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October 22, 2008

Nobel Prize, The Economy & McCain

Tom McLaughlin

Once again it is time for my yearly commentary on the Nobel Prize in Economics. Here, I try to make some sense of this award.


This year’s winner is American Paul Krugman. I like this guy. He is an op-ed columnist for The New York Times and rabid anti-Sen. John McCain, the Republican nominee for President of The United States.


His famous, or infamous, quote, depending on your side of the aisle, is that “the McCain plan would do for health care what deregulation has done for banking. And I am terrified.”


He claims conservative Republicans hate Medicare and would kill it if they could; but so far they haven’t been able to. He also states that Senator McCain would destroy the health care of non-elderly Americans.


He is not too keen on Sen. Barack Obama’s plan, but prefers it to Senator McCain’s. I must admit, I am not well versed in the intricacies of the health plan in relation to the tax code, but I would tend to believe Mr. Krugman because of his prestigious credentials and he sensibly also hates Senator McCain.


Now, let’s try to understand why he won the prize. It is based on the elaboration of the obvious.


Before he came along the theory was that two countries traded with each other. One country would sell goods it could make cheaply to another country. Then the other country sells goods it could make cheaply and trading partners arose out of that relationship. The Wall Street Journal (yes, even Democrats read it) used the following analogy:


Suppose Portugal made wine cheap and England made cloth cheap. Portugal would sell wine to England and England would sell cloth to Portugal. Portugal and England would be trading partners.


In the modern world, this theory does not hold. Trading partners sell the same goods to each other at the price each country can afford.


For example, we sell cars to Japan and Japan sells cars to us. People in Japan buy American cars and we buy Japanese cars. But why does this hold true?


Paul Krugman and his colleagues at Harvard elected to find out. He discovered people want diversity in the things they purchase. Americans buy French perfumes and wines even though the American ones smell and taste the same or better that their French counter parts.


This theory has been used to determine the location of manufacturing plants to take advantage of the desires of both nations. It also has incorporated transportation costs.


I think that is what he said, but I don’t agree because of my lifestyle. I buy a Toyota because Consumer Reports tell me to. Ditto my Samsung television sets.


In my purchases, I buy what is on sale, what I have coupons for and really don’t care where it’s from or who makes it.


I guess there are a lot of people who purchase because of the country of origin. Italian suits; French cheese, English beer, Hungarian goulash, Australian wine, Polish sausage and other stuff. But I am not one of them.


I guess I really don’t understand his theory in depth, but because he supports Barack Obama, he’s all right by me.


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