|New Trade Theory|
|File:Paul Krugman-press conference Dec 07th,|
|Birth||February 28, 1953|
|Alma mater||MIT (Ph.D.)|
Yale University (B.A.)
|Influences||John Maynard Keynes|
|Awards||John Bates Clark Medal (1991)|
Nobel Memorial Prize in Economics (2008)
|Information at IDEAS/RePEc|
Paul Robin Krugman (pronounced /ˈkruːɡmən/), born February 28, 1953, is a prominent American economist, columnist, and author. He is a professor of economics and international affairs at Princeton University, a centenary professor at the London School of Economics, and an op-ed columnist for The New York Times. In 2008, Krugman won the Nobel Memorial Prize in Economics "for his analysis of trade patterns and location of economic activity." Krugman is known in academia for his work in international economics, including trade theory, economic geography, and international finance. As of 2006, Krugman had written or edited in excess of 25 books, over 40 scholarly articles and 750 columns at the New York Times dealing with current economic and political issues.
Krugman was born into a Jewish family and grew up on Long Island in New York. He graduated from John F. Kennedy High School in Bellmore. He is married to Robin Wells, a fellow professor at Princeton, his second wife. They have no children.
Krugman says that his interest in economics began with Isaac Asimov's Foundation novels, in which the social scientists of the future use "psychohistory" to attempt to save civilization. Since "psychohistory" in Asimov's sense of the word does not exist, Krugman turned to economics, which he considered the next best thing.
Krugman earned his B.A. in economics from Yale University in 1974 and his Ph.D. from the Massachusetts Institute of Technology (MIT) in 1977. From 1982 to 1983, he spent a year working at the Reagan White House as a staff member of the Council of Economic Advisers. He taught at Yale University, MIT, UC Berkeley, the London School of Economics, and Stanford University before joining Princeton University in 2000 as professor of economics and international affairs. He is also currently a centenary professor at the London School of Economics, and a member of the Group of Thirty international economic body as well as the Council on Foreign Relations.
When Bill Clinton came into office in 1993, he considered Krugman for a leading post; Krugman was flown out for a meeting in Arkansas. Krugman's outspokenness was reported to be "the main reason the Clinton administration didn't offer him a job." Krugman says he would not have been interested in such a job; he told Newsweek, "I'm temperamentally unsuited for that kind of role. You have to be very good at people skills, biting your tongue when people say silly things." In his New York Times blog, Krugman repeated that statement, saying that he was "temperamentally unsuited to politics".
Paul Krugman has done extensive work in international economics, including work on international trade, economic geography, and international finance. According to the Research Papers in Economics project, he is among the 50 most influential economists in the world today. Krugman's International Economics: Theory and Policy, co-authored with Maurice Obstfeld is a standard introductory textbook on international economics. He also writes on economic topics for the general public, sometimes on international economic topics but also on income distribution and public policy.
As the Nobel Prize Committee explains, Krugman's main contribution is to analyze the impact of economies of scale in international trade. Prior to Krugman's work, trade theory (see David Ricardo and Hecksher-Ohlin model) emphasized trade between countries with very different characteristics, such as a poor country exporting agricultural goods to a rich country in exchange for industrial products, in their differences create benefits due to comparative advantage. However, in the 20th century, an ever larger share of trade occurred between countries with very similar characteristics, which is difficult to explain by comparative advantage. The Nobel committee, for example, mentions Sweden exporting Volvo cars to Germany while Germany exports BMW cars to Sweden.
Krugman's explanation of trade between similar countries was proposed in a 1979 paper in the Journal of International Economics. He assumes that consumers prefer a diverse choice of brands, and that production favors economies of scale. Consumers' preference for diversity explains the survival of different versions of cars like Volvo and BMW. But because of economies of scale, it is not profitable to spread the production of Volvos all over the world; instead, it is concentrated in a few factories and therefore in a few countries (or maybe just one). This logic explains how each country may specialize in producing a few brands of any given type of product, instead of specializing in different types of products.
