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December 27, 2007

Economist's View - 4 new articles

Krugman: Forget the Middle Ground

Paul Krugman says Democrats "need to be ready to fight some very nasty political battles":

Progressives, To Arms! Forget about Bush—and the middle ground, by Paul Krugman, Slate: Here's a thought for progressives: Bush isn't the problem. And the next president should not try to be the anti-Bush. ...

I'm not saying that we should look kindly on the Worst President Ever... Nor ... that we should forgive and forget; I very much hope that the next president will open the records and let the full story of the Bush era's outrages be told.

But Bush will soon be gone. What progressives should be focused on now ... isn't Bush bashing—what we need is partisanship. ...

Progressives have an opportunity, because American public opinion has become a lot more liberal.

Not everyone understands that. In fact, the reaction of the news media to the first clear electoral manifestation of America's new liberalism—the Democratic sweep in last year's congressional elections—was almost comical in its denial.

Thus, in 1994, Time celebrated the Republican victory in the midterm elections by putting a herd of charging elephants on its cover. But its response to the Democratic victory of 2006 ... was a pair of overlapping red and blue circles, with the headline "The center is the place to be."

Oh, and the guests on Meet the Press the Sunday after the Democratic sweep were, you guessed it, Joe Lieberman and John McCain.

More seriously, many pundits have attributed last year's Republican defeat to Iraq, with the implication that once the war has receded as an issue, the right will reassert its natural political advantage—in spite of polls that show a large Democratic advantage on just about every domestic issue. ...

The question, however, is whether Democrats will take advantage of America's new liberalism. To do that, they have to be ready to forcefully make the case that progressive goals are right and conservatives are wrong. They also need to be ready to fight some very nasty political battles.

And that's where the continuing focus of many people on Bush, rather than the movement he represents, has become a problem.

A year ago, Michael Tomasky wrote a perceptive piece titled "Obama the anti-Bush," in which he described Barack Obama's appeal: After the bitter partisanship of the Bush years, Tomasky argued, voters are attracted to "someone who speaks of his frustration with our polarized politics and his fervent desire to transcend the red-blue divide." People in the news media, in particular, long for an end to the polarization and partisanship of the Bush years—a fact that probably explains the highly favorable coverage Obama has received.

But any attempt to change America's direction, to implement a real progressive agenda, will necessarily be highly polarizing. Proposals for universal health care, in particular, are sure to face a firestorm of partisan opposition. And fundamental change can't be accomplished by a politician who shuns partisanship.

I like to remind people who long for bipartisanship that ... we got Social Security because FDR wasn't afraid of division. In his great Madison Square Garden speech, he declared of the forces of "organized money": "Never before in all our history have these forces been so united against one candidate as they stand today. They are unanimous in their hate for me—and I welcome their hatred."

So, here's my worry: Democrats, with the encouragement of people in the news media who seek bipartisanship for its own sake, may fall into the trap of trying to be anti-Bushes—of trying to transcend partisanship, seeking some middle ground between the parties.

That middle ground doesn't exist—and if Democrats try to find it, they'll squander a huge opportunity. Right now, the stars are aligned for a major change in America's direction. If the Democrats play nice, that opportunity may soon be gone.

Trade Openness and Economic Development

Edward Glaeser notes that evidence on the relationship between trade openness and economic growth is murky and thus doesn't help much with the debate over how open trade should be:

Those Who Do Not Know the Past, by Edward Glaeser, Commentary, NY Sun: Should developing countries embrace free trade or shelter their nascent industries behind protectionist walls? This debate has been going on for two centuries since Adam Smith faced off against the mercantilists. Ha-Joon Chang's "Bad Samaritans" ... is a lively addition to the protectionist side of the debate. ...

Mr. Chang's main charge is that free trade advocates from wealthy countries are hypocrites, because the history of America and the United Kingdom is full of protectionism. Mr. Chang alleges, with scant evidence, that the two nations grew great because of these tariff barriers. First world economists have reaped the benefits of protection, he suggests, but are now trying to deprive the world's poor of the wonders of tariffs.

Mr. Chang also takes aim at other free market policies such as privatization and fiscal prudence. Again he argues that since rich countries have public ownership and deficits, it is rank hypocrisy for us to try to forbid them to the poor. An alternative view is that economists shouldn't be required to endorse the worst policies of their own countries. ...

