In his December 22 column, Paul Krugman says we must step away from so-called 'free trade' if we want a sustained economic recovery (italics added).

A more plausible route to sustained recovery would be a drastic reduction in the U.S. trade deficit, which soared at the same time the housing bubble was inflating. By selling more to other countries and spending more of our own income on U.S.-produced goods, we could get to full employment without a boom in either consumption or investment spending.

This, of course, is heresy in the High Church of Free Trade.   According to dogma, if a good or service can be produced elsewhere more efficiently (and the wizards of finance will tell you what 'more efficiently' means), domestic employment or balance of trade must be sacrificed to the higher cause.  

Krugman seems to be sanctioning something dangerously close to import substitution, an approach to economic development popular in the post-colonial era - and replaced by the neoliberal 'Washington consensus.'  But he doesn't stop there.

[W]here will the capacity for a surge in exports and import-competing production come from? Despite rising trade in services, most world trade is still in goods, especially manufactured goods -- and the U.S. manufacturing sector, after years of neglect in favor of real estate and the financial industry, has a lot of catching up to do.

Krugman is whacking another pillar of the church: the infallibility of the post-industrial service economy.  This doctrine holds that we are past making 'things,' whether it's clothes and steel (dubbed 'sunset industries'), or computers and consumer electronics (mere 'commodities'), and our economic future is in services, as in, say, financial services. (Funny how the cheerleaders for the post-industrial economy were so jazzed by China's economic miracle - though it sprang from manufacturing, not services.)

The under-appreciated Eamonn Fingleton has pointed out that policy-makers' misplaced faith in a service economy is an error of historic proportions.  At any rate, Krugman brings up the often-overlooked fact that most of the world's economic activity still involves making things - and our ability to make things has been crippled by the financial sector's growth.

Kevin Phillips has chronicled what happens when manufacturing is eclipsed by finance, and it is not pretty.  Krugman is catching up. In his December 19th column, he writes:

The financial services industry has claimed an ever-growing share of the nation's income over the past generation, making the people who run the industry incredibly rich. Yet, at this point, it looks as if much of the industry has been destroying value, not creating it. And it's not just a matter of money: the vast riches achieved by those who managed other people's money have had a corrupting effect on our society as a whole. ...

[H]ow much has our nation's future been damaged by the magnetic pull of quick personal wealth, which for years has drawn many of our best and brightest young people into investment banking, at the expense of science, public service and just about everything else? Most of all, the vast riches being earned -- or maybe that should be "earned" -- in our bloated financial industry undermined our sense of reality and degraded our judgment.

The problem is the bloated financial industry itself, not just bloated salaries in the industry.  It has undermined and degraded our productive capacity, our ability to make the things we use in our everyday lives, leaving us dangerously dependent on uncertain sources of not just energy, but food, clothing and technology as well.

Even Tom Friedman, that archbishop of flat-earthism, is beginning to see the light. Two days before Christmas he wrote:

[W]e've fallen into a trend of diverting and rewarding the best of our collective I.Q. to people doing financial engineering rather than real engineering. These rocket scientists and engineers were designing complex financial instruments to make money out of money -- rather than designing cars, phones, computers, teaching tools, Internet programs and medical equipment that could improve the lives and productivity of millions.

Sorry, Tom, but we didn't fall into a trend - we jumped head first into the post-industrial-financial-service-economy-is-the-future abyss, and you were standing tall at the edge of the flat world assuring us the bungee cord was secure.

In reality, research and engineering follow production. You'll find the researchers and engineers creating the next generation of technology right there where you find people making the cars, phones, computers and medical equipment we use today.

This is cross posted on my blog Relevant Information, http://ellisinfo.blogspot.com/.