 Good afternoon and welcome. I'm Susan Collins, the Joan and Sanford Wildein of the Gerald R. Ford School of Public Policy, and I am simply delighted to see all of you and welcome you here on behalf of the Ford School, the International Policy Center, and the Department of Economics. It is really wonderful to have so much interest in our speaker today, who I'll introduce in just a moment. But as most of you know, we've had to move the venue because of that interest, and I'd like to thank Hill Auditorium for wedging us in in the midst of performances by the University Symphony Band. I feel like I should go and play the drums, but perhaps not. It's a great honor and a personal pleasure to welcome Paul Krugman to campus as the Ford School's 2009 City Group Foundation Lecture. This lecture series was established several years ago by the City Group Foundation as a gift in honor of Gerald R. Ford. We're very grateful to the Foundation for their generous gift, which has enabled us to bring distinguished policy leaders to campus, and we're extremely honored this afternoon to be able to add Professor Paul Krugman's name to the list of our City Group Lecturers. Today's lecture is the keynote address for an academic conference we're hosting on campus today and tomorrow. The conference was organized in honor of the distinguished career of our colleague and friend, Professor Allen Deirdorf, who is currently the associate dean of the Ford School. Allen's wide-ranging and astute contributions have furthered our understanding of why countries trade, the implications for growth, and the impact of trade policy in a globalizing world. And the conference has also brought many of the world's leading trade economists to Ann Arbor, and I'm very pleased to welcome all of them here today as well. Well, like many of those conference attendees, I'm an international economist, and while I'm very proud of my profession and its contributions, I do have to concede that there aren't many economists whose work is followed closely by the general public, whose opinions on economic matters stir great passions among laypeople, and whose weekly writings are routinely discussed around the water cooler. Well, Paul Krugman is the exception. Whether they agree with him or not, people from all walks of life want to know what Paul has to say. In just the past few days, for example, he's appeared in quite disparate settings, such as the keynote speaker at a conference in Helsinki on Finnish economic competitiveness, and as a guest on the HBO show Real Time with Paul Mayer. Paul's even a hit over YouTube, where a little-known performer scored a quarter of a million views with his song, and I promise I won't sing it for you. His song, Hey Paul Krugman, and if you haven't checked out the YouTube video, I encourage you to do so. But of course, they don't award Nobel Prizes for popularity or YouTube hits. Paul Krugman is one of the great economists of our time, and he was awarded the Nobel Prize for his analysis of trade patterns and the location of economic activity. Traditional theories of international trade emphasized why countries are different and why they will trade with us exporting and importing, trade with each other, exporting and importing different products. Paul's work emphasized that an awful lot of the trade we see in the real world is between countries that are quite similar, and they're trading relatively similar products. His models highlight both that firms can take advantage of economies of scale or produce more cheaply by producing large quantities, and that consumers value variety and choice. Thus, he pioneered models of trade in which large firms producing similar products compete in a globalizing marketplace. These models also link globalization to economic geography, helping us to understand where firms and people choose to locate and why. Paul's academic work stands out because of its insights about the real world in packages that economists love because they're mathematically elegant and deceptively simple. This work on trade, like his work on financial crises and in so many other areas, has launched new avenues of research in literally thousands of academic papers. As most of you know, Paul's work is also remarkable for its clarity. Lucidity of the writing in his many articles, books, and columns has significantly raised economic literacy around the globe, and as dean of a policy school, I particularly wanna highlight his dedication to the importance of clear analytic thinking as a guide for policy. On a more personal note, I can also attest to the fact that Paul has educated and inspired generations of international and policy-oriented economists. Nearly 30 years ago, his course on international trade was one of the first courses that I took in my doctoral studies in MIT, and I have had the great fortune to benefit from Paul's insights and perspective as a member of my dissertation committee and at numerous points during my career. For all of those reasons and more, I could not be more pleased to call to the stage our 2009 city group foundation lecture. Please join me in welcoming Paul Krugman. Thanks, thanks, Susan, and thank you all for coming, and thank, I'd like to thank the economics department here for organizing this great event, not this event, but the Fest Shrift, the celebration of the work of Alan Dierdorf, which is a great group of people, and it's kind of a homecoming for me. This is the world in which I started. Because the occasion for this is the conference honoring Alan Dierdorf's work, I'm gonna try to talk, at least in the speech, a little bit about different things than what I mostly talk about these days. Mostly, everybody wants to know about the economic crisis, and I will talk about that a bit at the end, and I'm sure it will come up in the questions, but at least for starters, I wanna talk about my home territory originally, academically, which was the discussion, sorry about that, of international trade and globalization, and since this is, again, this is really all about honoring Alan Dierdorf, I just thought I'd reminisce for a moment. So I got into international economics, coming straight out of graduate school, late 1970s, and joined what was then the conference circuit, the people who would meet, and many of whom are here now, it's so somehow they all look older, that hasn't happened to me, but anyway. And Alan Dierdorf was there, and Alan was, you know, many meetings, I was at late 70s, early 80s, and was extremely distinctive because he was an American, which at the time was quite rare. At the time that I got into international economics, there were a few Americans in it, but it was mostly from other places. Actually, the way I thought about it was that it was a field dominated by colonials, some Indians, but mostly Canadians and Australians, it seemed at the time. That's probably not true, literally, but there were an awful lot of them, which actually imparted a certain character to the conferences. I was able to finally pinpoint the character. Initially, I would go to these meetings and they were incredibly, I come home exhausted, blasted, even though I was much younger then, obviously, but even so, I really was having a hard time, and then I actually went to one with a bad cold, and was taking cough and cold medicine, and really couldn't drink, didn't dare to drink, and it's funny how much less, there were all these Canadians and Australians and an awful lot of beer at those, anyway. By the way, there's a chihuahua in my throat now, which may make an appearance. There was a reason why Americans didn't warrant that prevalent in international economics at that point, because even then, international trade didn't seem to be that big a deal for the United States. In 1970, which is about when a lot of people who were on the conference circuit and would have made their decisions to be in international economics, no, imports were only about 5% of GDP. They're 17% now, so we had this explosion of international trade, which has turned what was at the time a little bit of a backwater within economics into something that's enormously important. So I wanna talk about globalization, what it's done, and I'm gonna finish up by talking about the role of globalization