an article for The New York
Times Magazine published in August, the economics correspondent Adam Davidson recounted
how a trove of economic data from
around 1860 B.C. recovered from
an archaeological site in Turkey
also seemed to confirm the conclusions of the gravity model despite the fact that ancient economies operated under rules and
parameters that are entirely different from our own.
Mr. Davidson wrote that, For
all the debate about trade agreements and currency rates, import
duties and World Trade Organization disputes, trade tends to follow its own rules. He also noted that this discovery may seem
like bad news for people who want
the economy to be fairer. I have
spoken to countless activists and
concerned friends who see global trade as a choice, something a
specific set of politicians and businesses decided to impose on the
rest of us, through all those confusing acronymic trade deals. ...
To me, though, the model suggests
that these deals have less impact
than either their boosters or their
detractors imagine. There is a natural tendency for different regions
to trade at fairly predictable volumes.
Ultimately, in Mr. Davidsons
view, politicians have little control
over trade patterns no matter how
hard they try to alter them in order to suit the needs of their constituents. They can stop trade
through blockades, slow it through
tariffs or try to jump-start it with
trade agreements, he wrote.
What they cant do, at least not
reliably, is shape it with precision to achieve their preferred outcomes.

of free markets. What happened to

conservative principles?
Actually, nothing those alleged
principles were never real. Conservative religiosity and faith in the
markets were never about living a
godly life or letting the invisible hand
promote entrepreneurship. Instead,
as City University of New York political science professor Corey Robin
describes it, modern conservatism
is a reactionary movement, a defense of power and privilege against
democratic challenges from below,
particularly in the private spheres of
the family and the workplace.
Its really about whos boss, and
making sure that the man in charge
stays boss. Mr. Trump is admired for
putting women and workers in their
place, and it doesnt matter if he covets his neighbors wife or demands
trade wars.
The point is that Mr. Trump isnt
a diversion hes a revelation,
bringing the real motivations of the
conservative movement out into the
open.

influence as a cudgel. Simply put:

Wealthy people own the Republican
Party.
Donald Trump is a threat to Republicans because he has, as you put
it, exposed the real motivations of
conservatives.
ROSE, MISSOURI

The support Mr. Trump is drawing from conservative evangelical

Christians is an indication of the
gross hypocrisy that has always
been at the heart of the American
evangelical movement.
God forbid an evangelical baker
should be asked to provide a cake for
a same-sex wedding but the same
baker likely has no problem voting
for a thrice-married candidate.
NAME WITHHELD, NEW YORK