Why a 'hard' Brexit won't work (despite being right on nearly everything about trade theory)

Probably the most important single insight that an introductory course can convey about international economics is that it does not change the basics: trade is just another economic activity, subject to the same principles as anything else.

If you're going to write about trade (and don't want to start with David Riccardo) then Paul Krugman, who got his Nobel Prize for writing about trade, is as good a place as any to start. And Krugman's opening point is that international boundaries don't change the fundamentals of economic theory. There is no essential (economic) difference between me buying something from Basingstoke and me buying something from Beijing. As far as theory is concerned, therefore, making this comparison practically as well as theoretically true should be the point of trade policy. Any other approach would be against the interests of the buyer (and, therefore, by extension favouring the interests of the seller) and bad for the economy.

The problem with trade is that, as they say on Facebook, it's complicated. It's not complicated because Krugman is wrong, it's complicated because sellers - producers - in various nation states and groups of nation states have persuaded their government (quite often - as with US sugar producers - through the extensive use of cash money as a persuader) that their particular business is peculiar and it will not benefit consumers to have access to all the world's production of that good or service. These persuasive folk have spun the point of trade 180 degrees - it's all about national competition, a global race as David Cameron kept telling us. Britain is competing with China and India and the USA and Mexico - we must back our producers even if it means ordinary Brits having to pay more for stuff. Here's Krugman again:

After all, the rhetoric of competitiveness, the view that, in the words of President Clinton, each nation is “like a big corporation competing in the global marketplace”, has become pervasive among opinion leaders throughout the world. People who believe themselves to be sophisticated about the subject take it for granted that the economic problem facing any modern nation is essentially one of competing on world markets, that the United States and Japan are competitors in the same sense that Coca-Cola competes with Pepsi, and are unaware that anyone might seriously question that proposition.

Again, Krugman is right - the point of trade is imports, the stuff us consumers buy, not exports. For sure we need the exports so we can pay for the imports but if we're running a gap in favour of exports then this is simply money that UK consumers would otherwise have spent on buying stuff (this is one reason why China becoming a net importer of goods sometime in the next decade or so is a very significant event - we'll need to find a new set of folk to buy stuff off). So when you hear that familiar Brexit Ultra argument, "they export more to us than we do to them so they need us more", smile sweetly because they've entirely missed the whole point of trade.

The problem, however, is that this position on trade utterly dominates debate - far from us seeking a trade policy that makes buying from Peshawar more like buying from Penge, we seek instead a policy that ossifies difficulties in exchange by pretending that international trade follows a different set of economic rules (or, more to the point, a set of rules defined without reference to economic theory by lawyers and bureaucrats, often at the behest of well-connected lobbies for business interests) to national trade. Here Scott Sumner sums up all this:

Over the past 200 years, debates about trade have occurred on two levels. Academics insist that unilateral free trade is the best option. However the “very serious people” (VSP) who conduct real world trade negotiations act as if open markets are a “concession”. They act as if we were doing other countries a favor by letting them export goods to our market. They view the academic perspective as hopelessly idealistic, even as the VSPs have worked hard to gradually move the world toward the same goal of freer trade, one agreement at a time.

Sumner goes on to say that the VSPs' chickens are returning to roost as first Trump then the EU succumb to managed trade - mercantilist - arguments. The most striking thing about the Brexit debate isn't its economic illiteracy (on both sides) but rather that, in the real world, neither side seems remotely interested in open markets. Indeed many of the arguments should have been put to bed while Wellington's boot was used to describe the oppression of the Corn Laws. Trade is only possible because of incredibly complicated sets of rules contained in huge tomes that only a few are able to understand. It's sad that governments - because of the effectiveness of business lobbies and the delusion of competition between nations - have created the situation where this sclerotic, rules-bound system makes it possible that a willing buyer in the UK is unable to get her goods from a willing seller in France (or for that matter The Phillipines). Anyone who thinks such a system is a good idea is, in my view, the worst sort of deluded fool. And, you'd hope that intelligent people would be trying to make sure such a system didn't come to pass.

It is, depressingly, what we've got. And the lawyers and bureaucrats aren't about to let something like 200 years of solid evidence backing up the best of economic theory get in the way of their lovely rules (there's a whole new can filled with self-interested worms right here). So the job isn't served by doing the right thing in terms of the evidence (more free trade, more open markets, lower tariffs, fewer regulations) but by making sure that, in the case of Brexit, the UK can leave the EU without a bunch of rules merchants crashing our economy simply out of spite. This is the only reason why a "no deal" option should be avoided - international trade still operates in an essentially mercantilist manner with the interests of producers sat round the table alongside the lawyers and bureaucrats and this means any settlement will, wrongly, be concluded on the basis of 'competitiveness', 'export' and 'protection' rather than in the interests of consumers.

