Once upon a time in America, whenever an administration spokesman spouted economic nonsense, you could rely on Paul Krugman for a sneer, a blast of outrage, and frequently an imputation of the basest motives. That time ended on approximately January 20, 2009. Today Krugman sleeps at the wheel while administration press spokesman Robert Gibbs spews forth the following:
I think it’s safe to say that for quite some time, when it came to building the solar panels and the wind towers and the wind turbines and a lot of the manufactured equipment for clean energy, we had a number of foreign countries that were doing much better in addressing that demand than we were. And as the President has said often, the type of demand for these components in manufacturing is only going to increase as we seek solutions to our energy problems.
And we have to ask ourselves as a country, are we going to create those jobs and create those components, or are we going to import those components from overseas? The President believes that we have an opportunity to lead the world in this type of manufacturing.
Nobody in the Bush administration ever displayed more economic ignorance, but Krugman was all over those guys every time they came close. Now he lets it slide. So let me do his job for him:
When the domestic demand for a product increases, the law of comparative advantage tells you to import more of it, not less. If it is in fact true that “the type of demand for these components is only going to increase” then American manufacturers might want to start producing them, but American consumers will certainly want to import more of them, and any attempt to circumvent that is a good way to make Americans poorer.
(For those following along in their economics textbooks: The world supply and demand for, say, wind turbines, must be more elastic than the domestic supply and demand, so a demand shift has a smaller effect on the world price than the autarkic domestic price and so must increase the foreign comparative advantage—or decrease the domestic comparative advantage, if any.)
For goodness’s sake—if Barack Obama or Robert Gibbs discovers that he really likes bananas on his Cheerios, is his first thought that he’d better start growing bananas, or is his first thought that he’d better figure out where to buy them? That’s the kind of question Paul Krugman used to ask. I miss him.
And where exactly in the quote you provide is the economic mistake? There doesn’t seem to be an exhortation to slap duties or quotas or any other kind of limitation on imports in this quote (although you may have left out some context). I could read the quote as only an exhortation to domestic companies to start producing. Does that run afoul the same economic ignorance you quote?
If you want bananas on your Cheerios, isn’t the first question you ought to ask is if you’d be better off growing them yourself rather than buying them? For most people, the answer to that question is a resounding ‘no’, but still the question can be reasonably asked. Maybe a few people will realize how little they gain from their current occupation relative to the joy and profit that comes from banana farming. And if they switch jobs, won’t the world be a better place?
To expand on Ben Alexander, I understood that quote as
‘The _world_ will need more wind power, we should provide it..’
T.
Speaking from ignorance here– aren’t you just assuming that supply and demand are in equilibrium? And, just to sort-of sound like I sort-of know what I’m talking about, I’ll note that ‘equilibrium’ and ‘steady-state’ are not at all the same things.
@TjD –
If the world needs more wind, Gibbs and the Obama administration stand ready to oblige.
Ben – as to your last point….I think what Steven is saying is that the global price of bananas will be largely unaffected by Obama’s new craving and therefore there is no new information introduced to the “should I grow bananas myself?” equation.
In other words, what your saying is true that if they switch to a happier job, then we will be better off but the trigger point should not be an increase in global demand of say 3 bananas a day (except on the very very very very margin)
Dave
Ben, i don’t think most economists would disapprove of someone wondering whether or not to grow bananas vs buying them. I think the problem comes into play when a government says we should be doing one activity vs another.
So Robert Gibbs says something and this becomes a snarky slam on Paul Krugman becaues he didn’t write about it? What gives? The universe of things not written about is always going to larger than the universe of things written about. Is it a concern that Krugman’s audience is bigger? Don’t worry, size doesn’t matter.
Don’t know where or why Gibbs said what he said, but his statements raise reasonable considerations. Questions like make vs. buy are always appropriate — Even for a government officials. Especially when it could be a strategic industry at a time when the economy is depressed and R&D spending is down. There are real gains from trade, but there are also benefits in maintaining a degree of local self-sufficiency which is very different than autarky.
Izzydog: how do you defie local ?
In the context of this discussion, national.
Josh: in other words Izzy defines “local” as anything within this particular set of imaginary lines where the economic laws of trade somehow cease to be valid.
I’m sorry but I agree with Steven here. How is the government supposed to know the right amount of producion for a given nation to produce of any given product? How would you feel if uncle Sam told you that you probably want to start growing vananas instead of buying them? You might think that silly no?
Steve,
I think this is the point that TjD was making, but, you wrote:
“When the domestic demand for a product increases, the law of comparative advantage tells you to import more of it, not less.”