Most models of international trade nowadays follow Krugman's lead, incorporating economies of scale in production and a preference for diversity in consumption. This way of modeling trade has come to be called New Trade Theory.
When there are economies of scale in production, it is possible that countries may become 'locked in' to disadvantageous patterns of trade. Nonetheless, trade remains beneficial in general, even between relatively similar countries, because it permits firms to save on costs by producing at a larger, more efficient scale, and because it increases the range of brands available and sharpens the competition between firms. Therefore, Krugman has usually been supportive of free trade and globalization, and critical of industrial policy. (He writes on p. xxvi of his book The Great Unraveling that "I still have the angry letter Ralph Nader sent me when I criticized his attacks on globalization.")
On a lighter note, in 1978, Krugman wrote The Theory of Interstellar Trade, a tongue-in-cheek essay on computing interest rates on goods in transit near the speed of light. He says he wrote it to cheer himself up when he was "an oppressed assistant professor".
If trade is largely shaped by economies of scale, as Krugman's trade theory argues, then those economic regions with most production will be more profitable and will therefore attract even more production. That is, Krugman's trade theory implies that instead of spreading out evenly around the world, production will tend to concentrate in a few countries, regions, or cities, which will become densely populated but also have higher levels of income. This forms the basis of Krugman's theory of economic geography, which he began to develop in a 1991 paper in the Journal of Political Economy.
In addition to his work on international trade, Krugman has also been influential in the field of international finance economics. In 1979 he published a model of currency crises in the Journal of Money, Credit, and Banking showing that fixed exchange rate regimes are unlikely to end smoothly: instead, they end in a sudden speculative attack. Krugman's paper is considered one of the main contributions to the 'first generation' of currency crisis models.
Krugman was awarded the Nobel Memorial Prize in Economic Sciences, the sole awardee for 2008. This award, created in 1968 by the Swedish central bank in Alfred Nobel’s memory, includes a prize of about $1.4 million and was awarded to Krugman for his work associated with New Trade Theory. In the words of the prize committee, "By having integrated economies of scale into explicit general equilibrium models, Paul Krugman has deepened our understanding of the determinants of trade and the location of economic activity."
Krugman wrote first for Fortune and Slate, later for The Harvard Business Review, Foreign Policy, The Economist, Harper's, and Washington Monthly. Krugman said that to answer what he called Pop Internationalism, "I would have to write essays for non-economists that were clear, effective, and entertaining."
Since January 2000, Krugman has contributed a twice-weekly column to the Op-Ed page of the New York Times, which has made him, in the words of the Washington Monthly, "the most important political columnist in America... he is almost alone in analyzing the most important story in politics in recent years — the seamless melding of corporate, class, and political party interests at which the Bush administration excels."
According to The Economist, in 2003 Krugman was ranked[dubious ] as the second most partisan American political columnist, behind only Ann Coulter. The Economist concluded that Krugman gives lay readers the illusion that his personal political beliefs can somehow be derived empirically from economic theory.
In September, 2003, Krugman published a collection of his columns under the title, The Great Unraveling. Taken as a whole, it was a scathing attack on the Bush's administration's economic and foreign policies. His main argument was that the large deficits generated by the Bush administration—generated by decreasing taxes, increasing public spending, and fighting a war in Iraq — were in the long run unsustainable, and would eventually generate a major economic crisis. The book was a best-seller.
In 2007, Krugman published The Conscience of a Liberal, a book detailing the history of wealth and income gaps in the United States in the 20th century, and stared a blog of the same name. The book describes how the gap between rich and poor declined greatly in middle of the century, and then widened in the last two decades to levels higher even than in the 1920s. Most economists (including Krugman) have regarded the late-20th century divergence as resulting largely from changes in technology and trade, but Krugman writes that government policies played a much greater role than commonly thought, both in reducing the gap in the 1930s through 1970s and in widening it in the 1980s through the present. He rebuked the Bush administration for implementing policies that greatly widened the gap between the rich and poor. Krugman proposed a "new New Deal", which included placing more emphasis on social and medical programs and less on national defense. The book was praised in The New York Review of Books. 
