Powerless Economics
Why economists are useless, cont'd . . .
The always interesting Branko Milanovic does a number on mainstream economists’ inability to cope with international politics. In other words, their notion of national economic health does not match up with how policy-makers think about relations among adversarial nations, nor how nations act.
I had a glimmer of this myself, some time back, reading A.J.P. Taylor and Niall Ferguson. These are conservative thinkers. In their comparisons of national power between Russia, France, and the U.K., they dealt purely in volumes of iron, coal, etc.
A slightly more sophisticated version of this would be what economists call absolute advantage. If we can produce steel more cheaply than some other country, we are stronger (sic) in steel.
By conventional economic theory, this is totally wrong. Economic power derives from comparative advantage, not absolute advantage. It’s not whether ‘we’ can make steel more cheaply, but whether we can make it more cheaply in terms of some other product. Then it pays for nations to specialize in those tradable goods in which they enjoy comparative or relative advantage.
Specialization goes against the thirst for autarchical economic power, the contemporary version of mercantilism. America first. As Milanovic notes, both the Trump and Biden administrations worried about Chinese advantage in computer chips and took steps to support our domestic manufacturing capacity. In a world where trade is separate from politics, this would make no sense. In a state of competition and especially war, to the contrary, control of the supply of strategic commodities is basic to a nation’s power.
A popular, similar nostrum exploited by both parties is the dopey idea of “energy independence.” OUR oil, etc. The U.S. is a net exporter of oil and gas, thanks to the proliferation of fracking. We don’t need anybody else’s oil, though given transport costs, foreign trade in oil makes it less expensive for U.S. consumers. Japan has done well enough in manufacturing, despite lacking domestic oil production.
There is something to the conventional economic view. Insofar as peaceable relations among nations can be cemented, trade and specialization are good things. A progressive variation is to seek balance in the trade in high value-added (high wage) output, a concern of the labor left and my old outfit, the Economic Policy Institute, and one that Trump had also figured out a long time ago.
Some stray elements of the left and labor used to try and leverage support for manufacturing based on a national defense argument. It went nowhere. EPI used to be the black sheep in this field, back in the 90s, among economists. Now its trade ideas are mainstream. Credit to the founders who had vision: Lester Thurow, Barry Bluestone, Robert Reich, Robert Kuttner, Ray Marshall, and Jeff Faux (corrected from original).
How successful Trump is in pursuing this interest is another matter, since he is an idiot with limited attention span, endless conflicts of personal interest, and fading faculties.