October 12, 2003

Let's Take Steel First...

I argued that one case in policy debate in which it is clearly permissible--indeed desirable, if not morally required--to attack someone's motives is when they throw overboard an entire career's worth of intellectual commitments and arguments. When you find people enthusiastically adopting positions that a couple of years ago they would have dismissed as specious lies--and all to keep their White House mess privileges for a few more months...

There have been some requests for more documentation of my example of this phenomenon--former Assistant to the President for Economic Policy Lawrence Lindsey. My quote from him:

Let's take steel first. I am not telling anything here that wasn't public. There were two legitimate economic points.... One argument is that tariffs are never good. I certainly taught that in my economics class. The other argument [represented by Zoellick and Evans] is a little bit more subtle. The world has excess capacity in steel. In any market where that is the case, price is going to be at marginal cost, and marginal cost is going to be below long-run average total cost.... Either you say, "OK, we'll let our firms exit, and we'll let other countries pick up [the business], and we'll just import our steel." Or you say, "Well, that's not a very tenable long-run strategy for any country, because you are effectively letting others pick which industries are going to prevail." Do you unilaterally disarm, or do you use laws that are now on the books?.... There is a sound economic case for doing what we did.

is from an extended interview that the National Journal did with Lawrence Lindsey, published on July 27, 2002, reprinted below.


07-27-2002: WHITE HOUSE: 'The President Has Confidence in Me'

It is one of Washington's hoariest rituals. Things start going wrong, and
soon a front-page story questioning the ability of a key aide to the
president appears. Sometimes these stories are the product of scheming
careerists, ideological opponents, or simply those hoping to deflect blame
from the president. The press plays its role, of course-outdated
complaints and vague charges can get an airing when the times seem to call
for someone to take a hit.

In the gathering storm over the economy-the biggest political challenge of the Bush presidency-the top members of the president's economic team are in the crosswind. Stories in major newspapers and news magazines have revived old questions about the judgment of Treasury Secretary Paul H. O'Neill, the people skills of Office of Management and Budget Director Mitchell E. Daniels Jr., and the impartiality of Securities & Exchange Commission Chairman Harvey Pitt.

On the question of who is coordinating the White House response to the market turmoil, a number of these stories have criticized Larry Lindsey, director of the president's National Economic Council. "The White House seems a step behind in responding" to worsening scandals and shaky economic confidence, said one Republican congressional staffer, who is becoming alarmed about the party's prospects in November.

A former Reagan White House wunderkind, Lindsey later served on the Federal Reserve Board and was the dominant economic adviser during Bush's presidential campaign. He earned credit for designing and helping implement Bush's big tax cut, but since then his influence seems to have fallen sharply. By most accounts, politics has dominated many of the president's economic policy decisions in the past year, such as his decisions to embrace an expensive revival of agricultural subsidies and to endorse trade protection for the steel industry. When some of Lindsey's responsibilities were shifted last year to White House Deputy Chief of Staff Joshua Bolten, a few anonymous sources blamed Lindsey's shortcomings as a manager.

On July 24, with one eye on a much-needed stock market rally, Lindsey spoke with National Journal staff correspondents John Maggs and Alexis Simendinger. Reports of his decline, he said, were news to him.

NJ: The public seems to have the impression that the president's economic team is not functioning very well. Why is that?

Lindsey: I don't know. You'll have to ask the people making the assertion. I can't imagine. We all get together on a regular basis. Every Monday we have lunch with the Treasury secretary. Every Wednesday and Friday we meet right here [in Lindsey's West Wing Office]. I think we get together very well-get along very well.

NJ: Do you think the economic team has done a good job of communicating the economic policy of the administration? Is there room for improvement?

Lindsey: Oh, I'm sure there is always improvement possible.

NJ: Does there need to be improvement?

Lindsey: I think that our goal here is to provide the president the best advice possible, to anticipate events, and to have policies in place for those events. And I think we did that.

In the case of problems in the market, here's a quote from President Bush [when he was running for president] on December 1, 1999. This was when everything was going great. [Reading] "Sometimes economists are wrong. I can remember recoveries that were supposed to end but didn't, recessions that weren't supposed to happen but did. I hope for continued growth, but it is not guaranteed. The president must work for the best case and prepare for the worst."

