Keynes, Krugman, and Texas

by Don Boudreaux on August 17, 2011

in Myths and Fallacies, Prices, State of Macro, Work

Here’s a letter to the New York Times:

Unimpressed that wage flexibility creates jobs in Texas, Paul Krugman writes that “at a national level lower wages would almost certainly lead to fewer jobs” (“The Texas Unmiracle,” August 15).

By asserting – for he has no evidence – that job growth in Texas comes at other states’ expense, Mr. Krugman reveals his Keynesian confusion.

But he can be forgiven, for Keynes himself was deeply confused.  While it’s true that in some parts of the General Theory Keynes alleges that falling nominal wages won’t increase overall employment, in other parts of that book – parts in which Keynes more carefully spells out his assumptions – he sings a different song.  Consider Keynes’s conclusion on this matter from page 253 in Chapter 18: “If competition between unemployed workers always led to a very great reduction of the money-wage level … there might be no position of stable equilibrium except in conditions consistent with full employment….  At no other point could there be a resting-place.”*

Translation: “If wages are flexible, competition for jobs will reduce nominal wages until there is full employment.”

Keynes himself here contradicts his modern-day St. Paul.

Sincerely,
Donald J. Boudreaux

As the late David McCord Wright pointed out about Keynes’s General Theory (in addition to the fact that it is no general theory at all):

about half of the General Theory is inconsistent with the Keynesian model, usually understood.  The General Theory is almost, in fact, two separate books only slightly related by a common terminology.

This quotation from Wright is from page 83 of his superb article “Is There a Keynesian System?” found in Money, the Market, and the State: Economic Essays in Honor of James Muir Waller, N. Beadles and L. Drewry, eds. (Athens, GA: University of Georgia Press, 1968), pp. 82-90.

….

More generally, Mr. Krugman’s take on Texas is questionable – as Kevin Williamson explains.  (HT Peter Minowitz)

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{ 93 comments }

Invisible Backhand August 17, 2011 at 9:49 am

Here’s a link for non NYT subscribers:

http://www.nytimes.com/2011/08/15/opinion/the-texas-unmiracle.html

“What Texas shows is that a state offering cheap labor and, less important, weak regulation can attract jobs from other states. I believe that the appropriate response to this insight is “Well, duh.” The point is that arguing from this experience that depressing wages and dismantling regulation in America as a whole would create more jobs — which is, whatever Mr. Perry may say, what Perrynomics amounts to in practice — involves a fallacy of composition: every state can’t lure jobs away from every other state.”

ArrowSmith August 17, 2011 at 11:19 am

New York’s sky-high min wage and massive regulatory apparatus is doing such wonders for it, no?

W.E. Heasley August 17, 2011 at 12:16 pm

All capital and all human capital is mobile. Most capital and most human capital, over time, migrates to the lowest tax and regulation environment.

Regarding Krugman, which of the following should each of his columns start with?

(1) Once upon a time….

-Or-

(2) “Eye of newt, and toe of frog,
Wool of bat, and tongue of dog,
Adder’s fork, and blind-worm’s sting,
Lizard’s leg, and howlet’s wing,–
For a charm of powerful trouble,
Like a hell-broth boil and bubble.”

Darren August 17, 2011 at 6:39 pm
Ole August 17, 2011 at 9:55 am

Well, if you are at all familiar with Keynesianism you will know that one of the basic points is that WAGES ARE STICKY.
People are unwilling to see their wage go down in nominal terms. So…. the government uses INFLATION to lower the real value of wages. Not too much inflation, because that leads to serious market distortion and destruction of wealth, but just al itle bit.
Yes, goal of the Fed is to just make the price go up with a few percent every year.

So, this idea of a labour market with elastic nominal wages is false. They make real wages elastic by printing money.

Pom-Pom August 17, 2011 at 10:35 am

At the last downturn the firm I worked for lowered all our incomes by 5%. kaboom. No debate. No protests. No walkouts.

What you say is false.

Slappy McFee August 17, 2011 at 10:50 am

Germany also follows a very similar path as Pom-Pom describes.

Wrong again Ole.

And as public opinion regarding increasing taxes shows, people generally are willing to decrease their incomes as long as everyone else does too.

Ole August 17, 2011 at 11:39 am

It might be wrong, but thats the argument for the currrent policy.

Even if wages goes down 5 % they are are far more sticky than prices on goods. In other words, its easier to raise the price levels on goods than to lower wages.
Similary, the prices on houses are sticky. It takes years for them to go down.

