From: Paul Krugman To: James K. Galbraith
This debate is getting more civil by the minute--can it be that we will actually end up agreeing?
I think my first reply to James Galbraith effectively answered much of what James Devine had to say. (Hi, Jim.) I have never argued, or believed, that economic theory proves that markets always get it right; the truth is that economic theory allows lots of possibilities, and is always up for revision anyway. But your story must hang together; and you must be willing to do some arithmetic to see that it does. Moreover, the kind of arithmetic involved does not come easily to people who are unfamiliar with economics. Everybody here seems to be invoking the ghost of John Maynard Keynes; perhaps I should simply note that he wrote at one point that "[e]conomics is a difficult and technical subject, but nobody will believe it."
Let's talk for a minute about the substantive issues, then go back to the nature of economic discourse. I agree with Galbraith that the serious intellectual issue regarding trade and wages is how much of the widening inequality among workers can be explained by growing trade; everyone agrees that trade has played some role, and the question of how much is, well, "difficult and technical." Some of the studies that seemed to show that trade played a very large role have turned out, on closer inspection, to be deeply flawed; but I am quite willing to agree that trade has widened the gap between college- and high-school-educated workers by 2 percent or 3 percent. (See my article in Brookings Papers on Economic Activity last year.)
But when Galbraith says that this is the "real issue," I wonder what he means. If he means that statements like the one by Michael Lind that I quoted are silly, or that we need not take seriously the claim that wages have fallen because of the displacement of high-wage jobs by imports (as opposed to the displacement of low-wage jobs that has contributed to growing inequality), then, obviously, I agree. But, did the readers of Michael Lind's Harper's article know that what he was saying was nonsense? Did the editor of Harper's know that it was nonsense? (I have had some fascinating conversations with other editors who either have never heard of the idea that economics should be based on models, or are hostile to that idea.) Above all, did Lind himself know that it was nonsense, and that you are supposed to think these things through?
Or to take the more pointed case: It has been obvious since the early 1980s to anyone willing to do simple algebra that the deindustrialization hypothesis about wage stagnation could not be more than a tiny part of the story. So, in some sense, we could say that deindustrialization was not the "real issue." But did the authors and readers of the 1988 Cuomo Commission report, which placed deindustrialization at the center of America's economic difficulties, know that? I can assure you that as of 1992, Gov. and then President-elect Clinton did not: As a well-read, highly intelligent man who followed what people he regarded as serious economics writers had to say, he thought he knew that the loss of manufacturing jobs to imports ranked at the top of American economic problems.
In my unpleasant debate with Bob Kuttner in the pages of the AmericanProspect, Kuttner at one point asserted that "[a]s Krugman surely knows, the real controversies in economics and economic policy are not about the arithmetic: they are about the assumptions." I only wish that I did know that. But the debates over deindustrialization, or over national economic "competitiveness," or, for that matter, over supply-side economics, are not about assumptions: They are about arithmetic, and one side in each debate is wrong because it has simply failed to make sure that its stories add up. If these aren't real controversies, that is news to the participants and to the intellectual public.
There are actually many economists willing to push the boundaries of the field, to try out the consequences of alternative assumptions. It is hard to think of an economist whose research has been more innovative than Joseph Stiglitz, now chairman of the Council of Economic Advisers; and, as my critics endlessly point out--as if it somehow invalidates what I say now--I have a pretty good reputation as an innovator myself. Why, then, do people like Stiglitz or myself so often seem to be in the position of defending economic orthodoxy? Because when you enter the real world of policy debates, you find out that the great majority of those who attack standard economic prescriptions may imagine that they have transcended textbook economics, but, in fact, have simply failed to understand it.