That was a pretty courageous thing to say in December 1999. The president was ahead of the curve. He was out there willing to say things that were not popular at the time, because he thought it was the right thing to do.

NJ: Do you think the criticism of the economic team, whether it is Secretary O'Neill or Mitch Daniels or you, could be harmful to the administration or the president if it contributes to a lack of confidence in the government? Does it concern you?

Lindsey: How can I answer that question? I don't know. Ask the people who are making the accusation. I've been in Washington, unfortunately, for 20 years. For better or for worse, this is the way it happens, this is the game, this is part of politics. It is not the most edifying part of politics. I don't enjoy either doing it to others or having it done to me. I'd rather focus on policy. That's what we're focusing on.

NJ: In a recent New York Times story you were quoted as saying that you had the president's confidence, "as far as I know." Some saw that as a signal that you didn't know whether you have the president's confidence. Did you mean that?

Lindsey: I have no doubt that I have the president's confidence. It is just that I don't like to be presumptive when it comes to the president of the United States.

NJ: In an earlier interview, you summed up the NEC's role as "bringing economic arguments to bear on the policy process." Recently, I think, there is an impression that in several high-profile policy debates-on steel trade and agriculture, for example-economics was not a big part of the debate, and politics was the main consideration. Is that true?

Lindsey: Let's take steel first. I am not telling anything here that wasn't public. There were two legitimate economic points of view within the economic team. One that [U.S. Trade Representative Robert] Zoellick and [Commerce] Secretary [Donald L.] Evans put forward. Others, like Glenn Hubbard [chairman of the Council of Economic Advisers], certainly have a different view. One argument is that tariffs are never good. I certainly taught that in my economics class. The other argument [represented by Zoellick and Evans] is a little bit more subtle. The world has excess capacity in steel. In any market where that is the case, price is going to be at marginal cost, and marginal cost is going to be below long-run average total cost. And that is the method by which firms lose money and exit the market.

But this is a global issue. Either you say, "OK, we'll let our firms exit, and we'll let other countries pick up [the business], and we'll just import our steel." Or you say, "Well, that's not a very tenable long-run strategy for any country, because you are effectively letting others pick which industries are going to prevail." Do you unilaterally disarm, or do you use laws that are now on the books, that are on every country's books, that are consistent with [international trade rules] to challenge that process? I can make a case for either one of those. There is a sound economic case for doing what we did.

NJ: So economics was a big part of that argument. What about the big farm bill [which increased agricultural subsidies]? Did economics go into that?

Lindsey: Absolutely. With the bill that passed the Senate, we had three economic objectives: The first was to keep the overall cost consistent with the budget resolution. On that score, we reduced the price of the Senate bill by 29 percent. By any objective standard, cutting 29 percent is a victory. Our second objective was to have a bill that was consistent with [international trade] rules. We have a bill that is just consistent with those rules. The Senate bill was totally inconsistent with trade rules. The third economic objective was to avoid going back to the bad old days of permanent stockpiles and acreage allocation and all the rest. And this bill does not do this; it does not fundamentally change the basis for agriculture policy that was set up in the [1996] Freedom to Farm Act. Now, do I think the ag bill was a perfect bill? No, there are onion subsidies in the bill. I, personally, would never make the case publicly that onion subsidies are a good idea. I'll probably hear from a congressman whose district grows onions, but I don't think onion subsidies are a good idea.

NJ: Are any agricultural subsidies a good idea?

Lindsey: I think that over time-and this is administration policy-the right approach is to go to zero. But this is very much like the steel answer. In a world in which the European Union has a $60 billion agricultural budget, and Japan, which is less than half our population, has a $30 billion budget, for America to put up $19 billion may not be perfect, but we are the least of all. And what we have to do is convince the rest of the world that free trade in agriculture is the right thing to do. But no one believes that we will achieve that through unilateral disarmament.

NJ: But there is a proportion of the public that believes those decisions were made purely on politics and not based on economic principles. So your advocacy of those decisions on economic grounds failed. It has not been embraced, even by the president's supporters. So is that a problem when you, as NEC director, cannot articulate effectively the economic arguments?

