Trade war won't cause recession says Paul Krugman
Yahoo Finance's Dion Rabouin wonders Why Trump's trade war hasn't tanked the market or the economy yet:
Business sentiment has been shaken by U.S. President Donald Trump’s escalating trade war with China, the European Union and other countries, financial analysts say. But some are wondering why the impact hasn’t shown up in the hard economic data. And while the stock market has been volatile, it certainly could be a lot lower considering the nature of the political rhetoric.
After all, we know trade protectionism is disastrous for the economy, right? And if there's one bit of economic history your standard financial reporter or Wall Street mogul knows, it's that the Smoot-Hawley tariff of - well, whenever - caused the Great Depression.
Actually no, says economics Nobel prize winner Paul Krugman.
Or rather, that's what Krugman said in an NYT blog post “The Mitt-Hawley Fallacy,” on March 4, 2016, before the presidential election. That’s when the Republican Party establishment's big business frontman Mitt Romney tried to swat down Donald Trump’s run for the party nomination with this restatement of the Wall Street wisdom on trade:
If Donald Trump’s plans on trade were ever implemented, the country would sink into a prolonged recession … His proposed 35 percent tariff-like penalties would instigate a trade war and that would raise prices for consumers, kill our export jobs and lead entrepreneurs and businesses of all stripes to flee America.
But this is just “bad international macroeconomics,” says Krugman, “in an area where I really, truly know what I’m talking about.” There are reasons to be against trade protectionism, he says, but recession is not one of them:
Think about the arithmetic (which has a well-known liberal bias). Total final spending on domestically produced goods and services is
Total domestic spending + Exports – Imports = GDP
Now suppose we have a trade war. This will cut exports, which other things equal depresses the economy. But it will also cut imports, which other things equal is expansionary. For the world as a whole, the cuts in exports and imports will by definition be equal, so as far as world demand is concerned, trade wars are a wash…
But didn’t the Smoot-Hawley tariff cause the Great Depression? No. There’s no evidence at all that it did. Yes, trade fell a lot between 1929 and 1933, but that was almost entirely a consequence of the Depression, not a cause. … And while trade barriers were higher in the 1930s than before, this was partly a response to the Depression, partly a consequence of deflation, which made specific tariffs (i.e., tariffs that are stated in dollars per unit, not as a percentage of value) loom larger.
It’s not that protectionism does no harm: “protectionism in general should reduce efficiency, and hence the economy’s potential output. But that’s not at all the same as saying that it causes recessions.”
In a more recent post, Krugman also observes that:
There’s some truth to the argument that growing trade has contributed to rising inequality; if imports of manufactures from developing countries were still as low as they were in, say, 1970, real wages of blue-collar workers would probably be a few percent higher than they are.
Now it may be that, even on their own protectionist terms, Trump’s actual trade measures could be much better designed. Or it may be they are mostly threats designed to force open foreign markets, and so may even end by promoting more trade.
But as to protectionism in general, mainstream economics as represented by Paul Krugman leads to more complicated and nuanced conclusions than the idiot wind out of CNBC. Protectionism could reduce economic efficiency and long-run potential output growth, but it might also help curb rising economic inequality. Is it so out-of-bounds to think that slightly slower economic growth that flows more to middle and lower-class people may be preferable to faster growth that goes mostly to the already wealthy?