Do I Agree with Paul Krugman on Trade?

Not that it would be so terrible, given that Paul Krugman is clearly a fairly brilliant economist.  But over the past few years, as he has become more and more of a shrill political voice, and less and less of a measured economic voice, I’ve found myself disagreeing with him more often than not.

First, hat’s off to Google for sharing their visiting scholar program online.  I found this video, from December 14th, on Youtube this week.  It’s a great talk, from Paul Krugman, about the causal elements behind the current housing liquidity crunch.  (It’s over 1 hour, including Q&A.  And yes, I listened to the whole thing.)

But that’s about housing, not trade.  However, hearing Krugman speak live (vs. his normal Op-Ed tirades), reminded me of how intelligent and thoughtful he can be.

Interestingly, in the same week, I caught this piece from his NY Time blog (Dec 28, 2007).   It’s about the current references to his original work on global trade, which is where I remember first seeing references to Krugman’s work.  He references this blog post, which discusses some of Krugman’s original positions on trade in some detail.

Of course, Krugman wrote a full Op-Ed on trade in the December 28 edition of the New York Times.  It’s available online here.  Strangely, it’s an extremely rational piece, and it makes me wonder if his politics are moderating a bit as we get closer to the 2008 election.

Some paragraphs worth sharing:

…recently we crossed an important watershed: we now import more manufactured goods from the third world than from other advanced economies. That is, a majority of our industrial trade is now with countries that are much poorer than we are and that pay their workers much lower wages.

For the world economy as a whole — and especially for poorer nations — growing trade between high-wage and low-wage countries is a very good thing. Above all, it offers backward economies their best hope of moving up the income ladder.

But for American workers the story is much less positive. In fact, it’s hard to avoid the conclusion that growing U.S. trade with third world countries reduces the real wages of many and perhaps most workers in this country. And that reality makes the politics of trade very difficult.

This is perhaps one of the most fairly balanced assessments I’ve seen on free-trade recently.  The macro-economics behind the benefits of free-trade between nations is overwhelmingly positive, in terms of the aggregate economic gains.   But I’ve learned to be very suspicious of arguments that persist over long periods of time, between well-educated people, on topics that theoretically should be very simple.  If they really were that simple, you’d expect that over time, most well-educated people would resolve the discussion and move on.

The oscillation between free trade and protectionism doesn’t surprise me historically at a political level – it’s pretty easy to understand why the steel worker, seeing his wages drop and/or his local plant disappear, wouldn’t push politically towards protectionism.  But there has to be something more to this argument.  The macro-economics of this situation are clear: cheaper foreign steel means less money for domestic steel makers, but cheaper steel for everyone else in the country.  That may not be much consolation for the steel worker, but it is the answer on why free trade in the aggregate, tends to benefit the country more than it hurts it.

(No, I’m not going to touch the recent China poisoned toys issue.  Yes, it’s obvious that we need some amount of regulation to prevent poisoned toothpaste and lead-painted toys, etc.)

More from Krugman’s article:

All this is textbook international economics: contrary to what people sometimes assert, economic theory says that free trade normally makes a country richer, but it doesn’t say that it’s normally good for everyone. Still, when the effects of third-world exports on U.S. wages first became an issue in the 1990s, a number of economists — myself included — looked at the data and concluded that any negative effects on U.S. wages were modest.

The trouble now is that these effects may no longer be as modest as they were, because imports of manufactured goods from the third world have grown dramatically — from just 2.5 percent of G.D.P. in 1990 to 6 percent in 2006.

And the biggest growth in imports has come from countries with very low wages. The original “newly industrializing economies” exporting manufactured goods — South Korea, Taiwan, Hong Kong and Singapore — paid wages that were about 25 percent of U.S. levels in 1990. Since then, however, the sources of our imports have shifted to Mexico, where wages are only 11 percent of the U.S. level, and China, where they’re only about 3 percent or 4 percent.

This is interesting.  Theoretically, it has always been roughly assumed that the high wage countries compensate for their wages, somewhat, with high productivity.  More value created per worker, usually due to heavy investment in education, capital, infrastructure, and low-risk environments.  But it’s possible that while mostly true, that logic reaches it’s limit at some point.  If labor in some countries is priced at 3-11% of US costs, and our trade shifts meaningfully in that direction, then that becomes a competitive depression on wages.