and the mess we're now in, but I wanna talk a little bit about history, about the forces, what we understand. So the first thing you should know, in terms of the history, is that globalization is not a new phenomena. It was, there was a, the enabling technology for globalization, the key inventions, arguably were the railroad, the steamship, and the telegraph. There was a very extensive global economy created in the late 19th century. And there's a lot to be learned, even now, from studying that economy. But if that global economy kind of went into abeyance for a long time, between two world wars, the Great Depression and protectionism, and a lot of a shift by much of the world, by two inward looking strategies of economic development, globalization receded a lot. And by the 1970 world trade as a share of gross world product was probably only back to around what it had been in 1913. Other aspects of globalization were nowhere near their pre-World War I levels. There was not nearly as much flow of capital. Even now, despite all that we talk about immigration and so on, there's still less migration of people than there was, because there are many legal barriers now that didn't exist then, and the legal barriers of the poorest do actually matter. But just about the time that I was getting into international economics, just about the time that I first met Alan Dierdorf, all that was about to change. Now there had been some return. International trade had grown substantially in the 60s and in the 70s, but it had done so in a kind of limited fashion. Most of what we would now consider the emerging markets were still inwardly turned in their economic policies. What was happening was that there were agreements that had opened up trade between quite similar countries. So there was a lot of trade between the United States and Canada, a lot of trade within Western Europe, but it wasn't a lot of the stuff that we now think of as globalization. Certainly China was not yet in the picture, and even the smaller Asian economies were barely there, so it really didn't look the way it looks now. What I was, the analytical work that I did that I and others did was a whole movement that really, that ended up with that kind of interesting event in Stockholm, was largely about that growth in trade, trying to understand why the United States and Canada, which looked so similar to each other, do so much trade. Why France and Germany ship automobiles back and forth to each other. Well, it's kind of the way things tend to work in economics is that as soon as you have a theory, the world starts moving in a way to make the theory less and less relevant. And so we've actually in some ways moved to a completely different world, which in some ways, but not at all, resembles the kind of trade that we had in that first age of globalization before World War I. What changed? Two things, I think, really. And they were both happening. I think to myself now, when we were at the Handbook of International Economics, the first volume was a conference that took place in Princeton in 1982. And when we were there, we didn't have no idea. But in fact, out there, the world was totally changing. The whole world of trade was changing in a way that certainly I had no sense of at the time. Two things were really changing. One was technology. The ability to ship things long distances fairly cheaply has been there since the steamship in the railroad. What was the big bottleneck was getting things on and off the ships. A large part of the cost of international trade was taking the stuff off the ships, sorting it out, dealing with the pilferage that always took plays along the way. So the first big thing that changed was the box, the container. One of those things, we think about technologies that change the world, and we think about glamorous things like the internet. But if you try to figure out what happened to world trade, there's a really strong case to be made that it was the container. The container that can be holed off a ship and put onto a truck or a train and moved on. And these days used to be that ports were places with thousands of thousands of longshoremen milling around doing stuff. Now they're like something out of one of those science fiction movies in which something has caused all of the people to disappear and they're only machines. But there's a huge thing. And I told you about the Chihuahua in my throat. The big change there, I've just been re-reading a very good book called The Box, which is about the containers. The big change there was really between the late 1970s and the big 1980s. Sharp drop in the cost of transactions, which opened up the world, made it possible to do what we do now, which is to produce a good in many, many different places. Have different stages of production, different components. Ask yourself where is an iPod made and the answer is that's a really complicated question to answer. The other thing that changed was policy. To some extent in countries like the United States, but we'd actually already moved quite a long ways towards free trade. What really changed was that many of the developing countries had followed for 35 years after World War II, they'd followed a policy of looking inwards, of encouraging production for the domestic market, which, whether by design or simply because that's the way general equilibrium works, ended up discouraging exports. Basically, the way these inward looking policies discouraged exports, great shift towards outward looking policies. Great shift towards allowing foreign trade to become the driver of growth. Most extreme case, of course, being China, which went from virtually closed to the world to extremely open. And all of a sudden, this explosion of world trade and all of a sudden, or over a relatively short period of time, international trade was no longer interesting just to Canadians, for whom it's always been interesting because they have this neighbor and was interesting to all of us Americans. What do we know about globalization? I think even now, we're still adjusting our stories. In fact, I've actually been changing my own story about globalization a little bit in the last few months because I've been noticing some stuff that I was not paying sufficient attention to and I really should have because it's up my line very much. So this is the point where I get to tell you what I did on my summer vacation. I did actually take a, was holidaying in Scotland earlier, just relatively recently, and this is kind of depressing. What do we economists do on vacation? They go to museums that are focused on economics. So in Dundee, Scotland, there's a terrific, if there are any people economics oriented who find themselves there, visit the Verdant Works Museum which is dedicated to the history of the Dundee jute industry. And if you may, if you haven't been there, you might think of Dundee with the name. It sounds like it ought to be some cute little town. It's actually a, they're trying to rebuild, but it's a grim decayed industrial city trying to claw its way back. And what it was industrially was, it was juteopolis is what they called it. It was the center of the world jute trade, which was a enormous long distance trade in the late 19th century. Taking the fibers, which come from India, treating them, drawing them, eventually ending up as burlap bags and such like. Huge business. Dundee had more millionaires per capita than any place else in Britain. How do we think about that? Part of it is that it was comparative advantage, which is what economists, the grand theory of international trade that's dominated most of our thinking, which is that countries trade because they're different. They have different resources, different competences, and they trade in effect to take advantage of those differences. Obviously Britain had to import the jute because it won't grow in Scotland for sure. Why was the manufacturing taking place in Britain because Britain had the capital? It had the technological skill. It had certain kinds of skilled labor in a way that India at the time did not. Later on, actually the industry moved back, the actual manufacturing moved to India because those things did spread, but initially at least it was something you would