Lindsey: Well, I have given the speech I just gave. I have answered this question a hundred times in public. I have talked to reporters. It is not that the arguments haven't been made. Now, maybe what I've just said hasn't been persuasive.

NJ: Does that bother you, that, as much as the White House tries to defend this on economic grounds, it still gets portrayed as politically motivated?

Lindsey: My job is to present the president of the United States with the best economic advice we can get. That's the job, and I think we are doing that. I think we gave a close eye to the two cases you are talking about. I think we did that in a timely fashion; I think we were ahead of the curve on pensions and corporate governance. Whatever it may be, we were ahead of the curve, that's what was important.

NJ: There has been some suggestion that a lack of confidence in the president's economic team may have contributed to the recent depreciation of the dollar. Is it true?

Linsdey: Oh, I don't think so. We could say the same thing about the markets, but the European markets are down much more than the American markets. Is that our fault? I don't know.

NJ: What is the best way to describe the administration's dollar policy?

Lindsey: First of all, the secretary of the Treasury is the person who says this, and I will reiterate what he has said. That we believe in a strong dollar. Before I came into the administration, I am on the record defining a strong dollar in an article for International Economy magazine. A strong-dollar policy involves three things. First, it involves not doing what the Clinton administration did in 1993, and that is talking down the dollar. Deliberate devaluation is not something that should be tried on the world's reserve currency. Second, a strong dollar means that the purchasing power of the dollar must be preserved, and that means supporting an anti-inflation policy by the Federal Reserve. Third, a strong-dollar policy means that we should make America the premier place in the world in which to invest. And I think we are pursuing policies which do that.

NJ: So are people wrong when they say that the Bush administration has sent confusing signals on the dollar?

Lindsey: I don't think there is any doubt what our dollar policy is.

NJ: It was reported last fall that there were widespread concerns in the White House about your managerial ability. And it was also widely reported that some of your responsibilities were shifted elsewhere. Was this accurate? Was there some change in your responsibilities?

Lindsey: No, I don't think there was any change. Now, after 9/11, there was a lot of overlap between security, economic, and domestic issues. And there was also a greatly enhanced premium on the president's time. So there was much more coordination of what we call "policy time" on the president's schedule. I thought it was essential. The president had a lot of information, a lot of issues he had to deal with. And I thought it was very appropriate.

NJ: It didn't have anything to do with you personally?

Lindsey: No, not as far as I know. Oh, wait-[laughter]

NJ: There goes that phrase again.

Lindsey: Look, I'm the wrong person to ask. You can ask Josh [Bolten, deputy White House chief of staff]. But it happened right after 9/11, and I think it was because the president's time was scarcer. Now we're back in a pre-9/11 policy mode. The president is a very busy man, but we do have policy time two or three times a week.

NJ: You have walk-in privileges?

Lindsey: I need to see him, I can walk in.

NJ: How often do you see him in a week?

Lindsey: For substantive meetings, the average is about three, it might be four.

NJ: This past week, you have been in the midst of a Washington ritual-the front-page story in which someone questions your influence and relevance in the administration. How does that make you feel? Does it just roll off your back?

Lindsey: I wish I had the time to read the papers. Maybe I don't wish I had the time to read the papers. This is the fourth administration that I've been involved with. For better or worse, this is just the way it is.

NJ: Do you have any plans to leave the administration after the elections?

Lindsey: [Laughing] After 2008? I have no idea. I have no idea what I'm going to do. My wife wants me home, I'll be frank. My pocketbook wants me out of here, but you can ask anyone [in the White House] that question and you would get the same answer. My kids sure want me home.

NJ: Is it a good time to accelerate the president's tax cut?

Lindsey: I don't know. The president proposed that on October 1 last year. I think it would have been a good idea if the Senate [had] passed it. Business investment planning is done usually at the end of November, and if we had gotten it to go through at that time, I think we would have had a better investment climate. So I do think that was unfortunate.

NJ: After a speech about corporate excesses and the president's proposed remedies, it was reported on CBS's MarketWatch on June 4 that you said President Bush's support for SEC enforcement and rule-making implied that legislation was unnecessary. By July 9, the president went beyond his 10-point plan and backed legislation on corporate responsibility, as did you. Was there a change there?