But in this scenario, isn’t it *world* demand that’s increasing, not just domestic demand?
And, can’t you have a model where if world demand increases, it makes sense to start making more of it rather than importing it?
And what about learn by doing?
Where did Prof Krugman go?
I can’t make any sense of how your economic argument in the latter part of the post is supposed to counter the quotation in the earlier part of the post.
Dave writes:
“Josh: in other words Izzy defines “local” as anything within this particular set of imaginary lines where the economic laws of trade somehow cease to be valid.”
Dave, that’s a really good point. When I go walking around I certainly never trip over anything called a border. I wish I had thought of it that way before. When you get out of the dorms and go to interview for a job, you should be sure to let your potential employer know this example. I’m quite sure he/she would be very appreciative to learn how you think. Good stuff.
The whole point is that any given country’s government probably does not know the “right” or “optimal” amount for it’s given country to produce… Whether it’s the government of NYC, birmimngham, south Carolina, USA, France, or the world gov
Izzy: way to go ignoring the point about economic laws being suspended by going off on a tangent. I’ll be sure to tick your name as “marginally overqualified” when I fill out the employer feedback card next time you serve me at the drive thru.
Josh,
Raising banannas sounds silly because it was an example designed to raise ire, not promote serious thought.
Off the top of my head, I can think of at least 3 potentially important ways in which development of wind power differs from the raising of banannas.
1) The good ole USA may just have a source of engineering expertise that might be really good at developing wind.
2) It might be a way to cut down on green house gas emissions.
3) It might be in our long term strategic interest to get off foreign oil dependence.
I’m sure there are others. As to the question about governments not knowing optimal production amounts, I would generally agree in normal circumstances. Unfortunately, these are not normal circumstances and in times like these, the standard macro econ models come up wanted. The Press Secretary’s trial balloon was really about jobs.
During recessions, there is a big rise in unemployment. In thinking about the labor market, workers supply labor and employers demand labor. The price of the labor is how much people get paid. Wage rates shift, standard macro theory tells us, until the number of people who want to work at that wage level just equals the number of employers who will hire people at that wage rate. We then have that magical circumstance for economists, equilibrium.
If you study recessions, however, you start to get queasy about labor markets and equilibrium. What happens quite regularly is that wage rates don’t fall. Instead, more and more people get fired, and unemployment climbs, in many cases for over a year.
Times like these, maybe labor markets will eventually clear, (evidence this is actually true is very scant at best). But even if it were, the time it would take is too long for most households to endure. Add in the complication that China has fixed the RMB artifically low relative to the dollar, and even more jobs get sucked out of the US and over to China.
This is why governments get involved.
Wage rates typically don’t fall in a recession because of some combination of government pressure/threats, minimum wages, union strongholds with politicians in their back pockets and labour legislation promoting rigidity.
ie BECAUSE government get involved.
But izzy… Regarding your points…reducing geenhouse gases should be a separate issue from trying to influence what your particular country actually produces. We could still turn to wind Or solarand perhpaps have the equipment Manufactured more producively Mexico or china. Why pay more? On your 3rd point if ones goal is to gain oil independence, again why pay more if someone else can make he equipment more cheaply? On your first point, if we have such a great engineering corps, then perhaps we would be the ones producing them…but hiopefilly the reason is because we give the best deal and not bc we’re Americans per se.
I would love to see a politician express the understanding that the creation of jobs is the principle cost of most programs, and not a benefit. (Labor is a scarce resource.)
If Obama and Gibbs decided they liked bananas for breakfast, wouldn’t it make sense that a farmer would consider whether he can grow and sell bananas to them at a profit? Are you saying that they shouldn’t? How does that help?
Incidentally, things like wind turbines are exactly the kind of things the USA is good at making. We make most of the aircraft in the sky. Now just cement one in place and hook the prop up to an alternator.
I just don’t get it. Why would it be bad for America if American companies began supplying the increasing demand for green-tech?
Steve L.,
Why is there not an Office of Landsburg in every presidential administration checking this stuff before it gets out the mouth, or rather, the door where some guy like you is waiting to shoot it down?
As to wind power, as my Mexican friends say: Soplas!
Gibbs does not say that imports of clean energy technology should be reduced, restrained or otherwise limited to protect American producers. He simply says that American companies should be more aggressive in competing in the growing market for clean energy technology. This might well result in both increased imports AND increased domestic consumption of U.S.-produced technology as the two share the growth in U.S. demand.
Moreover, Steven’s argument ignores the fact that foreign demand for clean energy technology is also growing and that Ameerican producers may win a portion of this market as well, further contributing to job growth and the overall expansion of American wealth.