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Paul Krugman on the Pound (and how Brexit voters mightn't be so dumb after all)

Krugman knows his apples (or is it onions) on trade - it's what he got his Nobel Prize for after all. So this little comment on Brexit and the Pound is interesting:

Pre-Brexit, Britain was obviously experiencing a version of the so-called Dutch disease. In its traditional form, this referred to the way natural resource exports crowd out manufacturing by keeping the currency strong. In the UK case, the City’s financial exports play the same role. So their weakening helps British manufacturing – and, maybe, the incomes of people who live far from the City and still depend directly or indirectly on manufacturing for their incomes. It’s not completely incidental that these were the parts of England (not Scotland!) that voted for Brexit.

Rather questions the automatic presumption that people in Barnsley and Boston voting for Brexit were voting against their interests.

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Free exchange (that's trade folks) makes everyone richer...

Alright. I know. We don't like Paul Krugman. He's that snarky left-wing economist with a beard and a New York Times column. And he's levered his Nobel Prize in economics to become the poster boy of progressive economic commentary.

But we really should take note of what he says when what he says is the stuff he got a Nobel Prize for. This is like paying attention to Paul Nurse when he's talking about genetics and cancer research but treating him with contumely when he sounds off about climate change.

Paul Krugman's Nobel Prize is for trade economics. So when he writes an essay about comparative advantage we should listen. Certainly we should listen more to Krugman than to folk like the late Sir James Goldsmith. Here's Krugman:

What is different, according to Goldsmith, is that there are all these countries out there that pay wages that are much lower than those in the West -- and that, he claims, makes Ricardo's idea invalid. That's all there is to his argument; there is no hint of any more subtle content. In short, he offers us no more than the classic "pauper labor" fallacy, the fallacy that Ricardo dealt with when he first stated the idea, and which is a staple of even first-year courses in economics. In fact, one never teaches the Ricardian model without emphasizing precisely the way that model refutes the claim that competition from low-wage countries is necessarily a bad thing, that it shows how trade can be mutually beneficial regardless of differences in wage rates. The point is not that low-wage competition never poses a problem. Rather, what is significant is that despite ostentatiously citing Ricardo, Goldsmith completely misses one of the essential lessons of his argument.

Now you'll be familiar with Goldsmith's argument (it was - in the manner of Oolon Colluphid - the central premise of Sir James' book 'The Trap') as it now forms the core of the argument from Donald Trump, Nigel Farage, Marie le Pen and many others - either foreigners over there are doing us out of jobs and cash or else foreigners coming here are doing us out of jobs and cash. Sometimes this argument is fluffed up with fancy words, sometimes it has a dash of scientific racism (you know - black people are genetically thick but good at sports) but in the end it's the same - trade is bad.

I'd add here that this nativist argument makes common cause with the protectionist argument beloved of the anti-market, socialist left. Some of this anti-trade stuff is presented as wanting 'fair trade' or as protecting workers rights. A little bit of saving the planet is added in for good measure to created a sort of 'I'm all right Jack' autarky.

The thing that Krugman explained is that, while trade does have losers, these are vastly outweighed by the winners. Trade - free exchange between individuals - is mutally beneficial. It's not a competition between nations, it's not a 'global race', and it's not a winner-take-all game of international treaty poker. The whole bloody point is that both participants gain.

We sort of understand this in our daily lives. Most businesses aren't trying to take advantage of you - they've got stuff to sell you and you buy it because you think it will enhance your life (or fix a problem which amounts to the same hill of beans). And when it is boiled down this is all trade tells us - if we focus on doing the stuff we're good at and other folks do likewise then the whole world benefits from that specialisation. But only when we allow free trade.

The problem is that, as Kipling observed, we have small hearts so get stuck in the idea that somehow buying stuff made on the other side of the world is doing people here out of a living. What comparative advantage tells us is that, however much empathy tells us otherwise, this ain't so.

In the end, free trade like free speech and free enterprise is what makes for our great world. We should not let up in making sure this isn't destroyed by powerful people pretending that somehow we'll be richer is we restrict trade. Trust me on this one, Corbyn, Trump, Farage, Le Pen and all the other opponents of free trade - they lie when they say their autarky will make us richer.

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So much for equality, eh!

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Paul Krugman, lefties favourite Nobel laureate economist, has a new source of income - researching inequality. And a nice little earner it is too:

According to a formal offer letter obtained under New York’s Freedom of Information Law, CUNY intends to pay Krugman $225,000, or $25,000 per month (over two semesters), to “play a modest role in our public events” and “contribute to the build-up” of a new “inequality initiative.” 

