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News : Irish Last Updated: May 5, 2009 - 8:33:36 AM

Nobel Laureate Krugman says "Erin go Broke" as Coughlan arrives in Washington
By Michael Hennigan, Founder and Editor of Finfacts
Apr 21, 2009 - 6:09:06 AM

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Paul Krugman receiving his Nobel Prize from King Carl XVI Gustaf of Sweden at the Stockholm Concert Hall, 10 December 2008.

Paul Krugman, Princeton University professor, New York Times columnist and winner of the 2008 Nobel Prize in Economics, is one of America's most influential economists and a week after raising hackles in Austria, coincidentally marked Tánaiste (Deputy Prime Minister) Mary Couglan's arrival in Washington for meetings with members of President Obama's Cabinet, with a Monday column titled “Erin Go Broke.” Coughlan is today ending a week-long trip to the US in which she pleaded for more US investment and jobs for Ireland at a particularly economically challenging time for America.

Last week, Paul Krugman said Austria may need a bank rescue that will seriously strain the country's resources

Finance minister Josef Pröll said the claims were "absolutely absurd", adding that Krugman was - perhaps unwittingly -– assisting a campaign of "economic warfare" against Vienna. "It is shameful," he said.

Pröll said the attacks may have been prompted by "envy" at Austria's success in eastern Europe over the last decade. Austrian banks have loans outstanding in in the region equivalent to 70 per cent of GDP, the highest of any country.

Krugman made the remarks to journalists, noting merely that Iceland and Ireland are in a bad way, and that Austria may"join the club".

"It seems to have reached the stage where I create a stir by saying the obvious,"he wrote in his blog. "Is Austria doomed? Of course not. It's not as outrageously leveraged as Iceland or even Ireland. But it may need a bank rescue that will seriously strain the country's resources."

On Monday, Paul Krugman wrote in his New York Times column:"“What,” asked my interlocutor, “is the worst-case outlook for the world economy?” It wasn’t until the next day that I came up with the right answer: America could turn Irish.

What’s so bad about that? Well, the Irish government now predicts that this year G.D.P. will fall more than 10 per cent from its peak, crossing the line that is sometimes used to distinguish between a recession and a depression."

Krugman wrote that like its near-namesake Iceland, Ireland jumped with both feet into the brave new world of unsupervised global markets. Last year the Heritage Foundation declared Ireland the third freest economy in the world, behind only Hong Kong and Singapore.

He said one part of the Irish economy that became especially free was the banking sector, which used its freedom to finance a monstrous housing bubble. Ireland became in effect a cool, snake-free version of coastal Florida.

Krugman concludes that the lesson of Ireland is that you really, really don’t want to put yourself in a position where you have to punish your economy in order to save your banks.

On his blog, Krugram writes:" I’ve been getting some reactions from the Emerald Isle, and a lot of them come down to this: OK as far as it goes, but I didn’t sufficiently emphasize the crony capitalism aspect. True: I was aware of all that, but it didn’t make it into my story, and perhaps it should have.

Of course, today’s column was essentially “America in an Irish mirror.” How does the cronyism affect that? In Ireland you had key government officials with close personal — and, in some cases, financial — ties to the people inflating the bubble. And there are complaints that despite the crisis that hasn’t changed."

Mary Coughlan has acknowledged that the Government has “a lot of work to do” to reassure foreign investors that it is taking the right steps to ensure that Ireland remains an attractive country in which to do business.

Speaking in Washington ahead of meetings with the US treasury secretary, commerce secretary and labour secretary, Coughlan described as unhelpful some economic commentary on Ireland’s difficulties.

“There has been comment which has been neither helpful nor, in my view, appropriate, and I would like to move on from that and give the view that we have collectively as a Government have, yes, difficult times, but we have the capacity to deal with these issues and we would like to revert back to the international reputation we had and continue to have,she told The Irish Times.

Yes indeed!

Blame economic commentary again!

Having been a member of Irish governments since 1997 and played a part in setting the economy on fire, of course, it would be nice to move on.