do in Britain. But that's not the whole story because that says why you should be producing, why you should be processing jute in somewhere in Britain. Doesn't say why you would be doing it in Dundee. And there the answer is much closer to the kinds of things that I've spent a lot of time thinking about in my career, which is the role of increasing returns, the role of things that accumulate. So as characteristic of these stories, there's some more or less accidental historical things that got it started. In the early stages, the process of treating the fibers relied on whale oil. Later it turned to mineral oil, but initially it was whale oil and Dundee was a whaling port. And also it was similar in some respects to dealing with flax, which is something they had. But all that, that's just how it started. It became irrelevant. You eventually had this clustering. You had this process where it fed on itself. And in the economic geography, a lot of us some years back rediscovered the works of the great Victorian economist, Alfred Marshall, who focused a lot on these industrial clusters, which were very much a story of the time. And he said there were really three things. There was the creation of a thick market for particularly highly skilled, but specialized skilled labor. There were specialized suppliers of equipment, services that you needed in the industry. And there was what we would now call technological spillover. But as his phrase was, the mysteries of the trade become no mystery, but are as it were in the air. Basically everybody in Dundee knew all about jute. And so you had this kind of clustering. And that's actually quite typical. If you go back, we do tend to think of 19th century trade as having been straight forward. There were countries with different, there were tropical countries, there were temperate countries, there were countries that knew how to do manufacturing, and there were countries that didn't. But there was actually a lot of this clustering as well. So there were many such clusters, obviously jute in Dundee, hose and lace in Nottingham, cutlery in Sheffield, go down these lots, they're a series of things. We actually had counterpart things in the United States as well, although the United States was protectionist and relatively closed. So they served the domestic market. So we also had Patterson, New Jersey was the equivalent of Nottingham. And Troy, New York was the Detachable Collar and Cuff Center and that sort of thing. Well anyway, I always love these historical things. What about today's world? Today's world is extraordinary, complex, enormous volumes of trade. When I was first getting into this, we could say, well you know, in some ways globalization still falls short of what it was in the Edwardian era. Can't say that now. Now we have this enormous, what we have and what didn't exist in the past is these complex supply chains where things are many, many stages of production. That said, the iPod, about a dollar, the iPod's final assembly point is China, but that assembly is only about a dollar 50 of the price of the iPod. The rest, there is other Chinese stuff in there, but there are just many, many stages and it's a large number of countries are involved. Creates a tremendous amount of shipping back and forth. A lot of that now reflects, again, differences between countries. Wealthy countries still have advantages. They have still somewhat better technology. They have more skilled labor. They have all of the advantages of being in an advanced country environment, so there's quality control issues. I understand, I haven't seen it. There's a new book called Badly Made in China, right? There's still, even now, there are differences in competence, but on the other hand, the developing countries have inexpensive labor and in some cases, reasonably good productivity in manufacturing and so we have a trade back and forth that is based upon this. The goods that are really, goods or stages in the production process that are really still required in advanced country environment are done in advanced countries, but the other stages are done in developing countries. Within that, there's a lot of the same thing as my story about Dundee. Except what's interesting is these days, if you want to find those clearly defined industrial clusters, those cities where a particular sort of narrow competence leads to the dominance of the whole city economy, you really find them best in the emerging markets in the developing world. So if you go around China, you'll find that there's a, well, if Dundee was Jutopolis in the late 19th century, Yanbu is underwear city in the 21st century. There are these clusters. Again, the broad, it's pretty, it's probably a foregone conclusion that we're gonna have labor intensive apparel produced in China or now moving down to even lower wage countries like Vietnam. But it's a, the details depend a lot on accident, which leads some particular town to develop a specialty and derive advantages from that because there are advantages of this clustering, the advantages of the scale of production in a particular locality. I should mention, by the way, that since again, this is Alan Dierdorf's conference that this whole process of fragmentation of production, which has made it possible to have this huge volume of world trade is one of his, one of the areas he's done a lot of work in. When the stuff first began, when we were just starting to see the surge in exports from smaller Asian countries, we used to say, well, you know, there's only a limited amount of this stuff that they can, labor intensive stuff that they can export. What will happen? I mean, I remember specifically saying, what will happen when China tries to do this? There just isn't possibly gonna be enough labor intensive stuff. And of course it's there because we're, the ability to segment the production of goods and produce all of these labor intensive stages of production. Transform world. The process really gained a lot of momentum because of the interaction of these technological changes and the political changes. The technological changes meant that countries, some countries could do very well by integrating with the global economy and that made other countries more willing to liberalize their policies and do the same thing. And so this explosive growth of globalization. Is it a good thing or is it a bad thing? And the answer of course is yes. It's a good thing. First of all, just in terms of the economics, clearly there are, the world economy is richer because of all this stuff. It's richer both because we have countries, well it's richer for two reasons. One is that we have countries concentrating on the things they do relatively well. Which doesn't mean, as the economists will know here, it doesn't mean they do absolutely well. Actually on any given thing, it's almost certainly US labor is more productive than Chinese labor, but that varies quite a lot. And so by having the Chinese do the things at which they are relatively productive, we get the whole world producing more efficiently. Means the world wealth has gone up. In addition, the world market makes it possible to do a lot of things on an efficient scale. In some cases just by having a really big factory, but in many cases by having a concentration of production of not many factories in a place where the firms produce mutually reinforcing advantages. And all that gets passed through ultimately to buyers. In the end, the world is a richer place because the underwear makers of Yanbu are more efficient than any national, purely domestic market oriented underwear city could be. So we have a world that is clearly richer. That doesn't mean that everybody benefits equally. And there are many dislocations, many distributional effects. The most obvious and the one that we worry about a lot is that lower formal education workers in advanced countries are almost certainly hurt by imports. That inequality is wider to some extent because of globalization. I would argue that the evidence still suggests that that's a secondary factor, but inequality has widened and globalization is probably part of it. And that has probably hurt workers in advanced countries. The, if you take a global citizen point of view though, I