Paul Krugman Wins the Nobel in Economics

It is interesting to note that two of the American economics scholars who have been consistently the most clear-headed—and the most accurate—about the present economic crisis in which we all find ourselves were past Nobel Prize winner Joseph Stieglitz…. and the man who won the Nobel Prize in Economics today, the happily scruffy, wildly intelligent Paul Krugman. He won for his analysis of how economies of scale can affect international trade patterns.

It was only the second time since 2000 that a single laureate won the prize, “which is typically shared by two or three researchers,” notes the AP.

Congrats, Paul!

(I wonder if they’re paying him in kroner or in dollars. Pssssst. Paul. You might want go for the kroner. Oh, right. You’re way ahead of us on that stuff. Okay, nevermind.)

Here’s the AP story.

And here Harvard economist, Edward L. Glaeser, tells us why Krugman won. Here’s a clip:

They gave this prize to honor a truly seminal figure in economic trade and geography. Mr. Krugman’s fame as a public intellectual should not lead anyone to think that they understand his contributions to economic research just because they regularly read his columns.

The Nobel Prize citation highlights two distinct but connected contributions: Mr. Krugman’s development of the “new trade theory” and his work on the “new economic geography.” International trade has a long history in economics, and for the bulk of the field’s history, patterns of trade have been explained by factor endowments and comparative advantage. Why does England export wool and Portugal export wine? The cold winters of Yorkshire produce really fluffy sheep and the banks of the Douro produce splendid grapes. Yet comparative advantage does little to explain much of modern international trade, especially not trade within industries.

Mr. Krugman published two seminal papers in 1979 and 1980 that made sense of the fact that Toyota sells cars in Germany and Mercedes-Benz sells cars in Japan. Mr. Krugman started with a variant of Edward Chamberlain’s model of monopolistic competition. In this model, every firm sells a slightly different good — an Infiniti is not exactly the same thing as a BMW. There are fixed costs of production, which means that producers get more efficient as they sell more. Finally, consumers like variety, so that even if they live in the Land of the Rising Sun, with its abundant well-made cars, they still occasionally want something a little more Teutonic.
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Anyway, read the rest.

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By the way, I meant to post it last night (but ran out of time and steam), but Krugman’s column in this morning’s NY Times is a good one, and it is even vaguely, sorta, slightly, a teensy weensy bit optimistic.

It’s about the concept called “equity injection”—and how the Brits are taking this path—which is what Krugman and a lot of smart folks had been recommending from the get-go, but that Pauson (and many, but not all, Republicans) rejected outright.

Here’s some of what Krugman said, but read the whole column. It’ll put you in a better mood, I promise.

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.

But when Henry Paulson, the U.S. Treasury secretary, announced his plan for a $700 billion financial bailout, he rejected this obvious path, saying, “That’s what you do when you have failure.” Instead, he called for government purchases of toxic mortgage-backed securities, based on the theory that … actually, it never was clear what his theory was.

Meanwhile, the British government went straight to the heart of the problem……

(The photo is of Krugman and wife, Robin Wells, also a professor at Princeton.)