American economists such as Paul Krugman wouldn't be writing about Ireland now if Coughlan and her Cabinet colleagues had not treated criticism of their boom that had been built on quicksand, as treason.

Less than two years ago - -  in July 2007 - - the then Taoiseach (Prime Minister) Bertie Ahern, publicly lamented why critics of Irish economic policy  - - "cribbers on the sidelines"  - -  did not commit suicide.

Presentation Speech by Professor Bertil Holmlund, Member of the Royal Swedish Academy of Sciences, Chairman of the Nobel Economics Prize Committee, 10 December 2008

To an ever greater extent, international trade intertwines the world's economies with each other. Early in the 1950s, Swedish exports were equivalent to about 10 per cent of Gross Domestic Product; today exports amount to more than 50 per cent of GDP. A similar trend applies to a great majority of countries.

Questions about the causes and effects of international trade are among the classic fields of economic research. What determines trade patterns? Does trade enhance welfare? Who gains and who loses from trade? Nearly 200 years ago, the English economist David Ricardo developed his theory of comparative advantage, which explains trade in terms of differences in technology among various countries. A country that is relatively more efficient in producing a given good will export this good and import goods for which it has comparative disadvantages.

In the 1920s, the Swedish economists Eli Heckscher and Bertil Ohlin developed a new theory that explains trade in terms of differences in relative access to factors of production, for example labour and capital. A country tends to export goods whose production requires a relatively large quantity of a production factor that is very abundant in that country.

The common element between Ricardo's theory and the Heckscher-Ohlin theory is that trade occurs when countries differ with respect to technologies or factor proportions. But in reality, world trade is dominated by flows between countries that have similar characteristics. A large proportion of trade also involves goods of the same type. The car industry is one of many examples: Sweden exports Volvo and Saab cars to Germany, while importing Mercedes and Volkswagen cars from Germany. Trying to explain such phenomena on the basis of differences in technology or factor endowments seems far-fetched.

In 1979, Paul Krugman presented a new theory of international trade that explains the occurrence of trade in similar products between countries with identical characteristics. One central assumption behind this theory is that many goods can be produced more cheaply in long series, in other words there are economies of scale. Another assumption is that consumers appreciate diversity in their consumption. Trade makes it possible to replace small-scale production for a local market with large-scale production for a world market in which companies with different brands compete with each other.

Krugman's model was elegant, persuasive and highly influential. His new trade theory provided a whole new picture of the benefits of free trade. This theory has evolved quickly since Krugman's pioneering contributions, today providing the basis for calculations of the effects of removing various trade barriers.

In his 1979 article, Krugman not only laid the groundwork for a new trade theory; he also sowed the seed for a new theory of economic geography – a theory that he developed 12 years later. This new theory helps us to understand rapid worldwide urbanisation. Today, for the first time in history, more than half of the earth's population lives in cities.

As earlier, Krugman's analytical assumption is that there are economies of scale in production at the same time as consumers demand a differentiated range of goods. But he also adds a new dimension: labour mobility between different regions. Highly populated regions are attractive because they offer a richer choice of different goods. Companies, too, have incentives to move to highly populated regions, since they can thereby keep down transport costs and meanwhile benefit from economies of scale. A self-reinforcing process may arise, with migration to cities making possible greater economies of scale and thereby further reinforcing the attractiveness of cities. Krugman shows that the end result may be a concentration of most economic activity in one or a few regions. The exact outcome depends on the interactions among transport costs, economies of scale and consumer demand.

Dear Professor Krugman: You initiated the new trade theory and were able to show how economies of scale in production along with consumers' preferences for variety could generate trade among countries that are identical in terms of technology and factor endowments. By doing so, you were able to explain the bulk of trade that takes place in modern economies. You also initiated the new economic geography which helps us understand rural decline and the growth of cities. In this way, you have unified two previously separate fields of economic research.

It is an honour and a privilege to convey to you, on behalf of the Royal Swedish Academy of Sciences, our warmest congratulations. I now ask you to receive your Prize from His Majesty the King.

Prize Lecture

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