think you wanna say that those losses are less dramatic than the huge gains which many workers have achieved in the developing world. And there's a real trap, I think, for concerned people in the advanced world. A tendency to think of, to compare the ugly reality of life for workers in today's developing countries with an abstraction of what you think it ought to be. Or with an idealized picture of what it used to be like rather than with the reality. So sometimes this almost comes down to condescension, thinking about happy peasants living their traditional lives. And you compare that with the actual workers of Guangzhou and you say, oh wow, this must be a terrible thing. But the fact of the matter is, given the reality, which is that developing countries were incredibly poor in 1970. And the fact that some of them have now achieved a really big increase in their standard of living, even if it looks pretty bad to us, that there's been a tremendous amount of progress. Hundreds of millions, perhaps billions of people, live better lives because of globalization. But it is a mixed picture. And it's also turned out to be much harder than I think many economists believed to actually reap those gains from globalization. When the great takeoff of some East Asian economies took place, a lot of people thought, well if you just open yourself up to world markets, this is what happens. And a number of countries, particularly Latin America, at least that's where I track it, have opened themselves up to world markets and have not gotten anything like the same results. So it's turned out that it's a much more mixed, much more uncertain picture than we were hoping it would be. But if you'd asked me two years ago how's globalization going, I would have said, well, there's a lot of, it's certainly not wonderful, but there are some, a lot of good things have happened. And that on the whole, this has been a force for good. All right, something happened to us recently. So we have the world economy go into this terrible crisis. What can we say about the role of globalization in this future globalization? Small questions, but anyway, let me try to talk about where I think we are right now. And by the way, of course, there is a, if you read your history, you can't help but think, gosh, we had this global economy, the single biggest force killing it. The original global economy was the Great Depression. And now we are in a world slump that bears a definite family resemblance to what happened in the early 1930s. Is it all going to happen again? Was it, say, about where we're going for now? So, okay, the crisis. We have had, well, it has been awesome, of course. The first year of the crisis tracks the Great Depression very closely. It actually turns out that the initial fall in industrial production was as big as it was in 1929-30, that the initial fall in world trade was actually sharper than it was in 1929-30. Fall in GDP, well, we don't really have the statistics back then, probably a little bit less. But on the whole, we really did have an onset of the Great Depression scale, world crisis. It does appear to have stabilized now. So it appears that Armageddon has been put on hold for at least a little while here. The apocalypse has been postponed. But it's been a pretty shocking crisis and, of course, nowhere near being out of the woods. Was the crisis caused? Did globalization pave the way for this crisis? Well, certainly not in the simple sense that all this increased trade was directly responsible for the crisis. It didn't do that. If you want to look for causes of the crisis, you would possibly look more at the financial side of globalization, which, of course, is not independent. So if you're looking for where things went wrong, you would say, well, as China became deeply integrated into the world economy, it also sort of stumbled into a policy of accumulating huge reserves, which led to a glut of cheap money in the United States, which helped feed our housing bubble. It's kind of an indirect chain, but certainly is part of the story. You would also say that in a more limited sense, we tend to think of this crisis as having been a primarily U.S. event, but actually there's a lot of it happened in Europe as well, and their sort of more localized globalization, if you can use that phrase, played a big role. They had huge lending to Eastern European emerging nations that was in its own way as big and imbalanced as the U.S.-China thing and has ended in similarly severe grief. So you can certainly say that the opening up of world capital markets, the opening up of world capital flows played some role in generating this crisis. Globalization has certainly played a role in propagating the crisis. One of the things that has been remarkable is that although you can point to certain, obviously the places of the financial excesses were the United States, UK, arguably, well, in different ways, some of the European countries that had enormous housing bubbles, so Spain. The punishment has not borne, if you look across countries, has not borne very much relationship to the crime, that the steepest falls in GDP, at least initially, have actually come in countries that did not have runaway financial sectors and did not have housing bubbles, have come in Japan and in Germany, which were, well, what was their sin? Their sin was being deeply integrated in the world economy and being exporters of durable manufactured goods which took the biggest hit. And so the biggest declines in GDP, at least initially, have come in countries that were being hit through world trade and all of this is possible because we have such an integrated global economy. And that contributes to what is, in some ways, the most troubling feature of this crisis, looking forward, which is that it hit everybody. I'll come back to that in a second. There's another sense in which the crisis, in which globalization helped to lead to a synchronized crisis and this is a little bit softer but I think still very important. One of the effects of globalization has been, well, obviously what's driving it is people looking for profit and it's about the movement of goods and services and money. It also produces an integration of thought. We all, certain of culture, I gathered there was a presentation this morning about the horrors of cultural homogenization, which is, whatever you think of it, it's very real. We certainly all dress alike around the world, we all watch the same kind of entertainment and we all think alike, which means that intellectual trends, the conventional wisdom of the moment is now a global conventional wisdom rather than a national conventional wisdom. And in particular, pretty much everyone around the world thought it was a great idea to deregulate banking and at the same time, so that we all, when the House of Courts came down, it came down everywhere, which makes this very difficult right now. We've just had an awesome financial crisis. It's not now that we've seen it happen that hard to understand. We look at it and it's actually, it is a more or less historically standard banking crisis but dressed in different clothes. So we, if you go back to the early 1930s, there was a wave of banking failures, bank runs, and such things have happened in individual countries since then. This time, well, we actually had pretty good guarantees for banks as conventionally defined, basically big marble buildings that take deposits. The trouble was that we had sort of failed to do anything about the growth of institutions that functionally are banks, basically anybody who borrows short and lends long as a bank but weren't called banks and didn't look like banks and weren't strictly speaking depository institutions. But once you take that into account, what we've had is the 21st century functional equivalent of 1931 around the world with, so this time bank runs don't consist of hordes of people out in the street, bang on the doors, they consist of hordes of people on the internet, clicking their mouses, but it does the same thing and it's sort of all played out very similarly. And we have, thank God, had a pretty vigorous emergency response. So we have learned a little bit these past 75 years and it appeared to have contained it from being