From Austerity to Free Trade, Elites Play Catch-Up

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Europeans march in protest against the Transatlantic Trade and Investment Partnership, austerity and poverty in Brussels on October 17, 2015. As conventional wisdom on austerity, free trade, taxing the rich and trade union rights is being turned on its head by a skeptical electorate, elites are scrambling to revise their thinking, the author writes. Eric Vidal/Reuters

This article first appeared on the Dorf on Law site.

One of the most interesting aspects of the political conversation over the past several years—on issue after issue—has been seeing the safe, conventional, bipartisan, self-satisfied insider view exposed as fraudulent.  

For example, decades of Democrats and Republicans agreeing that deficits are the worst thing ever led to President Barack Obama's insane embrace of austerity in 2010, where Obama's people clearly believed that he was on solid ground with establishment thinkers.  

He and his party quickly found themselves reaping the consequences of a slow, grinding economic recovery, but, much more surprising, they also discovered that the professional consensus among economists was not what they thought it was. Mainstream establishment liberals started to say, "You know, there really is not a good case for austerity. Quite the opposite."

On tax policy, Democrats and Republicans alike spent years believing that the best way to guarantee prosperity (as well as electoral success) was to cut taxes. Republicans were characteristically extreme about it, but Democrats were sure that economists all agreed that tax cuts are a good thing. The only question was which taxes to cut, and how.  

Then, as inequality became impossible to ignore, some highly credentialed economists were heard to say that marginal tax rates on the rich could go back to the 70 to 80 percent range without harming the economy. Moreover, there was a sudden acknowledgement that there simply is no empirical case supporting the claim that tax cuts lead to higher economic growth.

The minimum wage? We went from Democrats arguing in a pro forma fashion that the minimum wage is not terrible and should at least keep pace with inflation to a fight between those who would push the federal minimum to $12 within a few years and those who would go to $15.  

Again, the inside-the-Beltway belief that there was a professional consensus that minimum wages are bad was surprisingly exposed as a myth. And it also turns out that the case against labor unions was always weak to nonexistent.

This is getting embarrassing. Think about the list of things that conservatives and centrist liberals have always thought students should learn in Econ 101.

Because "markets are good," nearly everyone is apparently supposed to learn from their economics classes that the government should be small (so spending and deficits are bad, and taxes should be low) and that labor markets should not have "imperfections" like minimum wages and organized labor.  

Oh, and don't forget the hoary belief that the Fed should never let rates stay too low lest inflation get out of hand, which also turned out to be completely contradicted by events.

What remains of the "economics proves center-right policies are best for the economy" belief system? Well, at least everyone knows that free trade is a good thing, right? Who but a dead-ender with ties to old-style industrial unions could be opposed to "liberalized" trade agreements among countries?  

At this point, it will no longer be a surprise to learn that the supposed professional consensus on this issue was also a myth.

Jared Bernstein (Vice President Biden's former chief economist) and Paul Krugman have both written recently about the nonexistence of empirical (or even theoretical) support for the idea that expanded trade is an unalloyed good. In particular, it turns out that we have always known that (a) the overall measurable gains from trade are extraordinarily small, even when assessed from an orthodox viewpoint, and (b) the idea that "winners can compensate losers" from trade is at best a dodge.

Of course, no one thinks that we should now rip up all trade agreements and go back to what economists call "autarky." (No one, that is, except for the Republican front-runner, but he is truly an outlier on that issue, as on so many others.) Still, the safe political ground has always been that if completely closed borders are bad, then completely open borders (to goods and services, at least) must be good.

On all of these issues, of course, there are still true believers, and the Republicans are still fully supporting the old orthodoxy across the board. For example, Krugman recently called out Mitt Romney for claiming absurdly that trade barriers cause depressions.  

Even so, The New York Times ran a column this past Sunday by an establishment thinker who said that tariffs in the 1930s "worsened the Great Depression," and that Donald Trump's apparent willingness "to slap high tariffs on Japan and China...could trigger a global depression."

But what is most interesting about all of this discussion about trade is that the center-left and lefty economists are not saying, "Wow, we were wrong for so long, and now we need to rethink things," but "This is nothing new, why is anyone surprised?"  

The sub-debate on that side of the spectrum, in fact, is now between the people who can accurately say that they have always seen through the more-trade-is-always-good scam and those who are only recently claiming to have seen it all along.

This conflict is captured in a recent blog post by Tom Palley, who has been working on the left side of the economics profession for his entire career. Palley chides Krugman for "[trying] to walk away from his own contribution as an elite trade economist to the damage done by globalization," pointing out that "Krugman has been a booster of trade and globalization for thirty years: marginally more restrained than other elite economists, but still a booster."  

He argues that "the economics elite is moving to reinvent itself with a combination of minor backpedaling and its own studies that belatedly acknowledge the damage wrought by globalization."

Longtime readers of the Dorf on Law blog might recall a series of posts that I wrote in the spring and summer of 2014 (the last of which is available here, with links back to the other posts available through this post).  

My big point in those posts (most prominently here) was that the elite economists on the center-left, most obviously Krugman and Larry Summers, could readily shape-shift even after having been cheerleaders for policies that led to disasters.

Or, as I quoted a graduate school friend from a conversation in the 1980s: "Look, even if the economy completely tanks, Larry Summers will still be an economics professor at Harvard. And he's intellectually agile enough to try to make lemonade out of lemons (or maybe even lemons out of lemonade), even though he's currently very much embracing the dominant paradigm.  When the deluge comes, he'll come through it just fine."

Palley is thus right to say about the liberal elite group of economists that "[t]here is no professional cost to be paid for the grievous injuries it has helped inflict; no mention is made of the fact that outsider critical economists have long predicted and written about these injuries."  

For people who have long been dismissed as outsider cranks by economists like Krugman, it must be especially galling to hear him saying (probably accurately) that he never actually wrote anything that was as lacking in nuance as one sees in the pro-trade orthodoxy.

The fact is that, on trade as much as on the other Econ 101 issues, the outsiders have proved to be right all along, and the insiders are now claiming not actually to have been wrong.

I thus sympathize with Palley's complaint about Krugman. It truly is infuriating to see such a lack of self-awareness from someone who is so much a part of his profession's establishment. (And Krugman's initial fame was built on his work in international economics, where trade orthodoxy is especially oppressive.)  

In some sense, this exposes the deep corruption of the long-term policy conversation, and it has serious consequences for the economy and our society.

In the immediate moment, however, I am trying to look on the positive side. We finally have people in high places using their megaphones to announce that the case for so-called free trade was always at best oversold. That is progress.

Neil H. Buchanan is an economist and a professor at George Washington University Law School.