Who's the Real Economist?

Who's the Real Economist?

E-mail debates of newsworthy topics.
Nov. 16 1996 3:30 AM

Who's the Real Economist?

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       My hat is off to Paul Krugman for his frank repudiation of Peter Peterson's book on Social Security. Given the speed and fairness of Paul's self-correction on this point, I will apologize for being coy.
       Still, I am not going to take up the invitation to defame Adrian Wood, a meticulous economist, by comparing him to Peterson. The cases are very different. The differences can usefully illustrate the nature of serious disagreements that exist between economists. They also illustrate the distinction between a dispute over research results and a dispute over the reputability of the researcher.
       Economists generally agree (I think) that there has been a decline over several decades in the demand for less-skilled labor, of about 20 percent overall. The question is: How much of this can be attributed to the effect of trade?
       At the time Adrian Wood published his book North South Trade, Employment and Inequality, the mainstream answer was on the order of 0.5 percent, or one-fortieth of the total effect--an insignificant amount. But Wood showed that these estimates were based on the labor demands of industries that remained in advanced countries after North-South trade took root. The industries that had departed were much more labor-intensive. Correcting for this source of bias raises the estimate of the trade effect on the demand for unskilled labor by a factor of 10, to 5 percent, from one-fortieth to one-fourth of the total. This was Wood's fundamental contribution.
       It is also true, as I wrote, that Wood's challenge was ignored by many economists writing after it was published, in papers where citation would have been appropriate. (More recently, this situation has improved, thanks to the editors of the Journal of Economic Perspectives, who published a symposium on these issues.)
       Wood did go on to suggest that his own core estimate of a 5 percent trade effect was too small. This is the "flaw" Krugman accuses him of, but in fact the argument is not arbitrary, capricious, or irresponsible. It is based on phenomena that are known to exist: "defensive innovation" by import-competing firms and trade in services. Neither of these is measured by looking at the labor coefficients in imported manufactures. Hence, their existence suggests that the actual effect of trade on unskilled-labor demand is bigger than 5 percent. How much bigger? In both cases, Wood does quite explicitly guess at magnitudes--a factor of two in each case. But he is very upfront about this, carefully drawing the line between what he knows and what he is guessing at. Leaving out these final steps does not affect the validity of Wood's criticism of earlier work.
       Having said all that, do I believe that trade accounts for the whole increase in wage inequality? The answer, I have said before, is no. I think unemployment is a more important force. And I think the effects of trade work mainly through overvaluation of the dollar. But this is not a criticism of Wood's work, either. Our analyses are not based on the same data or methods; nor are they addressed to precisely the same question.
       Let's move on. I'll overlook the silly syllogism Paul attributes to me, and his claim, offered without evidence, that I "systematically exaggerate and misrepresent" the disagreements between economists. Readers should just look again at that syllogism, and judge for themselves who is exaggerating and misrepresenting.
       Let me turn, instead, to Paul's six theses, distilled from his heavy reading and attributed to a wide variety of people, myself not included. I want to be careful. In most cases, I cannot verify that Krugman has summarized accurately the writing of the people he names. I'm inclined to distrust him on this point, with all due respect, given the cavalier way he summarizes mine.
       In the six theses, Paul Krugman presents us with statements intended to be rejected as categorical nonsense. As worded, none of them is sensible. Some of them are pure nonsense. In a few cases, there may be an element of truth, or a bit of a reasonable thought, hidden here and there. In some (No. 4), the wording is so imprecise that it's hard to tell. But I'll happily concede that all contain errors. This is easy: They all do.
       Yet, the list of errors fabricated in this way is potentially endless. And the popular press is full of similar errors from the right and also from the allegedly mainstream center. The most galling of these nowadays, in my view, is the idea that balancing the budget will have identifiable economic benefits. There are many more errors, and many of them stem from the fact that the popular press does not know what the actual disagreements between serious economists are. I get frustrated too, frankly, when my ostensible political allies make themselves easy targets by messing up. I'm equally frustrated when correctly stated critiques of mainstream propositions are ignored, or irresponsibly misstated in the rebuttal.
       Krugman's real point, however, is not about his so-called doctrines. It's about the people who allegedly believe them. And here we do, once again, disagree. Based on my own reading, I'm perfectly happy to drop Pete Peterson, Edward Luttwak, and few others down a well. I'll take Krugman's word on James Goldsmith and the World Economic Forum. I haven't read Michael Lind, except for bits of his fine critique of the American Right. But Lester Thurow? Robert Kuttner? Bob Reich? Larry Chimerine? Adrian Wood? To me, these are reputable people--insightful writers and knowledgeable students of the world. Some of them have been well ahead of the economic mainstream on important issues in the past. There views deserve to be taken seriously, as a rule.
       We all make judgment calls. We all make mistakes. Many of us can even write bad books and only realize it later on. But if you want to make someone out to be a fool, you really have to present a documented, discriminating, systematic case. Paul Krugman shoots a bit wildly for my taste, both here and in other work.

James K. Galbraith, a professor of government at the University of Texas, takes issue with Paul Krugman's recent SLATEcolumn, "Economic Culture Wars." Krugman is a professor of economics at MIT.