Economist Daniel B. Klein published during 2008 a paper in Econ Journal Watch (of which he is the chief editor) that reviews and criticizes Krugman's columns for the New York Times. Klein contends that Krugman's "social-democratic impetus sometimes trumps people's interests, notably poor people's interests... Krugman has almost never come out against extant government interventions, even ones that expert economists seem to agree are bad, and especially so for the poor."[dubious ] Economist William L. Anderson has argued that Krugman's economic views are politically partisan and consistently promote a socialist agenda. Donald Luskin of the National Review is another frequent critic of Krugman. He has argued that that "Krugman’s liberal agenda always takes precedence over economic principle."
Daniel Okrent, a former New York Times ombudsman, criticized Paul Krugman for "the disturbing habit of shaping, slicing and selectively citing numbers in a fashion that pleases his acolytes but leaves him open to substantive assaults." Okrent has also said that "when someone challenged Krugman on the facts, he tended to question the motivation and ignore the substance."
In the 1990s, Krugman increasingly focused on writing books for a general audience on issues he considered important for public policy. In The Age of Diminished Expectations and The Conscience of a Liberal, he wrote in particular about the increasing US income inequality in the "New Economy" of the 1990s. He attributes the rise in income inequality in part to changes in technology, but principally to a change in political atmosphere which has been widely manipulated by Movement Conservatives.
In 1994 Foreign Affairs article, Paul Krugman argued that the idea of an "Asian economic miracle" was a myth. His article helped popularize the argument made by Laurence Lau and Alwyn Young, among others, that the growth of economies in East Asia was not the result of new and original economic models, but rather from high capital investment and increasing labor force participation, and that total factor productivity had not increased. Krugman argued that in the long term, only increasing total factor productivity can lead to sustained economic growth.
During the 1997 Asian financial crisis, Krugman advocated currency controls as a way to mitigate the crisis, saying "never in the course of economic events- not even in the early years of the Great Depression- has so large a part of the world economy experienced so devastating a fall from grace." Krugman later stated that his article advocating controls was ill-judged. Malaysia was the only country that adopted currency controls. Most countries recovered from the crisis in about two years, but the economy of Malaysia rebounded relatively more quickly.
Since joining the New York Times, a major theme of Krugman's writings has been Alan Greenspan's and the Bush administration's economic policies, which he blames for the US financial crisis and the weak performance of the economy since 2001.
In August 2002, Krugman argued that the economy would not recover quickly, and wrote that, "To fight this recession the Fed needs more than a snapback; it needs soaring household spending to offset moribund business investment. And to do that, as Paul McCulley of Pimco put it, Alan Greenspan needs to create a housing bubble to replace the Nasdaq bubble." He further noted that, "If we do have a housing bubble, and it bursts, we'll be looking a lot too Japanese for comfort" (referring to the Japanese 'lost decade' of slow growth in the 1990s). Krugman later stated that his statement about "a housing bubble to replace the Nasdaq bubble" was economic analysis and not policy advocacy.
In 2005, after Greenspan expressed concern over housing markets, Krugman criticized Greenspan's earlier reluctance to regulate the mortgage and related financial markets, arguing that "[he's] like a man who suggests leaving the barn door ajar, and then – after the horse is gone – delivers a lecture on the importance of keeping your animals properly locked up."
Krugman has repeatedly expressed his view that Alan Greenspan and Phil Gramm are the two individuals most responsible for causing the subprime crisis. Krugman points to Greenspan and Gramm for the key roles they played in keeping derivatives, financial markets, and investment banks unregulated, and to the Gramm-Leach-Bliley Act, which repealed depression era safeguards that prevented commercial banks, investment banks and insurance companies from merging.
