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Paul Krugman’s Book “End This Depression Now” is available…

… and I bought a copy yesterday at my favorite bookstore (The Four Seasons, in Shepherdstown WV). I have to admit I received a discount since I had a $5.00 certificate which I won playing a riddle quiz on WSHC on Thursday morning, but I would have bought it anyway.

Paul Krugman

Krugman thinks the country’s economic problems are solvable, and he uses his book to lead us to the solutions.

“We didn’t have a plague of locusts, we were not hit by a tsunami, there wasn’t some act of God that created this terrible situation. It was acts of man.”

…Krugman said yesterday to a Netroots Nation conference in Rhode island. he also commented on the NY Times reception of his book:

The New York Times Book Review is run by Sam Tanenhaus, who is very much a neocon, and makes a point whenever a progressive comes out with a book to find someone who will attack it. It’s not really an attack, but the reviewer is shocked at the lack of respect I show for ‘highly respected people,’ I think he uses that phrase.”

Another thing Krugman said, which may show up on my Quotes of the Decade series:

“If you don’t know multiple people who are suffering, then you must be living in a very rarefied environment… you must be maybe a member of the Romney clan, or something.”

A Quote for the Day – From the Sunday Morning Talkers

“Anyone who says we need to be bipartisan should bear in mind that for the last several weeks Mitch McConnell, the Senate Minority Leader had been trying to stop reform with possibly the most dishonest argument ever made in the history of politics, which is the claim that having regulation of the banks actually bailing out the banks and that basically the argument boiled down to saying what we really need to do to deal with fires is abolish the fire department, because then people will know that they can’t let their buildings burn in the first place, right. It’s an incredible… so anyone who says bipartisan doesn’t include the Senate Minority Leader.”

– Paul Krugman on ABC this morning.

Here’s an editorial I reprint from Truthout in its entirety:

Yes, Virginia, There is a Legitimate Case Against Free Trade

Sunday 25 April 2010

by: Ian Fletcher, t r u t h o u t | Op-Ed

There is a myth in wide circulation that the superiority of free trade is simply a settled question on which all serious economists agree. The flip side of this myth, of course, is that anyone who criticizes free trade must either be ignorant of economics, or the spokesman of some special interest which hopes to benefit from trade restrictions. Such critics are not only wrong, the story continues with admittedly impeccable logic, but profoundly worthy of public contempt, as they are necessarily either dumb or corrupt.

Unfortunately, this myth is just that: a myth, promoted by special interests which benefit from free trade, whatever the harm to the rest of the economy. Serious economists actually recognize a number of very serious criticisms of free trade – even economists who ultimately decide that free trade is better than the alternatives. They generally don’t talk about the flaws of free trade too loudly, for fear of provoking the public into supporting stupid forms of protectionism, but they certainly know they are there.

Thanks to recent developments in economics (most visibly signaled by Paul Krugman’s winning the 2009 Nobel Prize), these criticisms are becoming more serious every day. There is, in fact, an inexorable erosion of the credibility of free trade going on in the academy, not that you’d know it from watching the economists who show up on TV.

The rest of this article is just a wee bit technical. The point is not to baffle the reader, but to pry open the mysterious “black box” of free trade economics a little, and let non-economists in on the big secret that economists regard as dangerous to talk about too loudly: free trade economics is a package of mechanisms that, like any piece of machinery, can and do break down all the time. And when they break down, free trade ceases to be a good idea.

Let’s crack open that intimidating black box, shall we, and have a look at the machinery inside? Free trade has roughly ten very serious problems.

The first problem is the assumption that trade is sustainable. But a nation exporting non-renewable resources may discover that its best move (in the short run) is to export until it runs out. The flip side of this problem is overconsumption, in which a nation (like the present-day U.S., maybe?) borrows from abroad in order to finance a short-term binge of imports that lowers its long-term living standard due to the accumulation of foreign debt and the sale of assets to foreigners.

The second problem is that free trade increases inequality even if it makes the economy grow overall (which is itself questionable). Because free trade tends to raise returns to the abundant input to production (in America, capital) and lower returns to the scarce input (in America, labor), it tends to benefit capital at labor’s expense. Economists call this the Stolper-Samuelson theorem.

The third problem is so-called “negative externalities,” the economists’ term for when economic value is destroyed without a price tag being attached to the damage. Environmental damage is the most obvious example, but there are others, like the cost of writing off expensively-developed human capital (otherwise known as “people”) when free trade wipes out entire American industries.

The fourth problem is positive externalities, like the way some industries (mainly high technology) open up paths of growth for the entire economy. All industries are not alike, and the profits of an industry today do not necessarily predict the industry’s long-term value for the economy. Free trade can allow these industries to be wiped out because it ignores this hidden value, harming the rest of the economy for decades to come.