Lindsey: I don't think I was ever quoted [that way], because the president proposed legislation on this. Remember, the president proposed legislation on this back in March [Bush's 10-point speech, March 7].

NJ: You would recommend that the president sign the Sarbanes corporate responsibility bill?

Lindsey: Of course. It is important that we get legislation done, and this is the legislation.

NJ: What about other tax cuts? The Washington Post reported you were pushing for a tax cut on new investments in the stock market. How about that?

Lindsey: I don't read the papers. You're asking me to scoop the president.

NJ: Well, you've only got a few weeks before Congress departs.

Lindsey: That's a good thing, not a bad thing.

NJ: The New York Times story, the one you didn't read, questions your relevance. Are you still relevant?

Lindsey: Am I still relevant? I don't even think about those things. I'm here to do a job; I think I'm doing that job; the president has confidence in me, that's all that matters.

NJ: There has been some controversy about the president's comments on the stock market. What is the benefit of having the president speak out on markets?

Linsdey: I don't think the purpose is a 10-minute bang. The purpose is for the president to lay out, consistently, what his views are. And I think he's doing that. The president should speak honestly and candidly, and I think he's doing that. The great thing about this president is, he doesn't try and pull the wool over anyone's eyes; he doesn't have any agenda. He's a very up-front and candid guy. That's why we've survived some tough times in the last 12 months. I think the most important thing in a crisis-9/11, economic crisis, whatever-is to have a leader you can trust. That's why I signed on with him in 1998.

NJ: Republicans in the past were very supportive of a balanced-budget amendment. Would you be in favor of that now, or concerned that promoting that would be contradictory?

Lindsey: Well, I think the kind of balanced-budget amendment that was talked about was one that allowed for a lot of flexibility: There may be exceptions for war; an exception that is sensitive to the economic cycle; a balanced budget on a full-employment basis.

NJ: So that's still a good thing?

Lindsey: I think appropriate fiscal policy is a good thing.

John Maggs and Alexis Simendinger National Journal
Posted by DeLong at October 12, 2003 04:28 PM | TrackBack

Comments

Presumptuous is, I think, what he doesn't want to be.

Not terribly coherent he's apparently willing to cop to.

Posted by: julia on October 12, 2003 10:20 PM

Well, there are two possible reactions to Lindsey's flipflop. One is to cry, "Hypocrite!", which apparently is BDL's reaction. Another would be to assume good motives and try to understand it and maybe even learn something from it. Perhaps, just perhaps, here's a case of an honest man who believed in an economic dogma who, when confronted with the unacceptable real-world consequences of that dogma, backed away. Perhaps, just perhaps, unrestricted free-trade is not an unrestricted good. One would hope that, if BDL is entrusted with power similar to Lindsey in a Democratic Administration, he would be able to look at issues with a similar open mind - rather than reasoning straight from macro texts.

Posted by: Andrew Boucher on October 13, 2003 04:10 AM

Even this interview with Lindsey shows that staying on the political message is the virtue and expressing one's honest view is the vice. Amazing.

Posted by: Harold McClure on October 13, 2003 06:34 AM

What the unions want and what steel needs is help with the health benefits promised to retired employees. The situation points to the folly of both unions and corporations for locking in defined benefit programs. They don't work if the industry becomes unhealthy. This is a looming crisis but picking up some health care costs is anathema to this administration.

Because of their ideology, they refused to use a rational policy toward steel- helping out with health care costs. Instead, they chose steel tariffs. Of course the steel dinosaurs with the heaviest health care cost burden are losing out anyway despite the tariffs because they cannot compete with the more efficient domestic mini-mils.

Tariffs have driven up the price of domestic steel. Steel parts manufacturers are reducing the amount of steel in their parts and substituting alternatives to steel such as plastic and concrete that become more affordable as steel prices go up. Steel parts manufacturing is less competitive and is losing jobs to foreign manufacturers with access to cheap steel. Since there is no tariff on the manufactured parts this is killing domestic manufacturers.

As a result, there is little net gain in domestic steel consumption even though steel imports have dropped. Eventually, high domestic steel prices will decrease domestic steel consumption below levels seen before imposition of the tariffs.

