Paul Krugman on tariffs and the trade balance

Here is a long post on those topics, worth a careful read and it contains many good points.  But, Nobel Prize in trade or not, I am not convinced by all of it.  On his first topic, I do not think a Trump administration will give us a pure VAT, rather I think the final outcome (if there is one), will indeed be more like a tax on (some) imports and various subsidies to exports; Jared Bernstein suggests the same.  On the second topic, given that the U.S. dollar is a global reserve currency, I don’t think it has to be the case for model-embedded reasons that “…reduced openness to trade should also inhibit capital flows”, though it is likely the case for broader political economy reasons (if they mess around with your trade, you are more afraid to invest your capital).  Krugman’s claim “…trade deficits are always a temporary phenomenon”, while technically correct, represents an odd, sudden conversion (reconversion?) to Don Boudreauxism, and a return to the kind of 2006 analysis/worries that predicted America would see a dollar crisis.  Yes, temporary along some time horizon.  But is the American trade deficit, which by now has persisted for decades, best and most usefully modeled as something due to flip because of an intertemporal budget constraint?  Maybe.  But maybe not, as that view has performed extremely poorly in predicting the value of the dollar.  (Most of all, it depends on the country, but it’s least likely to be true for America.  And what about “dark matter“?)  On most days, you’ll find more takers on the intertemporal budget constraint approach to macro over at Minnesota, and no I don’t think the “different models for different questions” trope gets one out of this box.  At the macro level, that constraint either kicks in or it doesn’t.  Finally, toward the end of the post there is an overestimate of how much an implied dollar depreciation is likely to persist in the forward rate in a manner that would limit investment from abroad.  For the USD, predicted movements as embedded in the futures or forward rate are generally quite small relative to movements due to “news”; of course the same isn’t always true for Argentina and other disaster-prone countries.

Here are comments from Brad DeLong.


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