a total collapse, but what comes next? Well, we've had a number of more localized banking crises around the world since the Great Depression. We've had, obviously, and financial crisis of various sorts. We've had Mexico and Argentina and then Mexico and then Argentina again and the Asian countries and Sweden and Finland and all of these are very nasty. We know the IMF has done a lot of now reaching back into history to ask what happens. And the answer is that financial crises not only are severe but it takes a long time to recover. There's one other thing that comes very clear from the record, which is that all modern financial crises, economic recovery from all modern financial crises relies crucially on the same thing, which is that the crisis-afflicted country recovers to a large extent by, at least for a while, running big trade surpluses. It basically pulls itself out of its hole by selling a lot of stuff to parts of the world that were not caught up in the crisis. I think you see the problem. Unless we can find another planet to export to, the normal exit from financial crisis. Not the stabilization, which I think has been achieved but the actual return to something that looks like a reasonably fully employed economy, that route is not available. And you really look, as far as I can tell, no exceptions to this rule in modern times. Whether it's Argentina or the East Asians or even Japan emerging temporarily from its lost decade of growth. They've all been achieved through export surpluses and that is not available. So if you're actually looking for a precedent for a world economy managing to emerge from a financial crisis, fully recovered from the effects of a financial crisis without where everybody's caught up in it and where countries are not able to do it by running trade surpluses, you actually have to go back to the recovery from the Great Depression itself, which was the full recovery was achieved through a large public spending program known as World War II. So it's not a very encouraging thing. Last time we had a global crisis. One of the effects was to roll back globalization for a long time. That does not seem to be happening right now. Although, yes, there are tariffs on tires and things, there actually is nothing like the kind of protectionist response that took place in the 1930s. Not much sign that that's going to happen. Question I guess one might ask is maybe should it happen? We seem to have a global economy that is, that we don't exactly, our institutions have not caught up with this. We aren't actually managing to find global solutions to the crisis. We're just managing to find ad hoc patches to keep the thing from totally falling apart, but we are to a certain extent holding the world economy together with Scotch tape and chewing gum. So is there a reason in the crisis to roll back globalization? I think you could actually possibly make that case, but I don't think it's going to happen because the advantages of globalization are still very real, the virtues, and of course everybody does remember, actually they remember something which may not be entirely true, which was that protectionism was a major cause of the Great Depression. That's arguably not true, but in any case it stands as a cautionary tale, which means that we need to find a way to deal with this. And I think one way to look at the world right now, I mean there are many different ways to look at it, but one way to look at it is that we actually created this global economy without creating the institutions that we need to manage it. We're still in a world of national policies even where we have super national institutions, they're not functioning very well so that the European Union is looking awfully disunited when it comes to macroeconomic policies these days, and they're enormously interdependent and yet they don't seem to be able to make policy jointly. We've had some cooperation in some of the emergency measures, but those have been amazingly dependent really just on sort of personal contact. You could argue that we managed to save the world basically because Jean-Claude Trichet and Mervyn King and Ben Bernanke were able to sort of agree on some things that needed to be done in the heat of the moment. And while I would like to have a rule that the levers of policy would always be in the hands of smart bearded Princeton professors, that's not something we can really count on in the future. So we do actually, we have not yet come to terms with this enormously more integrated economy, this economy that I have to admit 30 years ago when I was getting into international trade, I never imagined it would be this relevant. And we had no choice in the end because, well, you could imagine rolling back trade flows. You could imagine it would not, it's not technologically impossible to go back to a world of relatively inward looking economies. There are other ways in which we're globalized like it or not. The atmosphere doesn't care where a ton of carbon dioxide gets emitted. And we're now at a stage where those global constraints combine enormously on all of us. So we're globalized whether we like it or not. It's amazing, frightening time. I'd like to think that we'll come out of all this with the understanding that we really need to go beyond just trusting this vast global economic machine to do the right thing and figuring that we actually need to have some adult supervision of the whole thing. Maybe it'll actually happen. And hey, we're supposed to be optimistic, right? Otherwise, what's the point? So amazing times. As a citizen of the world, I am quite horrified by what we're going through. Little less frightened than I was six months ago, but still awful prospect. But this is a conference to analyze economic research and to celebrate the research of Anandir Dorf. And as an economic researcher, may I say, boy, I'm in Clover. This is like a volcanologist watching Mount St. Helens erupt. And great times, great times to study, unfortunately, not to live through. Thanks. Thank you so much, Paul. Yeah, first I'd like to thank you, Professor Krugman for coming to the University of Michigan today. Sorry, I wrote this down. Recently, I watched you and former Governor Spitzer speak on Bill Maher concerning the current lack of social mobility in this country and the decreasing income growth of the middle class. Former Governor Palin was also mocked on the show as she has been before for saying recently that the key to an economic recovery is a slashing of payroll taxes, corporate taxes, et cetera. Globalization is obviously very real and capital is free to flow where the costs of it are the lowest. If, in fact, the go for our economy is job growth, real wage growth and the decreasing of the income gap between the rich and the poor, how does the maintenance of a high corporate tax rate, which makes it more expensive for multinational corporations to do business in the US relative to other countries and therefore makes the US that much more uncompetitive with the rest of the world achieve that goal. Okay. The corporate tax, the argument that corporate taxes are really high in the United States and are driving business out. You know, it could be true, but it happens not to be. I mean, if you actually look at the numbers, there's a lot of massaging of the data that are used. So people, the overall US corporate tax rate is not much out of line with other advanced countries and direct investment has on balance been flowing in. There's just no sign that that's actually been happening in America, so not the thing to worry about. And by the way, if you take the overall level of taxation, we're pretty much at the bottom among advanced countries. And if you take, and even if there were, there really were a big problem with corporate taxation. It's not as if we're dealing with anonymous vast forces. If there was really a war of corporate tax cutting among the major economies, we could sit down around the table and try and settle this. It's not a large number of players. So this is of all the things to worry about. The idea that high corporate taxes are costing America lots of jobs is really doesn't belong in the conversation. I'd like to ask you to clarify an observation that you made about globalization