Krugman describes himself as politically liberal. His choice of the book title "The Conscience of a Liberal" is a play on Barry Goldwater's "Conscience of a Conservative". Krugman has explained that he views the term "liberal" in the American context to mean "more or less what social democratic means in Europe". He was an ardent critic of the George W. Bush administration and its foreign and domestic policy.
Krugman has sometimes advocated free markets in contexts where the American left condemns them, by writing against rent control, and that "sweatshops" are an inevitable reality. He has likened the opposition against free trade to the opposition against evolution via natural selection. Unlike many economic pundits, he is regarded as an important scholarly contributor by his peers. He has written over 200 scholarly papers and 20 books—both academic and non-academic.
Krugman has written in opposition to increasing farm subsidies, ethanol mandates and subsidies/tax breaks, manned NASA space flights, and has written against some aspects of European labor market regulation.
He has, however, declared himself an ardent supporter of the welfare state. His appointment in the Reagan Administration, he has reiterated in an autobiographical essay, was not expected or fitting. "It was, in a way, strange for me to be part of the Reagan Administration. I was then and still am an unabashed defender of the welfare state, which I regard as the most decent social arrangement yet devised." 
Krugman has been a prominent critic of the Obama administration's economic policies, in particular its efforts to prop up the US financial system, which he considers unsustainable in its present form. Krugman has criticized the Obama stimulus plan as inadequate and the banking rescue plan as misdirected; Krugman wrote in the New York Times: "an overwhelming majority [of the American public] believes that the government is spending too much to help large financial institutions. This suggests that the administration’s money-for-nothing financial policy will eventually deplete its political capital."
Krugman has praised Gordon Brown, the British Prime Minister, asserting that he "saved the world financial system" and has since urged British voters not to support the opposition Conservative Party, arguing their Party Leader David Cameron "has had little to offer other than to raise the red flag of fiscal panic".
Krugman served on a panel of several economists that offered Enron executives briefings on economic and political issues. He did this in early 1999, before New York Times rules required him to resign when he accepted an offer to be an op-ed columnist in the fall of 1999. Krugman later stated that he was paid $37,500 for the consulting that required him to "spend four days in Houston", and that the fee was "rather low compared with my usual rates".
When the story of Enron's corporate scandals broke, critics[who?] accused him of having a conflict of interest and the job of having been a bribe to control media coverage, charges he denies, referring to it as "a game of gotcha" and "tabloid journalism." He states that the payment from Enron did not "cause me to write anything I would not have written otherwise." For one thing, he says, he was not a journalist at the time: "when Enron approached me there was no hint that a Times connection lay in my future. As soon as I shook hands with the Times, I resigned from that board." Further, his "normal fee for a one-hour business speech in Boston or New York was $20,000 - more if the speech involved long-distance travel. The Enron board required that I spend 4 days in Houston"; thus the sum involved was not large, in his view. He says that in columns written before and after the scandal, he disclosed his past Enron relationship when he wrote about the company. He was critical of the company: he was one of the first writers to argue that deregulation of the California energy market had led to market-manipulation by energy companies (in a column in the New York Times on December 10, 2000 called "California Screaming"); Enron was the largest in this market - "I have been criticizing Enron since January 2001, long before everyone else started bashing the company."
He writes in The Great Unraveling (p. 26) that:
I was no more perceptive than anyone else; during the bull market years [of the late 1990s] some people did send me letters claiming that major corporations were cooking their books, but - to my great regret - I ignored them. However, when Enron - the most celebrated company of its time, lauded as the very model of a modern business enterprise - blew up, I immediately saw the implications: if such a famous and celebrated company could have been a Ponzi scheme, it was very unlikely that the rest of U.S. business was squeaky clean. In fact, it quickly became clear, the bubble years were both the cause and effect of an epidemic of corporate malfeasance.
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