Paul Krugman joins Al Gore as a nobel price winner

[Arne]

Krugman and the Nobel Fraud

by William L. Anderson

"What’s wrong?" my wife asked anxiously as I looked at the computer screen. I didn’t answer, except to blurt out another, "Oh, no!" Finally, I looked at her and said quietly, "Paul Krugman has won the Nobel in economics."

"Whew!" she answered. "I thought maybe one of your parents had died." "No," I replied. "This is much worse."

And, so an intellectual event matched only by the sacking of Constantinople in 1453, the Swedish central bank has announced that Krugman will take his place alongside F.A. Hayek and others as the Nobel laureate. Now, the bank announced that the prize was for Krugman’s semi-discombobulated trade theories, not his incoherent, Keynesian columns that he writes for the Democratic Party, er, the editorial page of the New York Times.

Now, before going on, I must say that most of the people who have received the Nobel in economics actually were economists; this is the first time I have seen a pure political operative receive the prize. However, there is precedence for this outrage: last year, Al Gore won the Nobel Peace Prize for his crackpot movie on Global Warming; this year Gore preaches violence against those who might have different thoughts or who might be economic competitors of his own bankrolled "new technologies."

(If any executive were to call for violence to shut down his competitors, he would be vulnerable to being charged under the RICO statutes; Gore, of course, receives a free pass. That is what a Nobel can do.)

Thus, armed with his Nobel, Krugman almost surely will be able to set forth with his own crackpot economic "theories" and ride this prize to a high position in the upcoming Obama administration. Because he has been front-and-center in the latest debate on the meltdown in financial markets, perhaps it is time to see what Mr. Nobel believes will be our economic salvation.

What better place to start than with today’s column in which he praises the British government for nationalizing the country’s banks? He writes:

“But the (Gordon) Brown government has shown itself willing to think clearly about the financial crisis, and act quickly on its conclusions. And this combination of clarity and decisiveness hasn’t been matched by any other Western government, least of all our own.

What is the nature of the crisis? The details can be insanely complex, but the basics are fairly simple. The bursting of the housing bubble has led to large losses for anyone who bought assets backed by mortgage payments; these losses have left many financial institutions with too much debt and too little capital to provide the credit the economy needs; troubled financial institutions have tried to meet their debts and increase their capital by selling assets, but this has driven asset prices down, reducing their capital even further.

What can be done to stem the crisis? Aid to homeowners, though desirable, can’t prevent large losses on bad loans, and in any case will take effect too slowly to help in the current panic. The natural thing to do, then – and the solution adopted in many previous financial crises – is to deal with the problem of inadequate financial capital by having governments provide financial institutions with more capital in return for a share of ownership.

This sort of temporary part-nationalization, which is often referred to as an "equity injection," is the crisis solution advocated by many economists – and sources told The Times that it was also the solution privately favored by Ben Bernanke, the Federal Reserve chairman."

As with so many other Krugman howlers, it is hard to know where to begin. First, this "liquidity crisis" exists because the banks found themselves owning worthless assets and, thus, could not raise the cash to make loans. This is kind of like my throwing my household money into pork bellies, losing my shirt, and then not having the cash on hand to pay my bills.

Krugman makes a huge assumption, and that is that governments actually have the spare change to raise the money to "inject" into the system. The $700 billion boondoggle (which he supported) means the government must float what surely has to be the largest single bond issue in history, with the seller on the hunt for suckers. (I don’t even want to think of logistics of this nonsensical exercise, except to say that in the end, the Fed will purchase the bonds and monetize the whole thing.)

Thus, this is not an "equity injection." It is a backdoor attempt by the government to print money, give it to banks, and call it equity. Furthermore, the reason that these banks got into trouble in the first place was because they made a series of very bad loans, yet the government is insisting that they continue to march in the same direction, even though a very high and thick wall stands in their way.

However, Krugman saves the best for last. The problem, he declares, is that the Bush administration is too free-market oriented to be able to solve this crisis:

"Meanwhile, the British government went straight to the heart of the problem – and moved to address it with stunning speed. On Wednesday, Mr. Brown’s officials announced a plan for major equity injections into British banks, backed up by guarantees on bank debt that should get lending among banks, a crucial part of the financial mechanism, running again. And the first major commitment of funds will come on Monday – five days after the plan’s announcement.