Henri Hein August 17, 2011 at 4:14 pm

To be fair to Ole, he did say, correctly that this is a feature of Keynesian theory.

A couple of counter-examples is not enough to disprove this. Much as I disagree with the Keynesians, I do believe they have a point here. I have seen many examples of people holding out for a job that pays the same as their previous one, even as they are unemployed and looking for a job for months during a downturn.

tdp August 17, 2011 at 4:23 pm

” I have seen many examples of people holding out for a job that pays the same as their previous one, even as they are unemployed and looking for a job for months during a downturn.”

Isn’t it then their fault they are unemployed? In a bad economic climate you should take what you can get. Especially since that means fewer people to pay unemployment benefits to. Perhaps with more people employed in such a manner unemployment would be lower, wouldn’t necessarily solve the economic downturn, but it would help the deficit just a bit.

Pom-Pom August 17, 2011 at 6:16 pm

I don’t deny menu prices and wages can be somewhat damped in response to downturns, but he said “People are unwilling to see their wage go down in nominal terms,” which is quite absolutist.

If I am out of a job, I am willing to take a huge cut from what I had before, and am willing to negotiate in situations where I do have a job in danger.

Moreover, as tdp points out, the governments policies make them more sluggish than they would otherwise be. This is probably due to labor law, court labor cases, and things like unemployment payments. The loony “progressives” have been brainwashing people for years about “rights to income.” At this point, people believe it. Companies afraid of lawsuits do big severance payouts, which along with unemployment payments make people resistant or lagging in their willingness to lower their price.

Henri Hein August 17, 2011 at 6:28 pm

Pom-Pom: ‘People’ is a flexible term and it can mean “some people” or “all people.”

You have not established that government policies is what makes people intransigent. I am not convinced. _Some_ people are just plain old stubborn when it comes to their living situation.

Pom-Pom August 17, 2011 at 10:11 pm

“_Some_ people are just plain old stubborn when it comes to their living situation.”

That only means they really don’t need a job, for some reason.

There was a study, of one of the Nordic countries, that showed a blatent correlation between how long unemployment benefits lasted and how long people stayed unemployed.

Chucklehead August 17, 2011 at 11:25 am

What they are doing is taxing all savings while reducing obligations with inflation.

Henri Hein August 17, 2011 at 6:18 pm

tdp: I agree. In general, I have noticed that during downturns, when I talk with people and reading human-interest articles on the jobless, that the people finding new jobs are the flexible ones. They change careers, go into business for themselves, or go back to college. The inflexible ones, the ones insisting on a like job with like compensation, are the ones staying jobless.

The Keynesians are still correct that there are people like that.

Henri Hein August 17, 2011 at 6:18 pm

Doh, again with the misplaced Reply button… :-/

Darren August 17, 2011 at 6:49 pm

My company uses inflation to lower wages. It just don’t give any wage increase or not enough of one to keep up with inflation, so we have a defacto decrease.

Ryan Vann August 19, 2011 at 2:10 am

One of the worst model assumptions since anorexia, IMHO.

Dan Moore August 17, 2011 at 10:12 am

“at a national level lower wages would almost certainly lead to fewer jobs”

Can’t a high-school economics student (in the first 2 weeks of the school year) point out the problem with this statement? If something is cheaper, more, not less, of it is demanded.

It seems to me that Mr. Krugman knows too much economics (and math), while failing to fully grasp its most basic principles.

Don Boudreaux August 17, 2011 at 10:18 am

Krugman’s argument – which is thoroughly textbook Keynesian – is that lower wages (assuming the demand for labor to be inelastic) will reduce consumer spending and, thus, reduce the demand for labor.

This argument is built on loads of questionable assumptions. And, as the above quotation from p. 253 of Keynes’s General Theory reveals, it is an argument that not even Keynes himself consistently bought.

Subhi Andrews August 17, 2011 at 10:39 am

Keynes had a more nuanced argument ( which again doesn’t stand up to scrutiny) that lower wages would cause a wage price spiral in the opposite direction – that is 1% drop in wages will be passed onto consumers as a 1% drop in price – all when economy is not in full employment. So dropping nominal wages will not cause a drop in real wages. This of course assumes that 100% of the cost of the product is labor costs. In the U.S the labor’s share of the output has been around 50-60%.

