Our good professor won the Nobel Prize for economics in October 2008 for his theory, that to be economically dominant, industries must concentrate their producers and suppliers into a common metropolitan area near their customers to maximize economies of scale and transportation savings. His model perfectly explained the 1950s and 1960s success of the U.S. auto industry's tight concentration of assembly plants, steel foundries and parts suppliers in and around the city of Detroit — within one day's delivery to the bulk of their big city customers.
But Krugman's theory of economic dominance through concentration has been rendered meaningless by modern supply chain management revolution that interconnects competitive vendors from across the globe. China has a massive balance of payments surplus because it can competitively ship products 10,000 miles to Detroit and beat local parts manufacturers on price and quality.
Just nine months after our Nobel Laureate picked up his $1.8 million check and Norwegian hardware, General Motors, the poster child of the professor's industrial policy, filed the largest bankruptcy in the U.S. history in September 2009 with only $82 billion in assets, but $172 billion in debt.
Krugman now wants to talk about how the Fed must be more stimulating to help small business in our own backyard. Supporting small business does sound admirable, given that it represents 99.7 percent of all the nation's employers and employs 51% of the 130 million Americans working today, according to the Small Business Adminisration.