Paul Krugman, the Nobel Prize Winner Who Threatens the World

     

When the self-proclaimed "conscience of liberal America" and a one-time free trader to boot starts arguing for protectionism, you know that things have come to a pretty pass. But that’s what’s happened over the past week.

Paul Krugman, a Nobel Prize-winning economist, has taken to advocating a 25 per cent "surcharge" – he refuses to use the more descriptive term of "import tariff" – on goods from China as a way of bringing the Chinese leadership to heel over currency reform. So potentially dangerous and out of character is this idea that when I first read it, I assumed he was being ironic. But sometimes the cleverest of people can also be the most stupid, and he’s now said it so often that you have to believe he’s serious.

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What he’s advocating is trade retaliation so extreme that it would make the 1930s look like a stroll in the park. Contrary to Professor Krugman’s naïve assumption that the Chinese would soon cave in and allow their currency to float if confronted by such hard-ball tactics, I am certain that nothing is more guaranteed to produce the opposite response.

Professor Krugman’s suggestion mines a rich seam of populist US thinking and rhetoric which grows ever more vocal and worrying as the recession persists. What makes Krugman and other highly regarded economists who toe the same line so dangerous is that they give intellectual respectability to a fundamentally disreputable idea.

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Unlike Britain, America doesn’t really do free-traders. Even progressives, though they may pretend otherwise, are protectionists at heart. And there is a good reason for it. The US is still a largely internalised, self-reliant economy for which trade with the outside world is relatively unimportant. Many Americans have long thought they don’t much benefit from globalisation and that they would be better off behind high, protectionist walls. When times are tough, these arguments find ever more traction.

I don’t want to be unfair on Professor Krugman, for he proposes tariffs only as retaliation against China for supposedly manipulating currency markets to gain unfair competitive advantage. The evidence is admittedly overwhelming, and if next month’s biannual currency report by the US Treasury were to set all diplomatic considerations aside, it would undoubtedly find China guilty of manipulation.

In the good times, the mercantilism of Chinese currency intervention was grudgingly tolerated. In return for carrying big current account deficits, America got cheap goods and cheap money. But now, with the advent of the Great Recession, the arrangement looks far from mutually beneficial. The US, it is argued, cannot forever be expected to keep accumulating debt to spend on other countries’ exports. It’s got to stop.

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March 26, 2010