The very same results occurred only worse with the steel tariffs back in the early 70s. Faced with higher steel prices, the auto makers cut the amount of steel in their low end products giving us such rust bucket gems as the Ford Pinto and Chevy Vega. Their Japanese competitors with access to cheap steel suddenly found themselves able to produce superior automobiles for less. The steel tariffs let competitors get a foot in the door and changed the face of the auto industry permanently.

Larry Linsay surely knows this. The big GOP donors that manufacture steel parts have been vocal in their complaints about the tariff. Yes there is fallout if the big steel dinosaurs go under. However, steel tariffs are possibly the worst short term solution to the problem. It only postpones the need for worker retraining, physical restructuring and alternative economic development in the affected areas.

Given a policy this miserable, is it fair or useful to ask why the administration chose this policy over other options?

Posted by: bakho on October 13, 2003 07:08 AM

Let's take the earth's shape first. I am not telling anything here that wasn't public. There were two legitimate astronomic points.... One argument is that the earth is flat. I certainly taught that in my astronomy class. The other argument is a little bit more subtle...

I am sure the same subtle argument can be made about evolution, AIDS etc.

The point with steel is twofold. First, you cannot obtain concessions from your trading partners on the goods and services for which you have a comparative advantage if you don't stand ready to give in on the goods and services they have a comparative advantage.

Second, and most importantly, it is to your national advantage to give up production of products with which you have a comparative disadvantage. That basically frees production factors to produce what you kick ass at (in relative terms) AND allows your nation to get more bang (in terms of imports) for its bucks (our exports), thus raising living standards (and likely, growth, although THAT is a more subtle argument.)

And we know this since Ricardo. But then again, we know about evolution since Darwin and I still received a flyer mocking evolution in this early 21st century.

The thing Lindsey knew full well, is that what is true of a nation is not true of the steel sector specifically. Benefits from trade come from the very fact you are letting firms producing goods and services for which you have a comparative disadvantage go down the drain.

Much like the EU should accept to only retain production of agricultural products for which it has a comparative advantage (like wine, luxury cheeses, etc.) And that would go a long way in raising European standards of living. Even if it would bring out on the streets the closet conservatives who are fervantly fighting for "alter-globalism."

Posted by: Jean-Philippe Stijns on October 13, 2003 07:16 AM

Andrew: To be sure, when one is in a policy-making position (though Lindsey probably wasn't making the policy), one is confronted more directly with the costs of any given policy. However, that doesn't make the results of academic research any less valid. It is certainly the case that there would have been people harmed if the steel tariffs were not imposed, as you suggest -- but the "textbook" insight that even GREATER damage was done by imposing the tariffs is still valid, and probably more even important to keep in mind than ever. Lindsey knew this. He also knew that his argument that not imposing steel tariffs would allow other countries to "pick their industries" was specious and just plain wrong.

Nevertheless, he made those arguments. Why? It's a reasonable question to ask. If a respected chemist suddenly claimed (to the derision of all other chemists) that, despite the lack of any new theory or evidence, he now believes that medieval alchemists were correct when they asserted that it was possible to transform lead into gold, we would wonder about his motives for doing so. Particularly if that chemist got to keep his job as a result of making such an assertion, and would have lost it if he didn't make it. In the same way, it's very reasonable to wonder about Lindsey's motives for making an argument that he -- and just about every other economist -- knew was wrong.

Posted by: Kash on October 13, 2003 07:18 AM

As far as I remember, there was no policy debate on the steel tariffs and alternative policies that might be pursued. I see this as a big problem for a CEO administration. They talk to a limited group and formulate a policy without examining the broader implications of that policy on other stakeholders. We then get a policy that poorly addresses the primary problem while making life worse for many who had no chance to offer their advice, concerns and objections. Public hearings and democracy is slow, but it can prevent hasty mistakes.

Posted by: bakho on October 13, 2003 07:20 AM

Andrew,
Actually, there are three possible reactions to Lindsey's apparent flip-flop. The first two are as you say, to cry 'hypocrite or 'the Diogenes of economics.' The third, of course, is to consider Lindsey's motives good but Lindsey intellectually incompetent. Since the current state of economic knowledge contradicts Lindsey's position and Lindsey has not presented any sort of coherent thesis to prove his view, I think the 'Diogenes of economics' position that you back goes a bit too far. On the other hand, if you don't want to accept the fact that he might be a liar and a hypocrite, we can split the difference and consider him to be the third option.