Yes folks, quarter of a million bucks moaning about how the world is unequal. There's a word for this sort of hideous explotiation - hypocrisy. Krugman is getting ten times what poor Americans pull in a month simply to turn up to a few events and help with the PR.

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Bitcoin threatens government ergo Bitcoin is evil

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This is the essence of Paul Krugman's argument suggesting Bitcoin's sinful nature. And this evil is defined in a quote Krugman takes from Charlie Stross:

BitCoin looks like it was designed as a weapon intended to damage central banking and money issuing banks, with a Libertarian political agenda in mind—to damage states ability to collect tax and monitor their citizens financial transactions. 

It is on this basis that Krugman makes the judgement that Bitcoin is evil. Indeed, he recognises that the debate about the morality of private money is very different from the debate about how (or whether) the private money actually does the job that state money does.

Krugman's core criticism of Bitcoin - and one assumes other means of exchange (or value storage) that aren't controlled by government - is that is undermines big government. Moreover, if private money succeeds (and the jury is out on this) then there is no foundation for monetary systems that drive these big state, big corporation systems - what we can call 'national accounting arithmetic' or 'magic money tree' models.

This is only a moral question is you accept that there is a moral basis for taxation.

Since I don't believe there is any moral case for taxation (as opposed to pragmatic, practical cases) then I see no reason at all to be concerned that private money makes it hard for the government to monitor my financial transactions.

What happens under this system is that government has to make the case for raising taxes - to set the price of government at a level where people willingly pay. Just as importantly, such a change more or less destroys the use of  income taxes to promote 'equality'. Taxes become what they should always have been - means for government to provide the services that people require of that government rather than a blunt instrument of social control.

We still have a way to go - these private monies are risky and unproven. But if the direction is towards a smaller, less intrusive and consent-based government then, far from being evil, Bitcoin is a source of moral salvation.

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Paul Krugman on cheap labour...

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The trendy left's favourite economist has this to say about cheap labour:

These improvements have not taken place because well-meaning people in the West have done anything to help–foreign aid, never large, has lately shrunk to virtually nothing. Nor is it the result of the benign policies of national governments, which are as callous and corrupt as ever. It is the indirect and unintended result of the actions of soulless multinationals and rapacious local entrepreneurs, whose only concern was to take advantage of the profit opportunities offered by cheap labor. It is not an edifying spectacle; but no matter how base the motives of those involved, the result has been to move hundreds of millions of people from abject poverty to something still awful but nonetheless significantly better.

This is absolutely right. Capitalism - neoliberalism if you prefer - is what gets us out of poverty and keeps us out of poverty.

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Krugman...Or When You Get Stuck Change the Subject

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I have just watched Paul Krugman's master class in punditry (note the use of this term rather than the term "economics" - there wasn't a great deal of economics in evidence) from yesterday evening's Newsnight. You can follow the link from the Great Man's blog .

What struck me wasn't that Krugman succeeded in putting the case against "austerity" although this was the billed intention but that whenever he reached the point where he might trip over his own argument he shifted the subject.

When confronted with the moral argument that debt means having something now rather than later - meaning of course that we, given the likely timescale for debt repayment, are taking that from future generations - Krugman chooses instead to talk about the lack of graduate job prospects. Rather than addressing the real issue raised - government debt as deferred taxation, Krugman chooses to talk about a relatively minor labour demand issue.

And then when Angela Leadsom raises supply side considerations - how to help the economy create jobs - Krugman lapses into accusations that Ms Leadsom and others are ideologically motivated and using the current crisis to shrink the size of the state. At no point in this does Krugman respond to or consider whether there are any supply side constraints. He waffles vaguely that there's no evidence of supply side constraint (in the US) and states baldly that the whole problem is a matter of demand. More seriously - from the point of debate - he accuses others of insincerity and exploitation without evidence.

On one level this was great telly - a clever pundit parading his skills and, no doubt, successfully flogging a few of his books (the real reason for his presence, of course). But, given that Krugman is billed as a "Nobel prize-winning economist" it was really disappointing that he chose political and ideological arguments as the basis for his opposition to austerity rather than economics.

Maybe that's because he doesn't have an economic leg to stand on? I wanted to understand the arguments - the economic arguments - against austerity but instead got political argument. And, whenever the challenge got close to denting that argument, Krugman either made ad hom attacks or changed the subject. We had the spectacle of two very polite 'opponents' allowing this man to attack them rather than responding to the serious points they raised. Rather disappointing really.

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