leading to greater inequality. Because it seems like you're describing globalization as sort of a level or that lifts up the wealth of China and that maybe does that at the expense of workers in other parts of the world. So what's the metric by which you see inequality increasing as a result of globalization? Oh, yeah. If you look at inequality within the United States has increased dramatically. Inequality within most advanced countries has increased a little bit, although basically mainly in the English-speaking countries which is an interesting thing. But if you were looking at some measure of world inequality that's gone down because of the big rises in income in some of the world, in some countries that were formerly very poor. Actually, I didn't give my usual pro-globalization sermon, which is when I went into economics, when I was a PhD student, I thought to myself, I really should be doing development economics. Because that's what really matters for people. But I didn't because in circa 1975, it was too depressing because development economics was basically non-development economics. There hadn't been any big success stories. There hadn't been, you tried to look for a country that had gone from third world to first world and you basically found, well, Meiji, Japan. You know, Japan in 1883. All of that has changed now. Lots of poor countries have remained very poor. There are a lot of terrible stories out there, but there are also real success stories. And all of those are tied to globalization. I think a world in which it is at least possible to have a place like South Korea that was on the edge of subsistence in the mid-1960s and is now a decent advanced society is a much better world than one in which we're sort of locked into permanent roles. So that's the pro-globalization sermon. Doesn't mean you should be blind to the downsides, but that is the plus, the upside. Professor Krugman, I just wanted to ask, do you think the contributions in the economic debate from people who aren't primarily macroeconomists, I'm talking voices like Richard Posner, who's not an economist at all, or Eugene Fama, who's not primarily a macroeconomist, or even just regular bloggers like Matthew Glacius, is their contribution adding to the state of the debate or is there a risk that they're muddying it by knowing just enough to sound interesting and reasonable to people like laymen like me, but don't know enough to really contribute substantially? Oh boy, I mean, economics is not a priesthood. And God knows at this point, the economists certainly have no claim to say that no one who acts, you know, that the piece of paper should be in the debate. It's not like we've done all that well in the last year or two. So, by all means, people should play in, but I think in some ways this whole modern system of credentializing is somewhat artificial, and someone can be, look, I'll give you, I'll praise him, Martin Wolf of the Financial Times is actually not a trained economist. That doesn't stop him from actually doing superb work because he's learned a lot about, and not just about the professional work but observing the world. So, that's fine. Now, if people are going to weigh in on the economic debate and not get basic facts right, not understand the difference between changes at an annual rate and actual changes over the quarter and GDP at an annual rate and GDP and so on. This is about Posner, who was off by a factor of 16 in his critique of Christie Romer. Then we probably shouldn't listen to them, but it's not a question of the credentials, it's a question of whether they're serious. Let me ask a question from two points of bias. One is I live in a state that at least used to make its way in the world by making things and selling things. And secondly, when I was getting my piece of paper, we studied a lot about exchange rates. A term, interestingly, you haven't mentioned yet. I just want you to think about contemplate a world in which our two of our major exports cease to be mortgage bonds, private debt, and on the other hand, U.S. Treasuries, public debt. And can we think about a world in which there's less demand for those things in other countries, the dollar in fact weakens considerably and all of a sudden, maybe some of our lost or losing industries have a stronger comparative advantage because the dollar is a cheaper thing for people to buy with. Yeah, that was actually starting to happen just before all hell broke loose. You could actually see U.S. exports were surging. U.S. manufacturing was staging something of a comeback and we were running into constraints which were a problem, but were revealing. There are a lot of stories from 2007 about the emerging shortage of skilled machinists, skilled pipe fitters. We were experiencing a manufacturing revival and being hurt by the fact that we've gotten so much out of the business. And no, I think that's where we will be if and when we finally emerge from this. United States will be a stronger manufacturing nation again, partly because of a weak dollar. Doesn't mean that we'll be doing the same thing as we were before. I don't think apparel is something that is gonna be done very much in the first world no matter what, but no, that's gonna happen. And it's just, we were in a very weird world in the middle years of this decade. We were in a world where the United States was as I used to describe it, a world where we were making a living by selling each other houses which we paid for with money borrowed from the Chinese. I mean, that's not sustainable, that's not the way it's gonna be. The other version of that is that we actually had fair and balanced trade, right? They were sending us poison toys and tainted seafood and we were sending them fraudulent securities, but neither of those is original. But it'll come back. Now it won't come back and it may be a while. I mean, of course, China. The other thing you need to bear in mind is that China's enormous surpluses. This, that's a recent development. And China was roughly in current account balance as late as 2002. So this whole bizarreness, this bizarre economy, the house of cards that collapsed was a relatively recent creation. If we can go back to a more reasonable set of exchange rates, more reasonable set of capital flows, some of this will come back. I don't know what the fate of the Michigan automobile industry is, right? That's problematic not just because of the dollar and the crisis, but also because of transplants and all of that, but it's gonna be quite different. And yeah, I mean, it still is weird using that word a lot, but there is, there is, it is hard to figure out. We've become so used to a country that doesn't seem to be making many things, although there's more of those than people imagine, but certainly less than there used to be. If you take the train up the northeast corridor, there's a famous, as you cross the Delaware River, there's a big sign that says, Trenton makes the world takes. And what they actually make in Trenton now is nothing. So things have changed. But I think we'll see some of it come back. Your comment about the U.S. actually having lower tax rates than a lot of Western advanced nations, maybe think about what those taxes pay for in other nations, namely social safety nets and healthcare systems, which led me to the question, if you were made king for a day and got to design the U.S. healthcare system, what would it look like? Yeah. Yeah, I mean, look, if you could wipe away all the political realities, you'd want it to look probably like France, which is hard. It's a very Gallic system. It's actually hard to explain, fully understand what's going on, but it's basically a single payer system with a mixture of public, private, non-profit provision of healthcare. But yeah, I mean, if I could start from scratch or wave away political reality, I'd go for something like an idealized version of Medicare for all. So not just a single payer, but a lot more effort to sort of police the provision of healthcare. So it is done wisely and you don't have runaway costs and a lot of spending on procedures don't help people. No, this is, but that's it, okay? I don't think you want to be a purist because there are lots of ways to have universal healthcare