Posted by: steve on October 13, 2003 07:48 AM

Perhaps it is worth distinguishing between two uses of the word "motive". It has an internal meaning, synonymous with "motivation" -- the intended end to which actions are means. But "motive" also has an external meaning -- as in "the suspect had a motive for the crime" -- where it is almost synonymous with "incentive".

I agree with many people on this thread of postings that, after a while, it is reasonable and necessary to extrapolate to people's motivation.

On the other hand, one of the things I like about reading economists is that they tend to focus on incentives. It tends to avoid the good guy/bad guy polarization that generates so much heat and so little light.

Posted by: Tom Slee on October 13, 2003 08:10 AM

"Let's take the earth's shape first. I am not telling anything here that wasn't public. There were two legitimate astronomic points.... One argument is that the earth is [***round***]. I certainly taught that in my astronomy class. The other argument is a little bit more subtle..."

I am so glad Professor DeLong can read between and over my lines... :-) Let's call an unexpected application of the Stiglitz Transformation to Astro-physics...

Posted by: Jean-Philippe Stijns on October 13, 2003 08:32 AM

Jean-Philippe

We knew it all the time, the earth is flat, really really really flat, it is.

Posted by: anne on October 13, 2003 08:52 AM

On a different thread I made the argument that in any strategic or competitive situation, speculation about the other's motives is often functionally necessary. In order to decide that an adversary's move is a feint, a bluff, or a bargaining chip, it's useful to try to understand what he really is trying to get. Otherwise you may end up defending against the wrong thing and unnecessarily giving him an easy victory.

This was called an "obfuscation", since this is a somewhat different thing than the M-arguments Kling was objecting to. However, it is relevant to one of the "anti-M-argument" points: that it's impossible to know what's inside people's heads, so we shouldn't even try.

Well, we can't be sure what's in our adversaries' heads, but that doesn't mean we shouldn't think about it at all; we really HAVE to. Politics is pretty much by definition a highly contingent game of imperfect knowledge. When economics or some other rigorous science succeeds in reducing some aspect of politics to knowable fact, that's a good thing and we should use those facts. But all of politics has not been so reduced, and speculation about opponents' aims is one of our tools.

Now, sometimes when you've come to conclusions about an adversary's motives, you end up convinced that their real motives are widely different than their proclaimed (or normally expected) motives. At this point you have to decide whether to publically proclaim this discrepancy or not (i.e., make an accusation). For a variety of reasons (civility, prudence, strategy) it is a mistake to make accusations too quickly. You can be wrong, and even if you're not, there can be a backlash which can hurt you. However, the principle that no one should ever make these accusations is impossible to justify.

A further question is the general context of the political life of the times. If the other side habitually makes hostile M-arguments while also systematically misrepresenting its own goals, understanding what's going on seems to require playing the game that's being played. Not to play exactly the same as the adversaries, but to take what they're doing into account and to respond strongly.

What I think is issue in these Krugman debates is whether or not it is permissible for an economist (a scientist dealing in truth) to descend into the political arena, where things are quite different and truth is only one factor. To me the purist position is not only politically destructive, but also involves a misunderstanding of the world we live in, part of which has been scientifically reduced to truth but large parts of which still are uncertain and contingent. (It's my opinion not only that the uncertain, messy, untheorized part of human life never will disappear, but also that we shouldn't want it to, since it is an area of human freedom. The reduction of politics to economics or to administration is, in my opinion, not an appropriate goal.)

In a democratic nation, if too many of the intellectual elite proudly abstain from politics, this leaves a gap into which the charlatans and caudillos can move. This is something which has happened in history, and it might be happening now.

Posted by: Zizka on October 13, 2003 08:57 AM

On a different thread I made the argument that in any strategic or competitive situation, speculation about the other's motives is often functionally necessary. In order to decide that an adversary's move is a feint, a bluff, or a bargaining chip, it's useful to try to understand what he really is trying to get. Otherwise you may end up defending against the wrong thing and unnecessarily giving him an easy victory.