At a special European summit meeting on Sunday, the major economies of continental Europe in effect declared themselves ready to follow Britain’s lead, injecting hundreds of billions of dollars into banks while guaranteeing their debts. And whaddya know, Mr. Paulson – after arguably wasting several precious weeks – has also reversed course, and now plans to buy equity stakes rather than bad mortgage securities (although he still seems to be moving with painful slowness).

As I said, we still don’t know whether these moves will work. But policy is, finally, being driven by a clear view of what needs to be done. Which raises the question, why did that clear view have to come from London rather than Washington?

It’s hard to avoid the sense that Mr. Paulson’s initial response was distorted by ideology. Remember, he works for an administration whose philosophy of government can be summed up as "private good, public bad," which must have made it hard to face up to the need for partial government ownership of the financial sector."

Now, I know that having a Nobel Prize gives one a certain amount of authority to speak in certain areas, but I must say that an administration that has ratcheted government spending to ruinous levels, effectively nationalized the financial system, and engages in systematic abuse of its citizens hardly qualifies as "free-market." Henry Paulson might be a lot of things, but a clone of Ron Paul is not one of them.

So, Krugman continues to peddle his snake oil, but today he gets to do it as the Nobel Laureate instead of just another partisan hack. Nonetheless, having a Nobel will enhance his stature as a guy who supposedly knows something. However, just as the peace prize does not make Al Gore a man of peace, neither does the Nobel Prize in Economics make Paul Krugman an economist. As I wrote five years ago:

… since my own writings have been extremely critical of the Bush Administration and both political parties, it does not bother me to read Krugman's anti-Republican rants. What does bother me is that the man pretends to be something he clearly is not: an economist.

That is correct. Let me say it again. Paul Krugman is not an economist. His colleagues in the economics profession and the editorial board of the Times may call him an economist, but that does not make him one.

This is harsh criticism, I realize, so I must explain my views in full. Yes, Krugman has a Ph.D. from MIT in economics, but his writings, both popular and academic, demonstrate that he does not believe in laws of economics. Instead, like most folks with socialist leanings, he believes that the state is both omniscient and omnipotent and simply by fiat can eliminate those pesky little problems caused by scarcity.

Whether it is the discussion of medical care or the nation’s financial system, Krugman believes that the state through edicts and the use of force can eliminate scarcity, a point of view he has not changed throughout the years. The Nobel Laureate, in the end, is just another statist hack and nothing else.

October 14, 2008
William L. Anderson, Ph.D. [send him mail], teaches economics at Frostburg State University in Maryland, and is an adjunct scholar of the Ludwig von Mises Institute.He also is a consultant with American Economic Services.

Copyright © 2008 LewRockwell.com

http://www.lewrockwell.com/anderson/anderson229.html

This guy said we need a new New Deal... Prepare for an even worse recession/depression.

[Epitome22]

That was a pretty hacktackular piece you published. Hint: Lewrockwell.com may be a good place if you're looking for 90 page essays on the tyranny of public sidewalks or why we need to go back to the gold standard but if you're one of the hundreds of millions of people too sane to care about what Ron Paul is up to, it's not a good place to look for economics commentary


but yes, Paul Krugman did win the Nobel Prize in Economics. You got that much correct.

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Paul Krugman wins the Nobel Prize
Tyler Cowen

He is cited for trade theory and, appropriately, location theory and economic geography. He could have been cited for his work on currency crises as well.

....Krugman is very well known for his work on strategic trade theory, as it is now called. Building on ideas from Dixit, Helpman, and others, he showed how increasing returns could imply a possible role for welfare-improving protectionism. Krugman, however, insisted that he did not in practice favor protectionism; it is difficult for policymakers to fine tune the relevant variables. Boeing vs. Airbus is perhaps a simple example of the argument. If a government can subsidize the home firm to be a market leader, the subsidizing country can come out ahead through the mechanism of capturing the gains from increasing returns to scale. Krugman himself has admitted that parts of the theory may be less relevant for rich-poor countries trade (America and China) rather than rich-rich trade, such as America and Japan.

I am most fond of Krugman's pieces on economic geography, in particular on cities and the economic rationales for clustering. He almost single-handedly resurrected the importance of "location theory," an all-important but previously neglected branch of economics. I believe this work will continue to rise in influence.