I learned this from Bob Murphy

http://mises.org/daily/5464/The-Critical-Flaw-in-Keyness-System

Ole August 17, 2011 at 12:02 pm

I live in Norway, and like Texas we have big oil income together with a highly regulated mortgage marked. Like in Texas, our banks blew up in the 1980ies so the financial sector has great contraint.

And like in Texas, our economy is booming.

But the similarites stops there. We have very much a socialistic system, with high taxes, welfare state and big government.

Our economic model is completely different from Texas, yet both our economies seems to thrive.

I just want to warn you guys that there might be more to the Texas miracle than meets the eye, and perhaps the biggest causes are high oil prices and a highly regulated financial sector.
Just food for thaughts and to take into consideration.

Don Boudreaux August 17, 2011 at 12:40 pm

Your warnings are wise. The world is indeed a complicated place. But note, on the other side, that Venezuela is doing quite poorly despite high oil prices and lots of government regulation.

GreenDinosaur August 17, 2011 at 4:29 pm

Norway has a very different population than Texas: essentially 4 million white, middle-class people, and a lot of natural resources for a country with that small a population (Texas has 6 times as many people as Norway), and certainly doesn’t have a lot of poor immigrants streaming in to find work, many of whom are poor for several years while they work their way up. As a result, Norway has a much larger tax base paying for a population with fewer needy people, and it is also easier to provide good education, etc. to 4 million people than 24 million, or 300 million in the whole US. As a result, the population is almost all well-off people who know how to advance themselves economically, so despite big government, high taxes, and lots of regulation, people can make profits. If Texas had Norway’s economic model, things would not go as well. If Norway had Texas’ economic rules, it might boom even more.

tdp August 17, 2011 at 4:29 pm

@ Don

Two words: Hugo. Chavez.

Subhi Andrews August 17, 2011 at 5:40 pm

Ole,

you might want to read this -

http://www.politicalmathblog.com/?p=1590

Sam Grove August 17, 2011 at 12:34 pm

In the end, all the costs of products are labor costs.

As distinguished from profits, of course.

Henri Hein August 17, 2011 at 6:10 pm

Sam, you are not advocating the Labor Theory of Value, are you?

Chucklehead August 18, 2011 at 1:06 am

In the end, all costs of products are energy costs. Labour costs are just the costs of others energy needs. Physical products are dirt with energy applied appropriately.

Sam Grove August 18, 2011 at 1:31 am

But the cost of energy is the cost of acquiring it, transporting it, and delivering it. Otherwise, energy would have no cost at all.
Coal is free, but it must be dug up, and machines constructed to dig it up. All labor costs.

No Henri. I say nothing about value, only costs.

Invisible Backhand August 17, 2011 at 10:51 am

“By asserting – for he has no evidence – that job growth in Texas comes at other states’ expense,..”

Texas Continues To See Influx Of Businesses Relocate From California

http://dfw.cbslocal.com/2011/05/18/texas-continues-to-see-influx-of-businesses-relocate-from-california/

Ken August 18, 2011 at 1:49 am

California put many of those businesses regardless of whether they move elsewhere. If it costs a business $X to produce product A and consumers are willing to buy A at price $X+Y, then California enacts regulations such that the new cost to produce A is $X’ and $X’ > $X+Y, the business closes. The fact that the business now has another place to go doesn’t mean Texas is stealing these businesses. California doesn’t want these businesses as is clear from their hostility to companies such as amazon.

Regards,
Ken

tdp August 17, 2011 at 11:24 am

Plus, Texas’ wages are slightly above the national average, and its unemployment numbers are artificially high because of all the unemployed people moving there looking for work. 739,000 people have moved to Texas since the recession, while unemployment numbers in blue states aren’t as high because in places like Massachusetts the people are leaving the state faster than the jobs are leaving the state. Texas has also seen 2.2% overall growth since the recession began and an increase in employment.

I wish I could find the article…it was somewhere on National Review, and the piece cited by Kevin Williamson is also excellent.

tdp August 17, 2011 at 11:27 am

Ike has the article I was talking bout. It was on Political Math.

Darren August 17, 2011 at 6:50 pm

If something is cheaper, more, not less, of it is demanded.

That’s why there are so few jobs in China.

Justin P August 17, 2011 at 10:29 am

Since I rarely read a PK column, has he even tried to explain why people are leaving NY, NJ, and CA without resorting to an “animal spirits” excuse? (ie weather?)