Once again, the economics are fairly clear that in the aggregate, those lower wages should mean cheaper goods for everyone.  But if a large percentage of our population faces this pressure all at once, it could lead to some extremely negative adjustment periods for not just those people, but for the entire economy.  This, in fact, is a potential explanation for some of the income disparity we’ve been seeing this decade as trade has shifted to China & Mexico.

One flaw I can see here already, potentially, is that a ever-declining percentage of our workforce is in manufacturing.  The last number I recall seeing was as low as 19%.  (please comment if I’m mistaken here). It’s tough to get to “most workers in this country” from there.

Now here is the part that scares me a bit – Paul Krugman’s conclusion:

So am I arguing for protectionism? No. Those who think that globalization is always and everywhere a bad thing are wrong. On the contrary, keeping world markets relatively open is crucial to the hopes of billions of people.

But I am arguing for an end to the finger-wagging, the accusation either of not understanding economics or of kowtowing to special interests that tends to be the editorial response to politicians who express skepticism about the benefits of free-trade agreements.

It’s often claimed that limits on trade benefit only a small number of Americans, while hurting the vast majority. That’s still true of things like the import quota on sugar. But when it comes to manufactured goods, it’s at least arguable that the reverse is true. The highly educated workers who clearly benefit from growing trade with third-world economies are a minority, greatly outnumbered by those who probably lose.

As I said, I’m not a protectionist. For the sake of the world as a whole, I hope that we respond to the trouble with trade not by shutting trade down, but by doing things like strengthening the social safety net. But those who are worried about trade have a point, and deserve some respect.

He’s right, the critics have a point.

Too often, opponents to free trade are kowtowing to special interests or misunderstanding economics.  Despite that fact, however, it’s clear that there are some significant macro-economic impacts from free trade that can not be brushed away, particularly around wage pressure and the percentage of the population affected.

I haven’t had time to formulate my own theories on how to weave through this complexity, but chances are that there is some analysis that could better quantify the impact of wage pressure of a given trade relationship.  That would give some guidance about when to slow down the pace of opening markets to phase in the pressures rather than having them catastrophically adjust over relatively small time periods.

2008: The Year Apple Becomes a Studio?

It’s the end of the year, and this is generally the time when journalists will put out sensationalist headlines about their predictions for the upcoming year, decade, millennium, etc.

Well, I’m not a journalist.  But I do have a blog.  So let me indulge here in at least one crazy projection that might actually make strategic sense.

Is 2008 the year that Apple decides to become a studio?

This might sound far-fetched.  After all, Apple is a technology company, not an entertainment company.  But I’ll argue that the same forces that pulled HBO into the innovative strategy of creating original content, now being emulated by every cable network from Showtime to FX, could also apply extremely well to Apple.

Let’s walk through this carefully.

First, can Apple move in the direction of producing original content? 

The answer here is clearly yes.  Apple now has the most important asset in entertainment – wide-spread, inexpensive distribution.  Apple has tens of millions of iTunes customers who have proven themselves more than willing to download content, even at a price.

Right now, roughly 2/3 of the cost of Apple’s service is actually royalty payments to the content providers.  If Apple produced their own content, those costs are replaced with actual production costs. HBO began their original content push with documentaries and short, 1/2 hour episodic comedies.

Apple currently has $16B in cash, and a market cap of $170B.  HBO put $30M into its 2-season run of Rome.  Apple could easily afford those budgets, and offset their costs with free distribution through iTunes.   The question is how much is a premium content brand worth?  The answer is billions, and Apple has the capital to invest against that opportunity.

Second, should Apple become a studio?

I’ll argue yes here, but with a number of caveats.

First, like HBO, they’ll have to walk a tight line between the need to license content from other major studios, and their own competitive efforts.  HBO managed to use original content to differentiate their offering, and Apple could do the same thing with iTunes.  HBO established itself as a premium brand and experience with their content and series, and Apple has similar brand elements.  HBO, however, had initial success with licensing movies from most studios before moving to original content – Apple right now is only tight with Disney.

Second, Apple has to be careful with pricing.  If their content is free, or cheaply priced, it might upset the difficult negotiations Apple continues to have around flat pricing on both the music and video sides.  You could argue that Apple would offer studios the same deal – cut your licensing fee and we’ll cut the price, but it’s a problematic area for Apple given their position on pricing.

