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Friday, January 27, 2017

Paul Krugman: Making the Rust Belt Rustier

Will Trump Repeat Reagan's mistake?:

Making the Rust Belt Rustier: Donald Trump ... appears serious about his eagerness to reverse America’s 80-year-long commitment to expanding world trade. On Thursday the White House said it was considering a 20 percent tariff on all imports from Mexico; doing so wouldn’t just pull the U.S. out of NAFTA, it would violate all our trading agreements. ...
Taken together, the new regime’s policies will probably lead to a faster, not slower, decline in American manufacturing.
How do we know this? We can look at the underlying economic logic, and we can also look at what happened during the Reagan years, which in some ways represent a dress rehearsal for what’s coming. ...
What Reagan did ... was blow up the budget deficit with military spending and tax cuts. This drove up interest rates, which drew in foreign capital. The inflow of capital, in turn, led to a stronger dollar, which made U.S. manufacturing uncompetitive. The trade deficit soared — and the long-term decline in the share of manufacturing in overall employment accelerated sharply.
Notably, it was under Reagan that talk of “deindustrialization” and the use of the term “Rust Belt” first became widespread.
It’s also worth pointing out that the Reagan-era manufacturing decline took place despite a significant amount of protectionism, especially a quota on Japanese car exports ... that ended up costing consumers more than $30 billion in today’s prices.
Will we repeat this story? The Trump regime will clearly blow up the deficit, mainly through tax cuts for the rich. (Funny, isn’t it, how all the deficit scolds have gone quiet?)..., interest rates have already risen in anticipation of the borrowing surge, and so has the dollar. So we do seem to be following the Reagan playbook for shrinking manufacturing. ...
And there’s a further factor to consider: ... Manufacturing is a global enterprise, in which cars, planes and so on are assembled from components produced in multiple countries. ... There will, inevitably, be huge dislocation: Some U.S. factories and communities will benefit, but others will be hurt, bigly, by the loss of markets, crucial components or both.
Economists talk about the “China shock,” the disruption of some communities by surging Chinese exports in the 2000s. Well, the coming Trump shock will be at least as disruptive.
And the biggest losers, as with health care, will be white working-class voters who were foolish enough to believe that Donald Trump was on their side.

    Posted by on Friday, January 27, 2017 at 01:29 AM in Economics, International Trade, Politics | Permalink  Comments (217)


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