Paul Krugman gave a pleasingly wonkish talk at the World Business Forum today: the attendees with their Speaker Workbooks will have found it difficult to fill out the Paul Krugman Summary Sheet on page 95, complete with blanks where they are meant to write in their Action Plans and associated Due Date. Instead, he gave a smart and detailed disquisition on the past, present, and future state of international trade.
First, though, Krugman gave a quick overview of the crisis, and there was essentially nothing there I took any issue with. He was rude about financial innovation, saying that most of it is about regulatory evasion and arbitrage; he also worries that due to the fast action of the Fed,” we stepped back from the edge of the abyss too soon, quickly enough that there wasn’t a thoroughgoing appreciation of the need for reform”.
Bernanke “has averted disaster” by putting the Fed into the lending business, he said:
Around the turn of the year, it looked as though it might be the apocalypse, but apocalypse now has turned into apocalypse put on hold, and the risk of a second Great Depression seems to have evaporated.
He also had a good line about economic forecasters, who have us returning to full employment in about five years just because all forecasts tend to bake in a return to “normal” in five years. Krugman’s more pessimistic than that, however: “We almost certainly have a long, long haul before we’re fully recovered,” he said. A good part of the reason for that is what has happened to international trade — it “has fallen through the floor in a way that it literally never has before, including in the Great Depression”. And building it back up is going to be very hard indeed.
Krugman noted that economies like Spain and the US, with overleveraged housing bubbles and financial problems, have actually outperformed relatively sober manufacturing exporters like Germany and Japan:
World trade acted as a transmission mechanism. The vector of disease spread even to those economies with relatively healthy financial systems and little speculative excess.
The reason, said Krugman, was the big spike in trade intensity (essentially the trade-to-production ratio) between 1990 and 2007, much of which can be put down to containerization and the rise in IT logistics, which allow products to be have touched dozens of different countries before reaching the final consumer. This is a good thing: “goods are a lot cheaper and our purchasing power is much greater because of this globalization,” he said. But it has also, now, come to an end.
World trade growth might not be as buoyant as it has been: this looks like a long siege for the world economy. When you recover from a crisis, you almost always rely on a large trade surplus. But the world as a whole can’t move into trade surplus, so this may be a really prolonged slump.
So the growth in world trade is going to stop, or at least slow down dramatically, even without any kind of spike in protectionism. And in fact Krugman was sanguine on that front: he sees no such spike happening, and says that once international trade rules are put into place, they tend to be pretty strongly observed. “It’s very hard to have the cascading protectionism that you had in the 1930s,” he said. “When I was in the government and someone said ‘that’s GATT illegal’, that was pretty much the end of the discussion.”
But the trade-related gains in global living standards that we’ve seen since the shipping container was invented might not be easily replicable going forwards. Krugman wasn’t specific on what he thought that meant for global GDP growth going forwards, but the clear indication was that we might be moving to a much more zero-sum world than we’ve been used to. It’s a powerful and sobering conclusion, and one which, wonderfully, said absolutely nothing about Greatness or Leadership or Success.