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

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

FRIDAY, SEPTEMBER 11, 2015

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Trade in Canada and Mexico Percentage of G.D.P. CANADA MEXICO 1980 1984 1988 1992 1996
Trade in Canada and Mexico
Percentage
of G.D.P.
CANADA
MEXICO
1980
1984
1988
1992
1996
2000
2004
2008
2012
Source: World Bank
THE NEW YORK TIMES

PAUL KRUGMAN

How International Trade Is Shaped

In a recent New York Times Maga- zine article Adam Davidson tells us about trade as documented by ar- chives found in Kanesh, an archaeo- logical site in modern-day Turkey, and reports that the volume of trade between Kanesh and various trad- ing partners seems to fit a “grav- ity equation”: Trade between any two regional economies is roughly proportional to the product of their gross domestic products, and is in- versely related to distance. Neat. But what does the seemingly universal applicability of the grav- ity equation tell us? Mr. Davidson suggests in his piece (here: nyti. ms/1KPW0pY) that it’s an indication that policy can’t do much to shape trade. That’s not where I would have gone, and it’s not where those who have studied the issue closely have gone. Here’s my take: Think about two cities with the same G.D.P. per capi- ta (we can relax that assumption in a minute). The cities will trade if resi- dents of City A find things being sold

by residents of City B that they want, and vice versa. So what’s 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 po-

tential sellers — City B’s population. And how many such desirous buy- ers will there be? Again, applying insignificant reason, a good guess is that it’s proportional to the number

of potential buyers — City A’s popu-

lation. 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 isn’t the same? You can think of this as increasing the “effective” popula-

tion, both in terms of producers and

in terms of consumers. So the attrac-

tion is now the product of the G.D.P.s. Is there anything surprising about the fact that this relationship

anything surprising about the fact that this relationship AYMAN OGHANNA/THE NEW YORK TIMES A street vendor

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, Por- tugal wine. And these models sug- gest that how much countries trade

should have a lot to do with whether they are similar or not. Cloth export- ers should trade more with wine ex-

porters and less with themselves. In reality, however, there’s basically no sign of any such effect: Even seem- ingly 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 “Arm- ington assumption,” which simply

assumes that even the same good from different countries is treated by consumers as a differentiated prod- uct — a banana isn’t just a banana, for instance, it’s 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 there’s also a puzzle about both the effect of distance and the effect of borders, both of which seem larger than concrete costs can ex- plain. Work continues. Does any of this suggest the irrel-

evance of trade policy? Not really. Changes in trade policy do have ob- vious 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 Can- ada, 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 ad- vantage is clearly incomplete; and that the process of international trade is subtler, with invisible as well as visible costs. This is not trivial, but it’s not particularly unsettling either. And gravity models are very useful as benchmarks for assessing other effects.

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 dif- ferent countries according to sea- sonal 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, lo- cally 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.

— 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 can’t 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

like to debate the merits of compara- tive advantage, but I consider that phrase to be a euphemism for labor exploitation. Surely some nations enjoy a com- parative advantage because they treat workers harshly.

— DAVE, WISCONSIN

I am not an economist, but based on the introductory eco- nomics 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

Economists tend to misunder- stand the fundamental risks asso- ciated 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.

— S., NORTH CAROLINA

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

nytimes.com.

BACKSTORY

An Enduring Equation

In 1962, the economist Jan Tin- bergen developed the “gravity model” of trade after noticing that trade between markets seemed to follow a simple mathematical for- mula. Named after its resemblance to the equation for determining grav- itational pull in physics, Mr. Tin- bergen’s theorem stated that the amount of trade between two econ- omies equals the multiplied size of their markets divided by the physi- cal 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 ex- amples. In an article for The New York Times Magazine published in Au- gust, the economics correspon- dent 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 conclu- sions of the gravity model — de- spite the fact that ancient econ- omies operated under rules and parameters that are entirely dif- ferent from our own. Mr. Davidson wrote that, “For all the debate about trade agree- ments and currency rates, import duties and World Trade Organi- zation disputes, trade tends to fol- low its own rules.” He also not- ed 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 glob- al trade as a choice, something a specific set of politicians and busi- nesses decided to impose on the rest of us, through all those con- fusing acronymic trade To me, though, the model suggests that these deals have less impact than either their boosters or their detractors imagine. There is a nat- ural tendency for different regions

