Foolish and common

Paul Krugman’s habit of distorting economic arguments to make non-economic points is getting out of hand

In this Sunday’s edition of the New York Times, Paul Krugman PhD ’77 has written a little piece called “Rare and Foolish.” In it, Krugman laments the concentration of rare earths mining industry in China, saying it has given them extraordinary leverage over other nations, and lambasts U.S. leaders (particularly Bush) for letting the industry slip away into foreign hands.

There are plenty of reasons to be sinophobic without having to fabricate new ones. If Krugman wanted to write an article about China’s deplorable lack of human rights, or its poor environmental record, or its imperialist foreign policy, or its foot-dragging on rogue states, he could do so and no one would think him particularly out of place. But instead, the Nobel prize winner lapsed into what is increasingly becoming his modus operandi — he draped himself in a piece of flimsy economic reasoning, and then, appealing to his authority as an economist, claimed a final say in some matter that lays well outside his field.

In this instance, Krugman claims that China’s rare earth “monopoly” is a threat to our national security, and their abuse of it makes them an irresponsible and dangerous power. He cites a recent incident where a Chinese fishing trawler collided with a Japanese coast guard vessel, and in response to the detention of the captain, China cut off export of rare earths to Japan. He says China has us over a barrel, and implies that without government intervention and some good old fashioned protectionism, they’ll have us over a barrel in the future too.

As an MIT trained economist, Krugman should know better. Monopoly power requires much more than merely being the sole producer of a good. In order for a monopoly to extract rents from its customers, it must be able to raise its prices without inviting competitors — there must be barriers to entry, something that prevents the hoi polloi from coming in and undercutting you as soon as you try to put on the squeeze.

While China may be responsible for over 90 percent of the world’s production of rare earths, it only has a third of its proven reserves. China has some 36 million metric tons of proven reserves against world-wide proven reserves of close to 100 million metric tons, and at 120,000 metric tons, annual global consumption is scarcely a fraction of these amounts. The prospect of ever developing a serious monopoly on rare earths is a distant one, especially given the feasibility of recycling, and the high likelihood of discovering greater reserves as prices rise and mining companies begin looking for new deposits.

From the moment China rattled its saber, every user of rare earth metals in the world cocked an eyebrow and made a mental note to keep a larger supply in stock in the future. This increase in demand raised the already increasing price of rare earth futures, and made previously uneconomical mining projects outside of China worth the while — a large mine in California is already set to open next year. In the meantime, there is not much danger — most consumers already have on hand six-months worth of stockpiles and will weather the storm just fine.

And so, in exchange for expediting the release of the captain of a lowly fishing trawler, a diplomatic non-event that most countries could solve at a conference table over a plate of cheese danish, China has cashed in its rare earths chip. Such is the fragility of the monopoly that Krugman claims exceeds “the wildest dreams of Middle Eastern oil-fueled tyrants.” Alternate sources will come on line, and will stay on line until consumers feel they have large enough stockpiles to weather a future tantrum. There is no need for government meddling in the lanthanide market, no need to turn a minor tiff into casus belli for some greater trade war or foreign policy battle. The takeaway is the same given in any economics textbook: protectionists hurt themselves just as much as their intended victims.

In 1997, Paul Krugman wrote a book called “Pop Internationalism.” In it he took to task a variety of non-economists for propagating misleading notions about the nature of international trade. It was an excellent book, the sort of well-crafted treatise that a decade later made me happy to see him receive the Nobel Prize and get a job writing a column for the New York Times. What I most remember from that book however, is the disdain Krugman heaped upon fellow economists for going along with the illogical views of pop internationalists in the hope that they might prove politically useful. Krugman believed then, as I still believe today, that faulty logic in support of the right idea is dangerous, that it would not only create collateral damage, but would discredit the good policies it had been bent to support, and degrade the profession of economics as a whole.

Today, Krugman asks us “Where did the rare earths industry go?” We should be asking him, “Where did Paul Krugman go?”

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