with much lower costs than the American system. Basically every other advanced country does it, right? And they do it in wildly different ways. They do it in single payer. They do it with actual socialized medicine in Britain and in Spain. They do it with private but tightly regulated and subsidized healthcare in Switzerland and the Netherlands. There appear to be about half dozen ways to make this work. We happen to be following none of those ways, but it's not that you have to do it one ideal way, it's just do it is the point. Hi there, what's going to happen to the world economy after a nuclear device is detonated at the corner of 6th Avenue and 42nd Street in New York? Oh boy. If it's one of the days that are fairly frequent that I'm actually in the city, I guess I won't care. No, look, this is, can I say though that look, this is terrifying, but the actual terrorist incident we had, which first was supposed to change everything, didn't. This is a real possibility that someone could do it, but it's not something that any of the players we know about is capable of doing. I mean, I'm stepping completely away from economics now, but Al-Qaeda is a vicious gang of fanatics, but they really got lucky on 9-11, 2001. They haven't been able to do anything on that scale since. But sure, you want to be fighting nuclear terrorism, which as I understand it, the most important thing is actually securing nuclear material in places like the former Soviet Union. And doing all of the things that one tries to do to fight terrorism. There's no indication that you have to completely change the way you live, that we need to become a police state ourselves, that we have to shut. There was a lot of talk about how world trade, world interaction, we're gonna have to be shut down because of the terrorist threat, and that has proved unnecessary. And I even think every time I squeeze my shampoo bottles into my little bag, I get really mad because that was clearly an overreaction. The war on liquids was inappropriate. So there are lots of bad things that can happen in the world and you try to deal with them, but I don't want to fix it just on that one. Thanks again for being here. As an economics student, you learn a lot, especially in introductory macroeconomics, you learn about when it comes to government spending. There's two major factors. There's the Keynesian multiplier and the idea of crowding out. And recently, I know some economists have argued that the Keynesian multiplier isn't as effective as we once believed. And you've actually argued against crowding out, you believe that the large trillion dollar stimulus package is crowding in. So I was wondering if you just explained that a little bit further. Yeah, we're in a very special circumstance right now. We're in a situation where, which we in the United States haven't been in since the 1930s, although the Japanese were there in the 90s, which is that interest rates, short-term interest rates are basically zero, that there's a, and if, see the normal, we talk about crowding out, sometimes as if it's a mechanical thing, but it's actually, it's mediated through through actions by the Federal Reserve normally. If you expand, then the fear of inflation, expanding economy causes the Federal Reserve to jack up interest rates, the ones that controls, which then lead to higher interest rates on other things, which crowd out private investment. Ordinarily, that's a very real story. Certainly what happened in the 80s from the Reagan deficits. Right now, take the Taylor rule. It's a rule of thumb for Fed policy. Depends on how depressed the economy is on the rate of inflation. Apply a Taylor rule that actually fits Fed policy in the past, and ask what the federal funds rate would be, should be according to the Taylor rule right now. And the answer is about minus 5% or 6%, around minus 500 basis points. This is a world in which expansionary fiscal policy is not gonna cause the Fed to raise rates. It's not gonna lead to higher interest rates. So the normal arguments for crowding out don't apply. And in fact, or an alternative way of saying it, I'm going off this, one way of saying it is, right now the world is awash in excess savings. Around the world, the amount that people want to save is less than the amount that businesses are willing to invest even at zero short-term interest rates. That's a world in which governments, by borrowing and spending, are not crowding out, are not taking away savings that could be used for private investment. They're actually putting these excess savings to work. And will actually need to hire investment because the main reason businesses aren't investing now is that there is not enough demand for their products. So this is not, we don't expect to be in this kind of situation very often. This is Alice through the Looking Glass territory. This is a weird, boy that's been my word all through the night anyway, but this is an economy in which everything is kind of reversed, on which I think I wrote this at some point, that virtue is vice and prudence is folly. That's not the normal state of affairs, but it is the state of affairs we're in now. And if you believe the projections from the Office of Management and Budget, it's the world we're going to be in for two or three more years at least. So this is special times. And part of what drives me crazy is the way that conventional wisdom about economic policy has not taken on board the craziness of the times we're now living in. So here in Michigan where the unemployment rates are really high, the local industry is really struggling. You know, the idea of some form of protectionism starts to have some appeal. And I think you mentioned you thought that was unlikely, but the argument could be made for that. Can you explain that a little bit please? Oh, no, I mean, there are different levels of argument. So the first is, I mean, would Michigan manufacturing workers benefit from some protectionist measures? Yes, at least in the short run. Would those protectionist measures make America as a whole poorer? Under normal circumstances, yes, but arguably not now because we do have this depressed economy and we need more demand. You can even make an analytical case, though you want to be very careful about it, that the world as a whole would be richer if we had a little bit more protectionism because every individual country would feel freer to engage in fiscal stimulus knowing that the extra jobs it creates would be at home. So the lack of policy coordination gives you some case for protectionism. Now, there are good reasons not to do this, mainly that protectionism does make the world poorer in normal times. Normal times will return eventually and if you break up the system of trade we've built, then it's very hard to put it together again. Probably take decades of negotiations to reconstruct it. So you don't want to do this lightly. But it does, look, take the issue. The tire tariff, that there was a lot of hyperventilating about that. It happens to have been legal because we had pre-arranged that we had more, we had the right to have temporary restrictions on Chinese exports that were imposing a big market share. Taking a big market share in a short period of time. So it was, Doug Irwin's out here someplace, it was not a violation, it was not like the steel tariff that Bush did, which was a clear violation of the rules. This was within the rules. Was it a wise thing economically? Probably not, but it was a response to the very real concerns of workers and I think you have to cut some slack in these very special situations. If temporary protectionism is what it needs to sort of hold our political fabric together for the time being, okay. As long as it doesn't endanger the underlying rules of the game, which we have not done. So the way to think about it is to not be too much of a purist here. This is not the moment to be crusading for absolutely free trade and no use of the safeguards that are actually built into the rules of international trade. It's a time to say let's get ourselves out of this economic crisis so we don't have worse things happen under irresistible pressure. Yeah, you show it's great. I think everybody love it and it's great. It's better than David Letterman. And