And whose to say where the long-term competitive advantage lies in this market? This technology is not static, but advancing very rapidly. Isn’t in at least plausible that the U.S. has a comparative advantage in technological innovation that could offset the foreign producers’ labor cost and economies of scale advantages. In fact, if U.S. producers successfully exploit an innovation advantage and expand their foreign and domestic markets, the economies of scale advantages of the foreign producer will shrink and perhaps even reverse.
Finally, Gibbs’ statement is probably as much (or more) a political statement as an economic statement. It not only encourages U.S. producers to compete more aggressively in this market but it also implicitly supports the administration’s spending and tax proposals before Congress encouraging the development and expanded use of clean energy technology.
Ah, you may say, that’s where the objection lies. Government intervention in the economy distorts the market signals that ensure economic efficiency. Too late. The energy markets are already hugely distorted by multiple forms of government support for oil, natural gas, coal and nuclear, from direct financial aid programs to tax breaks to the enormous sums we spend on the military to protect our access to Middle Eastern oil. (Not to mention the hidden subsidy inherent in the government’s failure to limit fossil fuel emissions, thereby allowing producers to externalize these costs to the rest of us.) This all amounts to many multiples of the modest support provided to clean energy.
So before you target government support for clean energy, go after the much bigger target of support for traditional energy technologies.
OMG, I cannot stop laughing. thank you
paulroscelli-
If you have ever studied geometry, you remember that by a course of reasoning, Euclid proves that all the angles in a triangle are equal to two right angles. Euclid has shown you how to work it out. Now, if you undertake to disprove that proposition, and to show that it is erroneous, would you prove it to be false by calling Euclid a liar? Political Debates Between Lincoln and Judge Douglas. Fourth Joint Debate at Charleston, 1858.
Well said, Paulo. Spoken like a true Caton ideologue. Brain freeze in Canada?
Benkyou Burito makes an excellent point. Come on, PaulRoscelli. Engage in some substantive discussion instead of the dismissive one-shot quips that charaterize your blog contributions across the web. But then what would one expect from a rabid Palin supporter, climate change denier, anti-Paul Krugman ideologue? Not much in the way of intellectual content. Damn, you’re pretty arrogant for a community college prof.
First, yes it should be a snarky comment because, as the author suggests Krugman NEVER let these sorts of idiotic policies go uncommented on when Bush was in office (and good for him!). It’s the hypocrisy that Steven objects too.
Second, are you guys you missed econ 101 kidding? Perhaps the comparative advantage discussion was too nuanced? Just think about the opportunity cost idea instead. The increase in demand doesn’t change the opportunity cost we face.
Guess i am just too dense to understand you. You really showed me, you and the sophists would get along great. Try rereading his piece instead of spending your time tying yourself into knots
thanks
pr
paul- “The increase in demand doesn’t change the opportunity cost we face.” I’m trying to discern the value of this statement. Of course the opportunity cost remains the same, but as changes in public opinion, and the supply curve of substitute goods change, the return on that opportunity cost can change enough to warrant additional production of green tech. Are you really a college teacher? Please remember that the cost of producing a product doesn’t determine whether it should be built. iPods would cost the same to produce (in the same quantity) even if nobody wanted them. It is the demand for the product and the price they can get for it that decides whether Apple is going to make them. What school do you teach at? Are they hiring? They should be.
OK, Paul, we’ll talk about opportunity cost, though I see that you continue to say nothing of substance. I have to assume your point is that the opportunity cost from producing clean energy technology is greater than the opportunity cost from producing some other product currently being produced from which scarce resources would have to be diverted, and that as a result, economic efficiency would be sacrified.
Of course opportunity costs are not restricted to economic value alone, and it’s entirely possible that higher non-economic value from production of green energy technology would be higher than that of whatever product is affected by the reallocation of resources away from its production to green technology, thereby reducing or eliminating the (alleged) difference in the economic opportunity costs of the current allocation of resources.
But for the sake of argument, let’s stick to economic value alone. The point of my first post is that even if the current allocation of resources is more efficient in today’s market, the expansion of American production of green technology (to meet increased foreign and domestic demand) is likely to alter the difference in the opportunity costs of green technology and whatever product is affected by the reallocation of resources to green technology. I’m saying this would occur because the absolute cost of producing green technology would fall as production increased as a result of economies of scale and the innovation advantage of US producers.
Now, it’s been many years since my last economics course, but humor me and tell me what’s wrong with this argument. AAnd just saying it’s sophistry doesn’t cut it.
Paulrascali, have you abandoned the field?