Krugman on the Economy: From "Phobia" to "Phobia"

Edited, translated: SUN

Source: The New York Times

[Editor's Note] In the late 1980s, fears of Japan's economic rise led to the rise of the United States that "Japan is going to take over the world." This was followed by a corresponding national industrial policy against the rise of Japan, especially the semiconductor industry. After that, there were mostly reports of Japan's economic decline. Paul Krugman argues that reports of Japan's successes and failures are overstated. In fact, in the past 30 years, the economic growth rate of Japan and the United States has been about the same.

Now, that concern has turned into China. However, while the Biden administration's "appeals" are "much smarter" than the Trump administration's, they are all essentially economic nationalism. So, "the Biden administration won't do as stupid things as Trump's obsession with bilateral trade imbalances, but it won't go back to the uncritical embrace of globalization that has characterized much of U.S. policy for decades." ”

Biden edition of economic nationalism

Text: Paul Krugman

If you're under 50, you probably can't remember when "Japan was going to take over the world." But in the late 1980s and early 1990s, many were fascinated by Japan's economic success and worried about America's decline. The airport bookstore's so-called non-fiction area is filled with samurai-covered books that promise to teach you the secrets of Japanese management. Michael Crichton, who has a best-selling novel, Rising Sun, about the looming threat of Japan's world domination, turned to dinosaurs again.

The policy aspect of neophilia/phobia takes the form of a broad call for the development of a national industrial policy. Government spending and possible protectionism to boost the industry of the future, especially semiconductor production.

Then, Japan largely disappeared from the U.S. conversation — if anything, as a cautionary tale of decades of economic stagnation and loss. We have entered an era of self-satisfied arrogance encouraged by the dominance of American tech companies.

The fact now is that Japan's failures, like its previous successes, have been over-hyped. The island nation remains wealthy and technologically advanced; its slow economic growth largely reflects its low fertility and low immigration rates, which have led to a shrinking working-age population. Demographic factors, Japan and the United States have grown at roughly the same rate of economic growth over the past 30 years.

In any case, however, we seem to be entering a new era of concerns about the role of the United States in the world economy, this time driven by concerns about China. We have heard new calls for industrial policy. I have to admit that I am not entirely convinced of these appeals. But the rationale for this administration's action is much smarter than it was in the 1980s — and, of course, much smarter than the economic nationalism of the Trump era, which ostensibly resembles the Trump era.

This reminds me of a 250-page report on supply chains released by the Biden-Harris administration a few days ago. This is one of those reports that may prove important, although few will read it. Why? Because it provides a kind of knowledge template for policymaking; when legislation and rules are drafted, the report and its analysis will lurk in their background, helping to shape the details of spending and regulations.

Now, much has changed in the world economy since the days when U.S. executives tried to reinvent themselves as samurai. In the past, countries made items like cars and airplanes; today, the parts of the goods they make, combined with other parts made in other countries, end up assembling into what consumers want. A classic example is the iPhone, which is assembled in China from bits and pieces from all over the world. Last year's World Bank's World Development Report (apparently pre-written) devoted itself to global value chains, with a good alternative to the iPhone: the bicycle.

By the way, I was a little surprised when I learned that Japan and Singapore have so many pedals and crank markets. I thought the U.S. was really ahead of the world in terms of cranks.

In any case, the World Bank provides a measure of the global value chain of world trade – exports cross at least two borders on their way to the final buyer.

This measure suggests that the massive growth in supply chains across the globe is not new; in fact, it occurred mainly between 1988 and 2008. But recent events have highlighted the dangers associated with decentralized production.

The Biden-Harris report focuses on four industries: semiconductor chips, batteries, pharmaceuticals and rare earths, which play a key role in many technologies. This is not difficult to understand.

The modern economy uses chips for almost everything – and the production of chips is very global. So, our situation is that U.S. auto production has been limited because the drought in Taiwan and the factory fire in Japan have destroyed the supply of these tiny but important components. In addition, most of the world's supply of rare earths comes from China.

And vaccine nationalism – countries restricting the export of vaccines and key components that make them – has become a real problem in the COVID-19 era.

As you might guess, much of the Biden-Harris report focuses on national security issues. National security has long been considered a legitimate reason to deviate from free trade. It has even been written into international agreements. Donald Trump's argument of abusing national security has discredited it. Seriously, is the U.S. threatened by Canadian aluminum? But you don't have to be a Trump to worry about our dependence on China's rare earths.

That said, supply chain reporting goes far beyond national security arguments, raising the need to retain domestic manufacturing across a wide range of sectors to maintain our technological capabilities. This is not a stupid argument, but it is very open-ended. Where will it stop?

One thing is clear: If you think the revival of economic nationalism is purely a Trumpian anomaly, you're wrong. The Biden administration will not do as stupid things as Trump's obsession with bilateral trade imbalances, but it will not return to the uncritical embrace of globalization that has characterized much of U.S. policy for decades. Will this lead to a new era of trade wars? Probably not – but don't expect to have a lot of big trade deals in the coming years.