Third, Apple has to watch out for their broad demographic.  HBO has a particular demographic – adult, high income, educated.  They used their platform (paid cable, commercial free) to produce content that better met the needs of that audience.  iTunes is completely mass market at this point, so it’s unclear what type of content Apple would build – maybe they would need multiple “studios” to address different markets.

Despite those caveats, the advantages of leveraging their lead with the iTunes distribution channel into a premium content play is extremely appealing, economically.  Just like in-house brands are economically too valuable to be ignored for a retailer, the huge fees paid to the content houses for video are extremely attractive when you own the distribution channel.

A quicker path for Apple would be to potentially buy HBO off of the ailing Time Warner, or possibly even NBC from GE.  That last option would have the added benefit of letting Steve relieve the current NBC executive staff of their current, difficult salaried positions.  🙂

Like the iPod/iTunes combination, unique Apple content that can only be accessed through iTunes could potentially boost the value of iTunes, and boost the potential success of the content by special access to the iTunes channel.

So, file this away in your bookmarks for crazy Apple predictions.  We’ll see what happens.

No More Godless Presidential Dollar Coins, 6 New “State” Quarters for 2009

Today, the White House announced that it has signed into law H.R. 2764, with $555 Billion in total spending, and which includes over $10 Billion in earmarks. That part is not really good news. You can read the text of the bill, if you want to, here.

However, as reported today, the bill includes two key coin-collecting gems.

6 More State Quarters. Yes, you read that right. Just because we ran out of states does not mean that the US Government will let the best new coin series end without a fight. Six more coins will debut in 2009, highlighting 6 great territories that aren’t states, but still deserve to be celebrated with two bits:

  1. The District of Columbia
  2. The Commonwealth of Puerto Rico
  3. Guam
  4. American Samoa
  5. The United States Virgin Islands
  6. The Commonwealth of the Northern Mariana Islands

“…Coins minted under this subsection honoring the District of Columbia and each of the territories shall be issued in equal sequential intervals during 2009 in the following order: the District of Columbia, the Commonwealth of Puerto Rico, Guam, American Samoa, the United States Virgin Islands, and the Commonwealth of the Northern Mariana Islands.”

The US Mint Press Release is here. Designs for these coins have not been published yet, but I will post them here when they are ready. Note that this is 6 coins for 2009, not the normal 5 per year that have marked the program to date. Without this bill, the quarter would have returned to its old design in 2009, since Hawaii, our 50th state, gets its own quarter at the tail end of 2008.

No More Godless Presidential Dollar Coins. Or at least, they’ll be harder to come by. This bill also includes text that mandates that the text “In God We Trust” move off the edge of the coin, and to one of the faces. Due to space considerations, this will likely mean moving to the face of the coin with the President.The text was moved to the edge, of course, to give more space on the face of the coin for the Presidential image. But, with the release of the first coin, there was a large error rate with the Philidelphia mint version that led to the creation of “godless dollars“, with no edge text. Despite the fact that this problem has not been repeated with the 3 subsequent coins for John Adams, Thomas Jefferson, and James Madison, a cottage industry has sprung up of people sanding the text off the edge of dollar coins.

In any case, the bill does not say when this change will be made, but that it “shall be put into effect by the Secretary of the Treasury as soon as is practicable after the date of enactment of this Act.”

The full coverage from is here and here.

Two thoughts on this news:

  1. Holy 2009 Proof Set, Batman. Let’s count up the coins for the 2009 proof set:

    That’s a total of 18 coins, and that’s not including the “P” and “D” versions, or any special proof varieties, like the copper-versions of the new pennies. That is going to be one fat proof set, likely 4 lens, minimum, at a pretty steep cost.  (Note: based on comments, I’ve correct the lines on the Native American dollar coins to correctly reflect their mintage at one per year, on the back of Sacajawea dollars.)

  2. What price the original Presidential dollar coins? The original Presidential dollar coins may now become more valuable, as they may end up the only “edge-incused” US coins ever. Not sure how this will affect prices in the short term, but now that this is confirmed, it’s an interesting side effect.

After running this blog for almost 18 months, I’m realizing that it’s confusing for people to have to remember a URL like “” to find this blog.  It’s my personal blog, and people expect to find it by typing “” into their browsers.

I haven’t decided to 86 yet, but as of today, this blog is going to start being served off:

The Psychohistory title and URLs will remain, as well.