The next four problems concern the all-important Theory of Comparative Advantage, the theoretical keystone of free trade economics. This theory, invented by the British economist David Ricardo in 1817, says that free trade will automatically cause nations to specialize in producing whatever they are relatively best at, and that this will lead to the best of all possible worlds. To wit:

Problem number five is that Ricardo’s theory assumes factors of production are mobile within nations. Unemployed autoworkers become aircraft workers, and abandoned automobile plants turn into aircraft factories. But this doesn’t always happen, and when it does, it is often at considerable cost.

Problem number six is the assumption, in Ricardo’s theory, that the inputs used in production (like labor, capital, and technology) are not mobile between nations. His theory says that free trade automatically reshuffles a nation’s factors of production to their most productive uses. But if factors of production are internationally mobile, and their most-productive use is in another country, then free trade will cause them to migrate there – which is not necessarily best for the nation they depart.

Problem number seven is that Ricardo’s theory assumes the economy is always operating at full output – or at least that trade has no effect on its output level. But if trade puts people and factories out of action, this isn’t true.

Problem number eight is that Ricardo’s theory assumes short-term efficiency is the origin of long-term growth. But long-term economic growth is about turning from Burkina Faso into South Korea, not about being the most-efficient possible Burkina Faso forever. History has shown time and again that the short-term inefficiencies of a tariff, properly implemented, are more than compensated for by the long-term spur to industry growth it can provide, largely because growth has more to do with the industry externalities mentioned above (problem number four) than short-term efficiency per se.

Problem number nine is that Ricardo’s theory merely guarantees (if true, which is itself questionable due to problems five through eight) there will be gains from free trade. It does not guarantee that changes induced by free trade, like rising productivity abroad, will cause these gains to grow rather than shrink. So if free trade strengthens our economic rivals, then it may harm us in the long run by stiffening international competition, even if it was advantageous for us to buy goods from these rivals in the short run.

The final problem is that, in the presence of scale economies, the perfectly-competitive international markets presumed by the theory of comparative advantage do not exist. Instead, industries tend to be imperfectly competitive and quasi-monopolistic. Under these conditions, outsize profits and wages accrue to nations that host such industries. And free trade will not necessarily assign any given nation these industries.

Hopefully, the above list should convince the reader that free trade is, at the very least, an extremely complicated question, and by no means something that anyone is entitled to consider simply settled. Therefore, it is high time that free trade’s critics were given the serious hearing that they deserve. America desperately needs a full-fledged debate on whether to continue with its Cold War policy of free trade or return to the protectionism we embraced from Independence until roughly the end of WWII.

Truthout / CC BY-NC 3.0

Krugman: Government Involvement Is The Only Reason Our Health Care System Works

Paul Krugman’s last column hits the nail on the head

At a recent town hall meeting, a man stood up and told Representative Bob Inglis to “keep your government hands off my Medicare.” The congressman, a Republican from South Carolina, tried to explain that Medicare is already a government program — but the voter, Mr. Inglis said, “wasn’t having any of it.”

It’s a funny story — but it illustrates the extent to which health reform must climb a wall of misinformation. It’s not just that many Americans don’t understand what President Obama is proposing; many people don’t understand the way American health care works right now. They don’t understand, in particular, that getting the government involved in health care wouldn’t be a radical step: the government is already deeply involved, even in private insurance.

And that government involvement is the only reason our system works at all.

To read it all, go HERE.

Krugman: Overwhelming evidence that the Free Market is not the solution for Health Care

Krugman’s last piece in the NY Times yesterday makes a crucial point concerning the Insurance Industry’s push for a free market solution for health care.

An edited quote (I recommend reading the whole thing in its original format):

There are two strongly distinctive aspects of health care. One is that you don’t know when or whether you’ll need care — but if you do, the care can be extremely expensive. The big bucks are in triple coronary bypass surgery, not routine visits to the doctor’s office; and very, very few people can afford to pay major medical costs out of pocket.

This tells you right away that health care can’t be sold like bread. It must be largely paid for by some kind of insurance. And this in turn means that someone other than the patient ends up making decisions about what to buy. Consumer choice is nonsense when it comes to health care. And you can’t just trust insurance companies either — they’re not in business for their health, or yours.
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The second thing about health care is that it’s complicated, and you can’t rely on experience or comparison shopping. (”I hear they’ve got a real deal on stents over at St. Mary’s!”) That’s why doctors are supposed to follow an ethical code, why we expect more from them than from bakers or grocery store owners.
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Between those two factors, health care just doesn’t work as a standard market story.

Krugman points out that this doesn’t mean “socialized medicine” is the solution. Nor is “single-payer” the only way to go. But,

…(t)here are, however, no examples of successful health care based on the principles of the free market, for one simple reason: in health care, the free market just doesn’t work.

There are, however, obscenely profitable Insurance Companies based on the free market, and it would seem that they will do anything to stay that way.