This was called an "obfuscation", since this is a somewhat different thing than the M-arguments Kling was objecting to. However, it is relevant to one of the "anti-M-argument" points: that it's impossible to know what's inside people's heads, so we shouldn't even try.

Well, we can't be sure what's in our adversaries' heads, but that doesn't mean we shouldn't think about it at all; we really HAVE to. Politics is pretty much by definition a highly contingent game of imperfect knowledge. When economics or some other rigorous science succeeds in reducing some aspect of politics to knowable fact, that's a good thing and we should use those facts. But all of politics has not been so reduced, and speculation about opponents' aims is one of our tools.

Now, sometimes when you've come to conclusions about an adversary's motives, you end up convinced that their real motives are widely different than their proclaimed (or normally expected) motives. At this point you have to decide whether to publically proclaim this discrepancy or not (i.e., make an accusation). For a variety of reasons (civility, prudence, strategy) it is a mistake to make accusations too quickly. You can be wrong, and even if you're not, there can be a backlash which can hurt you. However, the principle that no one should ever make these accusations is impossible to justify.

A further question is the general context of the political life of the times. If the other side habitually makes hostile M-arguments while also systematically misrepresenting its own goals, understanding what's going on seems to require playing the game that's being played. Not to play exactly the same as the adversaries, but to take what they're doing into account and to respond strongly.

What I think is issue in these Krugman debates is whether or not it is permissible for an economist (a scientist dealing in truth) to descend into the political arena, where things are quite different and truth is only one factor. To me the purist position is not only politically destructive, but also involves a misunderstanding of the world we live in, part of which has been scientifically reduced to truth but large parts of which still are uncertain and contingent. (It's my opinion not only that the uncertain, messy, untheorized part of human life never will disappear, but also that we shouldn't want it to, since it is an area of human freedom. The reduction of politics to economics or to administration is, in my opinion, not an appropriate goal.)

In a democratic nation, if too many of the intellectual elite proudly abstain from politics, this leaves a gap into which the charlatans and caudillos can move. This is something which has happened in history, and it might be happening now.

Posted by: Zizka on October 13, 2003 09:02 AM

JPS: "Second, and most importantly, it is to your national advantage to give up production of products with which you have a comparative disadvantage."

Prove it. (1) Show e.g. that, if England gives up growing food and then fights a war in which the Germans blockade the island, that it was to England's national advantage. There are reasons of national security for America to keep on producing steel. (2) Since there is not a Pareto optimum, you shouldn't be able to conclude that free trade is to the "national advantage" unless you make specific and debatable assumptions about what the "national advantage" is.

JPS: "And we know this since Ricardo. But then again, we know about evolution since Darwin and I still received a flyer mocking evolution in this early 21st century." Where are the free-trade fossils?

Kash: I take your point about "respected" chemist. My point would be: theoretician in ivory tower (respected or not!) actually confronts the real world and changes mind. But that doesn't cause the ivory-tower theoreticians to wonder that maybe they have just got it wrong...

Steve: Always willing to split the difference. Still, I'm not sure the best way to describe my position is "Diogenes." It's more the opposite - "welcome to the real world."

Posted by: Andrew Boucher on October 13, 2003 09:35 AM

Andrew Boucher, I believe your point 1 has some fundament, specifically in the domain of the ability to guarantee subsistence in adversity. However in the matters of steel, I think that for the USA the mini-mills that feed on recycling older steel allow for enough slack so in case of conflict the iron ore mills could be rebuilt even from scratch.

DSW

Posted by: Antoni Jaume on October 13, 2003 12:04 PM

Since Brad worked for a while in the Clinton administration, I assume he could give a direct answer to Andrew's question. I don't know what it would be.

I expect what he would say is that in this case, in his view, the only reality that got in the way of the standard economic judgment was the political reality that the Bush administration was trying to shore up votes in Pennsylvania and a couple of other states.

So, turning the question back to Andrew: what do you think the reality was that necessitated Lindsey's change of heart? Any guesses?

Posted by: Brandonimac on October 13, 2003 12:24 PM

Did steel imports threaten the entire US steel manufacturing industry? Or just those dinosaurs that are on their way out? The mini-mills are quite competitive with foreign steel. There are better ways to address oversupply and maintaining a domestic steel industry than tariffs.