to trade at fairly predictable vol- umes.” Ultimately, in Mr. Davidson’s view, politicians have little control over trade patterns no matter how hard they try to alter them in or- der to suit the needs of their con-

stituents. “They can stop trade through blockades, slow it through tariffs or try to jump-start it with trade agreements,” he wrote. “What they can’t do, at least not reliably, is shape it with preci- sion to achieve their preferred out- comes.”

PAUL KRUGMAN

When Media ‘Balance’ Fails

Almost 15 years have passed since I warned about media “balance” that involved journalists systemati- cally abdicating their duty to inform readers about simple matters of fact. As I wrote in a New York Times col- umn in 2000: “If a presidential candi- date 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 isn’t per- fectly 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 com- pletely wrong.

In particular, when you see re- ports on monetary disputes, you of- ten see characterizations of what the Federal Reserve’s 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 specula- tive bubbles. The helicopter-drop of money known as quantitative eas-

ing did little more than inflate stock markets and fund Washington’s 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 weren’t 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 Fed’s critics with warnings they didn’t give, and fail to mention what they actually said? The answer is that if you wrote, for instance, that “Ron Paul has been predicting run- away inflation ever since the Fed be- gan its expansionary policies,” you would make it clear that the former Republican congressman and presi- dential candidate has been utterly wrong the whole time. And convey- ing that truth — even as a matter of simple factual reporting — is appar- ently considered taking a side. So what we get instead is a white-

washing of the intellectual history, in which Fed critics are portrayed as making arguments that haven’t been shown to be ridiculous. It’s a pretty sorry spectacle.

shown to be ridiculous. It’s a pretty sorry spectacle. MICHAEL APPLETON/THE NEW YORK TIMES Donald Trump,

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

of free markets. What happened to conservative principles? Actually, nothing — those alleged principles were never real. Conser- vative 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 politi- cal science professor Corey Robin describes it, modern conservatism is “a reactionary movement, a de- fense of power and privilege against democratic challenges from below, particularly in the private spheres of the family and the workplace.” It’s really about who’s 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 doesn’t matter if he cov- ets his neighbor’s wife or demands trade wars. The point is that Mr. Trump isn’t

a diversion — he’s a revelation, bringing the real motivations of the conservative movement out into the open.

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!”

and more than 200 papers in professional journals and edited volumes. His latest book is “End
and more than 200 papers in professional journals and edited volumes. His latest book is “End

READER COMMENTS FROM NYTIMES.COM

How Misinformation Leads to Complacency

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 bal- ance that many journalists aim for when reporting the news is madden- ing. 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 con- sumed 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 govern- ment.

— RON COHEN, MASSACHUSETTS

The “balanced” reporting that you cite sustains the Republican Party as a competitive political

force, even though it has aban- doned real-world policies in favor of propaganda based on distortions, half-truths, oversimplifications and outright lies.

— JACK HUGHES, TEXAS

The media’s misstatements support the corporate domination of government by restricting the information that the public has ac- cess to. And this is no accident.

— STEVE, NEW ZEALAND

Voters need to understand that American conservatism isn’t

about principles — it’s about power and white privilege.

A few people control an enormous

proportion of wealth in the United States, and they are using their

influence as a cudgel. Simply put:

Wealthy people own the Republican Party. Donald Trump is a threat to Re- publicans because he has, as you put

it, exposed the real motivations of conservatives.

— ROSE, MISSOURI

The support Mr. Trump is draw- ing 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