without the blackmail, too. Well, your books are even better. I like those statements such as Dao Bao, Dao Ao, but I do have some questions. I hope that's not aggressive. Can you give me the honor explain this better version of the statement, cash for trash? We got $4.1 billion interest rate, interest payback. And after Tim Gatman have that statement you have very strong disagreement. And I was puzzling if you can give me the honor to explain what is the latest version of your cash for trash? Okay, cash for trash, which was not original. I picked up the phrase from somewhere, was the term I used for the original Paulson plan which was simply to buy toxic assets off the banks at prices that I guess would have been just sort of invented. And I thought that was a really bad idea, would be a really bad deal for the taxpayer. What we actually did, or what Paulson and then Geithner actually did, that version was dropped. What was actually done was buying equity in the banks to improve their capital ratios. And that's what's being paid back and has actually appears in the end to be making a little bit of money for the taxpayer. But it's not the original plan. The original Paulson plan was a pure giveaway. And that was, well, it had the risk of turning into a pure giveaway and that was what was so awful. Now, what's actually happened, I still think taxpayers did not get enough of the upside. We essentially had set up our system under which it was clear that we socialized the downside but didn't get a full payment for the taxpayers on the upside. And as it's turned out, the banks have been, at least so far, more profitable than I expected. And it's turning out, at least in a financial sense, okay, although the banks are still not lending, but it was, there was some really, if you revisit what happened in those first two weeks after Lehman failed, there were some really, really bad proposals out there and they got better. They still weren't good, but they got a whole lot better after the first round. You mentioned that you thought that the actions of the central bankers and Chairman Bernanke was essential to stabilizing the economic downturn. And you might be aware that there's a bill sponsored in the house right now by everyone from Barney Frank to Michelle Bachman calling for an audit to the Fed. I was just wondering if you could, Claire, like what do you think the real role of the Fed should be and how should it be administered? You know, I have mixed feelings about the whole thing. I believe in democracy and the Fed is, you know, it is a part of the government even though it's sort of structured as if it was in a way that makes it a little bit ambiguous and should have oversight. That said, it's unclear what's being audited. Part of the problem is we're gonna audit the Fed, but without defining what is the Fed supposed to be doing. You know, the Fed is not there to be making a profit. The Fed is there to be stabilizing the economy. So what are we auditing exactly? And we have been reasonably well-served not with some big holes, but by a quasi-independent central bank. Now, that's turned out, it doesn't look as good as it did three or four years ago when people still thought that Alan Greenspan was right about everything. But it's still, there's a lot, you know, we do do this. We do create institutions that are supposed to be somewhat outside politics, ultimately accountable, but somewhat outside. I mean, I used to say that the Fed Reserve was like the Supreme Court, that it was something that was stable, you know, something that was ultimately accountable but insulated from politics and above the partisan process. And then there was a point around 2001 when I was saying, okay, now we're 0 for two. But still, there's some virtue in it. This is gonna be, this is a tough debate. We gotta think about the question. The notion of a very independent central bank was something that really took hold at a time when people thought that credibility and inflation fighting was the most important thing. And obviously, we're not in that world anymore, but it's not something, basically, I don't think that any audit process in which Ron Paul is playing a large role in determining what we're looking for is gonna be helpful. Have time for one more question. What are the implications of your theories on clustering and economic geography for the future of automobile production in Michigan? And what must the region, the state, the local, and the national policy do to retain its competitive advantage or is this exodus of manufacturing inevitable? Yeah, I'm not going to be really reassuring here. What we think we know is that the sort of peak of the forces for manufacturing, clustering in the United States was probably in the 20s or the 30s. That you can actually see this. Saku Kim has looked at these indices of geographic concentration of manufacturing in the United States, and they peak around 1930 and head downwards. Partly that might be because mature industries, the necessity of having very specialized suppliers in the same place becomes less. Partly it may just be something about the changing nature of manufacturing. It seems to be less and less necessary to have manufacturing clusters. If you look for the really spectacular industrial clusters or economic clusters in the United States now, they tend to be intangibles. They tend to, Silicon Valley is not really at this point a semiconductor manufacturing cluster. It's more like a semiconductor design cluster and of course financial sector in New York City. So the forces that made it possible for Michigan to be this dominant force in automobile manufacturing, despite having high wages relative to other places where you might also do manufacturing, seems to be reduced. It's not clear that there's any way to recapture that. It's not just imports. It's the spread of the auto industry down auto alley. So it's Tennessee and Georgia and the Carolinas which stuff has migrated. So I don't claim to be an expert on the auto industry but I've read books and articles by people who are and they seem to think that the agglomeration effects that once made this such a dominant place in the auto industry are just much weaker in today's world. That doesn't mean you can't do other things. But that's a wrenching transition. It's, and I guess the hopeful thing would be to imagine and boy, if I was a presidential candidate, I'd be killing myself at this moment. But think about Massachusetts which had an old industrial base that went away much sooner than all those did here and eventually reconstructed itself as an economy based on, it's a little bit hard to know exactly what it's based on but it appears to be. Now one of the things people talk about in the geography when people talk about amorphous specialization now because it's really hard to figure out sometimes what clusters are doing even though there clearly is some kind of cluster there. But anyway, it's, but has rebuilt and it's become a reasonably strong vital economy in spite of all that. The other thing of course is that this is the United States and people move. I mean there is, there is this, Massachusetts is now a state that tends to have unemployment rates that are comparable to the national average that does pretty well but it's sheer of the American population has dropped a lot and that happens as well. So I don't think you can imagine Michigan rolling back the clock to 1980. It's not gonna work that way. Same thing can be, you know, there's a probably, I think there are multiple Bruce Springsteen songs about the industrial decline in New Jersey, right? So where I live and the industry, that industry has never come back but there are other things and so there's, the state has done reasonably well economically except right now where everyone is suffering. So the short answer is I don't think you can just turn that back. You can probably try to hold on to some of it longer, can try to find other things that will spring off from it but it's, what can I say, that's an awfully downbeat way to end this discussion but yeah, it has to be something good to say here. This is Ann Arbor. Ann Arbor must have all kinds of knowledge resources. Maybe this can be the hub of the new Michigan. Thank you all.