I have for many years argued that Anne Krueger and Jagdish Bhagwati should be awarded the Nobel Prize in economics for their work on trade, protectionism, and economic development. Indeed, they should have shared the 2008 Nobel with Bhagwati’s student Paul Krugman.
The extensive interview of Krueger in the latest issue of the Journal of Economic Perspectives supports my view of Krueger’s importance. I strongly recommend the whole interview. One of the most striking things is that Krueger dug around in the data in other countries by actually talking to the players. She learned a lot and that’s how she came up with the idea of rent seeking: when government officials have discretionary power, other people lobby to get special permission. Of course, we never see that happening in the United States.
I started to excerpt it for my Weekly Reading Highlights for next Sunday, but there are so many nuggets that it deserves a post of its own.
Thus this post.
The interviewer, Dylan Matthews, is a correspondent for Vox.
Lawyers and Economists on Free Trade
KRUEGER: Lawyers who do trade law are more pro free trade than economists, because they know how badly protection works. A distorted economy is terrible. Not just a little bad—import substitution probably cut growth rates in half of what they could have been.
Confessions of Corruption
KRUEGER: In both countries, I had a number of encounters with people who talked a great deal about black markets and that kind of thing, and I got interested that way, in part. I had a friend in India from graduate school who was working in Delhi at one time when I was there, and he knew I was interested in this, so he invited several of his friends to dinner. He was well connected and invited ministers and vice ministers. At the end of the dinner he sat back and said, “Because Anne is interested in this, and you can trust her, I want each of you to tell exactly how much more you’ve taken than you should legally have taken in your job.” And they did it!
One said, “I only took enough to get my three daughters each an adequate dowry. And that was ₹12 million” [about $1.6 million in US dollars at that time]. One of my very able Indian friends, then a graduate student in India, was forced to leave India because he was so honest. He couldn’t take the money. One of his sons got sick, so he had to work in the States to take care of his son. The corruption had all kinds of human effects that you don’t think about.
Would Helping the Poor with Mortgages Work?
MATTHEWS: You left the Fund before the global financial crisis in 2008–2009. Did you have a sense that that was brewing toward the end of your time there?
KRUEGER: Well, at the Jackson Hole meetings in 2005, Raghuram Rajan (2005) gave a talk where he described what the vulnerabilities were, why helping the poor with mortgages is not going to work. Why are we sitting on a bombshell? I think it was Larry Summers who said we were Luddites.
Industrial Espionage Goes Both Ways
KRUEGER: Let me answer half a question you didn’t ask: the Chinese have on occasion tried very hard, I think, to oblige [the United States]. And I think we have missed the signal completely. I think their system is not a good system, and I think they themselves are not quite capable of understanding why it is not a good system, but this idea that they’re always stealing from us, that we never steal from them is silly. I mean, the idea that there’s no industrial espionage in this country! When I was in Silicon Valley, nobody would send a piece of equipment to any of the electronics fairs, even the big one in Las Vegas, without making sure there was some employee 24 hours a day watching the machinery to make sure nobody could reverse-engineer it. Now we’re so mad at the Chinese that they tried to do the same thing. Meanwhile, we’ve had more than one CIA agent arrested [in China] and pretty much caught dead to rights.
Why “Market Failures” Are Not Enough of an Argument for Government Intervention
KRUEGER: Some of these arguments about the market assume that if there are market failures, then whatever the government will do will be better. Maybe the market failures are huge, but that does not persuade me that government failures will not automatically be as huge. That’s the part that’s wrong. I still think that when you’re talking about lots of economic activities, you want to just look at incentives. If there’s something wrong with the market, get the incentives right. Giving bureaucrats the incentive to regulate is not the incentive that will work best in most cases.
The Problems with Economists and Graduate Education Today
KRUEGER: Gradually, I think the technique guys took over, theory and econometrics. It weakened the field in several ways, one of which, it set the bar so high that some people just couldn’t do it or didn’t want to do it. Some, who were good, got out, even though they could do it, because they didn’t want [that focus]. In a sense, you’ve gotten the idiosyncrasies of that group. If the price of milk doubled, they wouldn’t even begin to wonder why. That’s a big part of it. The fact that we have supercomputers sets everybody in awe, and all I can see is higher caliber regression, maybe. And I still think you need some theory before you do it.
I think at some point it has to reverse a bit. Part of the way it’s reversing is, in my view, a bad way. Namely, the public policy schools are doing economics without enough analytical underpinning. So you get things like the advisers supporting industrial policy in the Biden administration and stuff like that, precisely because they haven’t learned what happened.
One thing that the Chicago school, for instance, was so good at was making everybody think in terms of, “What’s the alternative? What’s the opportunity cost? What are the incentives that are created?” One of my eureka days was when Milton Friedman was visiting Minnesota sometime in the 1960s, around when the first law came in restricting auto emissions for new cars, making them more expensive. Milton’s argument was, well, that would mean more pollution. Why? Because, obviously, then people keep their cars longer. To him, it was so obvious. But to me, until he said it once, it wasn’t obvious. [DRH note: Probably because I was educated at UCLA, Friedman’s point would have been obvious to me.]
There was so much of that in Chicago. Students learned to think that way. The rest of us had to figure it out the hard way. But Chicago often got it right.
Advice for Young Economists
MATTHEWS: I think a lot of the people reading this interview might be in grad school or early in their careers, and want to have an influence in policy. You managed to have a long career in both academia and in policy, and I think had a very positive impact in both places. What advice do you have for someone who wants to follow a similar path? What are the skills to develop, or the opportunities they should take?
KRUEGER: I really do think that depends on the individual and what they want, but I certainly am a very strong believer in having a good analytical frame-work. That to me is essential, and that means learning what questions to ask, which is often, “Why are people behaving as they are?” and then looking for where the incentives are. Finding out “why” is the important thing first. In the 1960s, the first answer in development economics was “peasants are irrational.” But of course, Ted Schultz (1964) put paid to that very fast.
My one disappointment: Although rent-seeking is a prominent part of the Krueger story and she definitely deserve credit for the term and for her evidence of its importance, neither Krueger nor Matthews points out that it was actually Gordon Tullock, in a 1967 paper, who came up with the idea of rent-seeking even though he didn’t call it that.
[Editor’s note: Bhagwati is also the author of the entry for Protectionism in The Concise Encyclopedia of Economics.]
