Krugman’s blog, early 5/19/15

He’s either in Yurp or he never sleeps.  Here are two posts from EARLY this morning.  The first is “Trade and the Decline of U.S. Manufacturing Employment:”

As Matthew Yglesias notes, many people believe that US manufacturing has disappeared because it has all moved to China and Mexico — but they’re largely wrong. I’m not sure that pointing to measures of industrial production is the bet way to make this point, however. A better approach, or so I’d argue, is to ask how much of the decline in manufacturing employment would have been avoided if we weren’t running big trade deficits.

Let’s start with the US trade balance in manufactured goods. Or actually let’s use a pretty good proxy that’s easy to pull up from FRED, the nonag-nonoil balance — non-agricultural exports minus non-petroleum imports. Here it is as a share of GDP:

We had rough balance in this measure 40 years ago, exporting about as much in the way of manufactured goods as we imported; nowadays it’s a persistent deficit on the order of 3 percent of GDP. That 3 percent matters — it’s a pretty major obstacle in efforts to achieve full employment, because it’s a drag on the overall demand for US goods and services.

But it’s not the main explanation, or even close, for the decline in manufacturing employment as a share of the total, which is down around 15 points since 1970:

You might be tempted to say that the widening trade deficit in manufactures accounts for 20 percent of this long-term decline — 3 points out of 15 — but even that is an exaggeration, because not every dollar of manufactured exports (or imports) corresponds to a dollar of manufacturing value-added.

For the most part, in other words, declining manufacturing employment isn’t due to trade. Again, that doesn’t mean that trade deficits are OK, or that trade hasn’t had other effects. But even if we’d had a highly protectionist world or in some other way had blocked the move into trade deficit, we’d still have seen most of the great decline in industrial jobs.

The second post this morning was “Stupid Austerity Tricks:”

Against willful stupidity, the gods themselves contend in vain. So it’s no surprise that Simon Wren-Lewis is having a hard time of it. Still, it’s amazing just how dependent the pro-austerity camp has become on one dumb trick — misunderstanding, or pretending to misunderstand, the difference between levels and rates of change.

Take basic national income accounting (and ignore the foreign sector, for simplicity): the basic GDP identity is

GDP = C + I + G

or, if you want to look at changes,

Change in GDP = Change in C + Change in I + Change in G

If you’re trying to understand how fiscal policies — which affect both government purchases G and, via taxes and transfers, consumption C — move the economy, you can tell a story either in terms of levels or in terms of changes; in the end, it shouldn’t matter, because these stories should be consistent.

Now, the story Simon has been telling all along, and which I essentially picked up in my Guardian piece, is that the Cameron government did a lot of fiscal tightening in its first two years, but not much thereafter (illustrated in this case by cyclically adjusted balances):

Furthermore, almost everyone concedes that this is in fact what happened.

And what you’d expect from this time path of policy is that the current level of GDP would still be below what it would have been otherwise, but that the negative impact on the rate of growth of GDP would have occurred only in the first couple of years, not thereafter; hence the pickup in growth since 2013 isn’t inconsistent with the view that austerity is a drag on the economy. I don’t think this is a hard point; surely it’s not a point anyone who writes regularly on economics should have trouble getting straight.

Yet what we get over and over are pieces that get this simple point wrong. Austerity critics say that the pace of fiscal tightening slowed after 2012 — aha, you’re claiming that austerity was reversed, which it wasn’t! You said that cutting spending depresses the economy relative to where it would have been otherwise — aha, you’re all wrong, because the economy started growing again in 2013!

This is, not to put too fine a point on it, stupid — and it has to be willfully stupid, because the people writing such stuff have to know better.

I’m actually used to such things; people are constantly pulling phrases out of stuff I’ve written, claiming that I was saying something I wasn’t. The way to assess such claims is to look at the overall shape of the argument I was making. If, for example, I was writing many pieces about the dangers of a slow, jobless recovery, then no, I wasn’t endorsing the Obama administration’s forecast of a V-shaped recovery, even if you can find a pull-quote that, taken out of context, might be read to say that; and so on.

Anyway, what you really learn from this “debate” is how weak one side really is. If you can’t make your argument without messing up levels versus changes and deliberately misreading simple statements, you must not have much of a case.

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One Response to “Krugman’s blog, early 5/19/15”

  1. A1A Says:

    It’s hardly news that what we make and what we buy are not the same. The question is can the people who buy clothes made in Pakistan and China work at Boeing? Well they can if they insist on hiring Americans! You know the situation at PSU’s engineering department and its R&D is so much more a concern than the ambivalence of an imbalanced trade account. The fact that headlines about hijacking planes with a laptop are even conceivable makes one wonder who is designing these systems?

    It is possible that WMT’s decline in net – shareholder accounts notwithstanding – is due to Americas satiation with junk. And I believe it’s another way of voting against China even if our politicians are impotent. But if u want to weigh the effects of our strategy look at the ads for the richest consumers. It’s embarrassing to think that is what Arabs see when they look at the US. And we wonder why the ME is in constant turmoil. I wonder how we wonder that it is anything other than a quagmire.

    Well, I’m sure u could write thousands of pages on the evolution of American manufacturing but it would do more good to hear what u have to say we must do to improve our cycles of change.

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