Paul Krugman's Excellent Protectionist Adventure

Note: Before starting on my post today, I want to share an excellent article, "My Encounter With Paul Krugman," by Murray Sabrin, a professor of finance in the Anisfield School of Business, Ramapo College of New Jersey. Prof. Sabrin lays out the Keynesian nonsense that Krugman gave in his talk and provides an alternative explanation. The article is well-worth reading.

(Murray is a friend of mine and is a regular reader of KIW. Yes, my sympathies to him on both counts!)

One of the things Krugman likes to do is to write a number of columns and blog posts according to a certain theme, and he keeps things varied, although the Keynesian thread runs through them. Thus, he "stays on message" even when moving from one area to another.

In his column, "Taking On China," Krugman repeats a couple of his constant themes: China's refusal to allow its currency to have an official value that meets Krugman's approval is helping to cause this current depression, and protectionism is a legitimate policy when the economy is in the tank. He writes:

Serious people were appalled by Wednesday’s vote in the House of Representatives, where a huge bipartisan majority approved legislation, sponsored by Representative Sander Levin, that would potentially pave the way for sanctions against China over its currency policy. As a substantive matter, the bill was very mild; nonetheless, there were dire warnings of trade war and global economic disruption. Better, said respectable opinion, to pursue quiet diplomacy.

But serious people, who have been wrong about so many things since this crisis began — remember how budget deficits were going to lead to skyrocketing interest rates and soaring inflation? — are wrong on this issue, too. Diplomacy on China’s currency has gone nowhere, and will continue going nowhere unless backed by the threat of retaliation. The hype about trade war is unjustified — and, anyway, there are worse things than trade conflict. In a time of mass unemployment, made worse by China’s predatory currency policy, the possibility of a few new tariffs should be way down on our list of worries.

So, let's see. Because prices are not rising out of control right now when some people predicted that the Federal Reserve System's vast expansion of the monetary base was going on, that means protectionism is a worthy policy. This is a typical fallacy that Krugman uses, the non sequitur.

To further his cause, Krugman resorts to another fallacy, the "Appeal to Authority," by enlisting the late Paul Samuelson (another Nobel Prize winner) who was one of Krugman's mentors when he was in graduate school at MIT. In a recent blog post, Krugman quotes Samuelson:

With employment less than full and Net National Product suboptimal, all the debunked mercantilist arguments turn out to be valid.

Yes! Laws of economics from the Law of Scarcity to the Marginal Utility Theory of Value hold ONLY when times are good! However, if the economy is sluggish, then it is time to trot out "Fable of the Bees" and start all over again.

Krugman lavishes praise upon those in Congress who are pushing this latest round of protectionism. (He calls this latest move "bipartisan," so I guess when Republicans -- who always have been protectionist since their beginnings in the 1850s -- aren't so bad when they do Krugman's bidding, or at least we can say they have taken a holiday from their usual goals of Doing Evil.)

However, as he has done with the "stimulus" and new government spending, Krugman claims that this still is not enough. I only can imagine that his next move would be to trot out Smoot-Hawley II, since it worked so well the first time it was imposed. He writes:

For the truth is that U.S. policy makers have been incredibly, infuriatingly passive in the face of China’s bad behavior — especially because taking on China is one of the few policy options for tackling unemployment available to the Obama administration, given Republican obstructionism on everything else. The Levin bill probably won’t change that passivity. But it will, at least, start to build a fire under policy makers, bringing us closer to the day when, at long last, they are ready to act.

So, it seems that those Evil Republicans have not been channeling enough of their Inner Smoot-Hawley to satisfy Krugman, but maybe, just maybe, we can have a full-blown world-wide trade war, blaming those Dastardly Chinese for their intransigence and for their effrontery in producing goods that Americans want to buy (and for buying U.S. Treasuries by the handful in order to fund our own deficit spending).

No doubt, this will rev up Krugman's base, as his supporters will claim that we can have this wonderful economy based upon a form of autarky. (It is amazing that Krugman actually got his Nobel Prize allegedly for his trade theory, as now he is claiming that unless currencies are matched according to Krugman standards, trade creates poverty.)

Keynesianism is based upon a belief that the laws of economics hold only in special conditions, and when those conditions are not met, then governments need to act as though the Law of Scarcity does not exist. To Austrians like me, the laws of economics are like the Law of Gravity: they are immutable and always apply.

As I see it, Krugman's latest missives contain about as much sound thinking as would be a directive from the MIT graduate that in special conditions, the Law of Gravity does not hold. However, I somehow doubt we would see Krugman then getting ready to take a leap off the Empire State Building, but economically speaking, that is exactly what he is demanding we should do.