The book would have made a more serious contribution if it shed more light on whether American or English protectionism helped or harmed these countries. .... Nineteenth-century America was protectionist, but that doesn't mean that protectionism played a positive role in our nation's growth. Did American protectionism really give us the textile mills of Lowell and the steel mills of Pittsburgh? Did English tariffs really foster the spinning jenny and the steam engine? The high physical costs of crossing the Atlantic in the age of sail made it natural, with or without tariffs, for the Lowells to want to weave cotton on this side of the pond.

Mr. Chang is going to have to do better than just point out that Americans and Englishmen had tariffs to make the case that tariffs produced rowth. There is a substantial empirical literature that looks at the relationship between trade openness and economic development over the last 40 years. An early wave of research, associated with Jeffrey Sachs among others, claimed that trade openness increased growth. A second wave of research, led by Francisco Rodriguez and Dani Rodrik ..., suggested that there was little robust connection across countries between trade and growth. My own research in this area found that openness had little impact on middle income places, but is particularly valuable for the poorest places. Certainly, there is no empirical consensus that openness is either good or bad for growth.

The lack of consensus on the connection between growth and openness does not imply that Mr. Chang's protectionism is equally attractive as the open borders urged by the Washington consensus. Adam Smith and David Ricardo didn't urge free trade because trade begets growth, but because trade makes goods cheaper for ordinary people. Smith's argument is still the strongest case for open borders. Even if protectionism does encourage industrial growth, it only does so by hurting ordinary people, who have to pay more to buy the goods of inefficient domestic producers.

Mr. Chang's protectionist brief suggests that the costs that tariffs impose on ordinary consumers are worth paying since the government can use tariffs to promote the right industries. Smith would have been skeptical about putting such faith in the government, and today's developing countries certainly deserve no more trust than the government of George III. Even if an incredibly wise tariff policy could protect future economic dynamos, the history of tariffs suggests that they are used more often to protect less than dynamic cronies.

The best thing to come out of this book is its challenge to the advocates of free markets to explain why England and America did so well despite embracing policies that were not always that free. Mr. Chang has not made the case that those policies were helpful, but free marketers have an obligation to help us understand why those policies did not do more harm.

"The End of Free Trade"

Robert Samuelson says the strong post World War II push toward open markets is beginning to fade:

The End of Free Trade, by Robert J. Samuelson, Commentary. Washington Post: ...[T]he "new mercantilism." [is] an ominous development affecting the world economy. Even as countries become more economically interdependent, they're also growing more nationalistic. They're adopting policies intended to advance their own economic and political interests at other countries' expense. As practiced until the mid-19th century, mercantilism aimed to do just that.

It was an economic philosophy that favored large trade surpluses. At the time, this had some logic. Trade was an adjunct to military power. Exports earned gold and silver coin, which financed armies and navies. But mercantilism fell into disfavor as a way to promote national prosperity. Free trade, argued Adam Smith and David Ricardo, would benefit all countries... The post-World War II economic order took free trade as its ideal, even though trade barriers were lifted slowly. Now mercantilism is making a comeback, as governments try to manipulate markets to their advantage. ...

The paradox is that as the Internet and multinational companies strengthen globalization, its political foundations are weakening. Of course, opposition is not new. Even if free trade benefits most countries, some firms and workers lose from added competition. But for most of the postwar era, a pro-trade consensus neutralized this opposition. That consensus is now fraying.

Two powerful forces had shaped it, notes Harvard political scientist Jeffry Frieden. First was the belief that protectionism worsened the Great Depression. Everyone wanted to avoid a repetition of that tragedy. The second was the Cold War. Trade was seen as a way of combating communism by promoting the West's mutual prosperity. Both ideas bolstered political support for free trade. For years the global trading system flourished on the inertia of these impulses, whose relevance has faded.

In a booming world economy, the resulting tensions have so far remained muted. China's discriminatory trade practices, for example, have excited angry rhetoric, but not much else. ...

But would a global slowdown change that if other countries blamed Chinese exports for destroying their domestic jobs? Would import quotas or tariffs follow? ... In the United States, the present pattern of global trade is viewed with increasing hostility: U.S. deficits are seen as eroding industrial jobs while providing surplus countries with the dollars to buy large pieces of American firms.

The world economic order depends on a shared sense that most nations benefit. The more some countries pursue narrow advantage, the more others will follow suit. ... It's an open question whether these conflicting forces -- growing economic interdependence and rising nationalism -- can coexist uneasily or are on a collision course.

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