Award analysis: This was definitely a "real world" pick and a nod in the direction of economists who are engaged in policy analysis and writing for the broader public. Krugman is a solo winner and solo winners are becoming increasingly rare. That is the real statement here, namely that Krugman deserves his own prize, all to himself. This could easily have been a joint prize, given to other trade figures as well, but in handing it out solo I believe the committee is a) stressing Krugman's work in economic geography, and b) stressing the importance of relevance for economics.

http://www.marginalrevolution.com/marginalrevolution/

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What is New Trade Theory?
Alex Tabarrok

Congratulations to Paul Krugman on his Nobel. Here is a primer on one of Krugman's key contributions, New Trade Theory.

Ricardo showed that every country (and every person) has a comparative advantage, a good or service that they can produce at a lower (opportunity) cost than any other country (or person). As a result, production is maximized when each country specializes in the good or service that they produce at lowest cost, that is in the good in which they have a comparative advantage. Since specialization in comparative advantage maximizes production, trade can make every country better off.

But what determines comparative advantage? In Ricardo it is the natural products of the soil, Portugal is good at producing wine and so England has a comparative advantage in cloth. Heckscher, Ohlin and Samuelson among others extended the model to show how factor proportions can determine comparative advantage - countries with a lot of labor relative to capital, for example, will tend to have a comparative advantage in labor intensive goods production.

Notice, however, that in the Ricardian model and its extensions the determinants of comparative advantage like geography and factor proportions lie outside of the model. New Trade Theory of which Paul Krugman can be said to be the founder, brings the determinants of comparative advantage into the model.

Consider the simplest model (based on Krugman 1979). In this model there are two countries. In each country, consumers have a preference for variety but there is a tradeoff between variety and cost, consumers want variety but since there are economies of scale - a firm's unit costs fall as it produces more - more variety means higher prices. Preferences for variety push in the direction of more variety, economies of scale push in the direction of less. So suppose that without trade country 1 produces varieties A,B,C and country two produces varieties X,Y,Z. In every other respect the countries are identical so there are no traditional comparative advantage reasons for trade.

Nevertheless, if trade is possible it is welfare enhancing. With trade the scale of production can increase which reduces costs and prices. Notice, however, that something interesting happens. The number of world varieties will decrease even as the number of varieties available to each consumer increases. That is, with trade production will concentrate in say A,B,X,Y so each consumer has increased choice even as world variety declines.

Increasing variety for individuals even as world variety declines is a fundamental fact of globalization. In the context of culture, Tyler explains this very well in his book, Creative Destruction; when people in Beijing can eat at McDonald's and people in American can eat at great Chinese restaurants the world looks increasingly similar even as each world resident experiences an increase in variety.

Thus, Krugman (1979) can be thought of as providing another reason why trade can be beneficial and a fundamental insight into globalization.

Moreover, Krugman (1979) began the task of bringing the reasons for comparative advantage within the model. In that paper, Krugman also hypothesizes briefly about what happens when we allow migration within the model. Recall, that in Heckscher-Ohlin-Samuelson factor proportions explain trade patterns but are themselves determined outside of the model. When people and capital can move, however, factor proportions are themselves something to be explained.

Krugman (1991) (JSTOR and here) brings increasing returns together with capital and labor migration and transport costs into one model. Krugman's (1991) model has become a workhorse of economic geography and international trade. The model is too complex to explain here but the reasons for that complexity are clear to see - when everything becomes "endogenous" small initial differences can make for big effects. To minimize transport costs, for example, firms want to locate near consumers but consumers want to locate near work! Thus, there are multiple equilibria and at a tipping point the location decisions of a single firm or consumer can snowball into big effects. So Krugman has been a leader in introducing tipping points, network effects and thus the importance of history into international trade as well as into economics more generally.

http://www.marginalrevolution.com/marginalrevolution/

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Congratulations, Paul Krugman
Arnold Kling

He wins this year's Nobel in economics. Tyler Cowen has an excellent commentary and links.

Before Krugman, the only explanatory variable in international trade was factor endowments. You produced stuff because you happened to have the right type of land, or the right type of labor, or what have you. Moreover, there were diminishing returns, which meant that once location A had a large capacity to produce something, at the margin the next increase in production capacity for that product would likely be in location B.

Krugman suggested that there are increasing returns in an industry. That theory explains why movies are done in Hollywood, fashion is done in New York, autos are done in Detroit, and so forth. International trade patterns may owe more to historical accidents and path dependence than to factor endowments.

It is a classic contribution. In retrospect, it seems sensible and obvious. But until Krugman developed the argument, the rest of the economics profession was on a completely different wavelength.

UPDATE: I have a slightly longer tribute at Reason Online.

http://econlog.econlib.org/