Posted by: bakho on October 13, 2003 02:02 PM

Brandonimac: No fair! But, here's an attempt anyway. I think political expediency can be (and I did write CAN, so no flames) a reasonable reflection of benefits vs. costs. By trying to pander to Pennsylvania, the Bush Administration made the political calculation that should there be no tarrifs on steel, a few people would suffer a lot (losing their livelihoods and their homes), and the gains would be spread all around (cheaper products made from steel). Now this calculation isn't taking the average; and I guess I would accept that the average wealth in a free-trade environment would be higher than the average with tarrifs (but I don't even hold that view so firmly, so I can be argued out of it). Instead the political calculation is weighting grievous suffering more than small gains. There is nothing which says that such a weighting is "wrong" or "worse" than taking the average. Averaging is only one way of resolving questions where there is no Pareto optimum, but it is not the only way. I imagine Lindsey's change of heart, if that is what it was, came when he realized (after numerous arguments with the political wing) that taking the average, which is so beloved of economists, isn't the way politicians think - and what's more, the politicians aren't necessarily wrong.

With that said, one calculation which the Bush Administration probably didn't make, is that the average gains from free-trade are skewed towards the well-off. That is, accept the economic dogma that the average wealth in a free-trade environment is higher than the average wealth in one with tarrifs. Unfortunately, the dogma says nothing about how the average wealth is spread around, and it could be that in the free-trade scenario, one person gets lots and lots of benefits, so bringing up the average, while most everyone else gets crumbs.

Posted by: Andrew Boucher on October 13, 2003 02:09 PM

There is always the argument that the decline in the Asia steel market caused a legitimate threat to the US market through dumping. That under the WTO, nation states are allowed to implement protectionism measures in these situations. While the WTO will likely decide against the US, the fact remains that the sharp decrease in world steel demand threatened the already weak US steel industry.

Outside of WTO trade issues, the problem with the Bush steel tariffs is that it was an expensive short term solution that failed to solve a series of long term problems. US steel needs to resolve several issues including 1) being too labor intensive, 2) scaling issues, 3) and finally pension and healthcare costs. The Bush tariffs failed to address any of these issues.

In Andrew Boucher's defense, Europe as already demonstrated the willingness to cut off goods or services if it does not like the actions of the US. The example I am referring to was when a Swiss company refused to send an attachment used for guided bombs. Historically speaking, the US did something similar with the Japanese before World War II. Governments will cut off supplies if they believe there is an advantage to do so.

Posted by: james on October 13, 2003 03:09 PM

Odd to find economics described as science. I think the absolute faith in free trade is not totally rational. To judge Lindsey's motives, it is enough to know what he has said to conclude that he certainly doesn't believe there was a case for steel tariffs. Brad & others are sure that Lindsey is sure that the Steel tariffs were a bad idea. This is not because Lindsey or anyone knows that but because Lindsey is sure of lots of things that he doesn't know (has great confidence in unproven claims). This is enough to enable Brad to parse his motives.

Now what about tariffs. It is interesting that even economists who are very firm on the difference between Pareto improving (good) and moving to the Pareto frontier (so what ?) are so sure that protecting the steel industry is a bad
idea. Part of this is that the calculations of the cost per job saved give really huge numbers. Partly, I think, because economists tend to look for the optimal policy which might be neither do nothing or impose tariffs. If the poverty resulting from closing stell mills is severe, it might be Pareto better to allow free trade and give the victims cash.

Now the optimal policy must run into a bunch of issues from the groaty real world of politics to the elegant game theory of dynamic inconsistency, but, for some reason, it fascinates economists.

Posted by: robert on October 13, 2003 04:06 PM

It sounds to me like Lindsey is twisting the
Brander and Spencer model of entry deterence
to roughly justify his change of heart.
Unfortunetly
1. That models is extremely sensitive to assumptions and parameters.
2. It doesn't apply to the steel industry
(if there are any industries it applies to in the
long run).
3. It's a beggar-thy-neighbor result.
4. The policy recommendation resulting from
the model is subsidy, not tariff.

So we're back to Lindsey being either very
incompetent or hypocritical.

radek

Posted by: radek on October 13, 2003 06:53 PM
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