Slappy McFee August 17, 2011 at 10:47 am

Scott Sumner discusses this here

http://www.themoneyillusion.com/?p=10489

And Tyler Cowen here:

http://marginalrevolution.com/marginalrevolution/2011/08/why-did-texas-create-so-many-jobs.html

For those that also want to see where Mr Krugman is wrong.

PrometheeFeu August 17, 2011 at 10:48 am

Wait, I thought the whole Keynesian model of unemployment was predicated upon the downward stickiness of wages preventing the labor market from clearing.

Msoane August 17, 2011 at 11:01 am

Having just spent $160 on Krugman’s “Macroeconomics” textbook for my high school senior, this discussion only deepens the depression I feel as I fear my son is going to have his brain poisoned with Keynesianism, a condition which becomes irreversible if one pursues a career in academia (George Mason economists excepted), government or law.

tdp August 17, 2011 at 11:25 am

Also Chicago economists and a few at Harvard.

SweetLiberty August 17, 2011 at 11:39 am

Like it or not, Krugman’s version of economics IS economics – as far as the mainstream is concerned. What GMU, Friedman, Mises, et al. practice is fringe economics. Doubt it? Just look who holds the economic keys to the kingdom – Bernanke and Geithner – both very much in lock-step with Krugman on most issues.

Regardless of which President has been elected over the past decade and more, the fundamental economic direction seems to be very much the same – stimulus, bailouts, low interest rates, regulations, etc. So rest assured, your child is getting the “real” economic education and perhaps can one day pursue a lofty position of power. Otherwise, your student would be relegated to the back of the bus as not truly understanding economics at all.

Daniel Kuehn August 17, 2011 at 12:11 pm

Friedman is fringe economics?!?!?!?!

SweetLiberty August 17, 2011 at 3:59 pm

Absolutely. Just ask Krugman.

Fearsome Tycoon August 17, 2011 at 4:13 pm

Or Lew Rockwell.

anthonyl August 18, 2011 at 7:32 am

Popular Economics! Remember all the stupid crazy stuff they had in Popular Science?

Mark August 17, 2011 at 11:08 am

Krugman’s argument is that low wages lead to a diminished tax base and thus smaller government. And we can’t have that.

The fact is that is cost a lot less to live in Texas because there is lots of available land. People can sustain themselves on a lot less.

Contrast that with New York City. Throw in Section 8 housing that takes away a huge supply of housing from the competitive market place and you need an extra $10 an hour just to equate.

There will simply be more jobs that pay $10 an hour than $30 an hour. Let’s face it Krugman’s right. You can support a bigger government on a tax base of $30 an hour than $10.

Ike August 17, 2011 at 11:15 am

This kid nails it.

The stats Krugman and others are promoting about Texas (like “They’re all minimum wage jobs”) is a total lie.

Read the piece… http://politicalmathblog.com/?p=1590

Paul August 17, 2011 at 4:49 pm
Ken August 17, 2011 at 5:40 pm

Paul,

If the best you can do is cite Daily Kos, you’re a pretty weak thinker and researcher.

By the way, if you had bothered to read the article Ike links to, you’ll see he discusses the growth of government jobs and puts the numbers in context, something you nor Daily Kos understand or know how to do.

Regards,
Ken

ArrowSmith August 17, 2011 at 11:21 am

IB – economics is not a zero-sum game. A rising tide lifts all boats. Wealth trickles down and no it’s not urine.

Darren August 17, 2011 at 6:54 pm

I have to wonder what if we ignored the top 1 percent in terms of wealth? What would the U.S. look like on paper? I suspect if the top 1 percent went away today, the new top 1 percent would be the new target.

Brian August 17, 2011 at 11:21 am

Much of the job growth in Texas has been in education, health care, and government, and has been funded by federal “stimulus” to dollars. So to that extent, the job growth in Texas does come at the expense of other people in other states.

Texas is borrowing its way to prosperity, exactly the same way CA and NY did. When the crash comes for Texas, it will look exactly the same as it does now for CA and NY. Wage rates are irrelevant when your state’s government is doubling its (your) indebtedness.

tdp August 17, 2011 at 11:26 am

Read Ike’s link. The jobs in Texas are NOT all due to the stimulus, which is actually shedding jobs, and even without any increase in government employment, Texas would still be kicking the country’s ass in job creation.

SweetLiberty August 17, 2011 at 11:43 am

I found Kevin Williamson’s deconstruction of Krugman’s simplistic position brilliant. Thanks for that link!

Invisible Backhand August 17, 2011 at 12:03 pm

An important point is that Paul Krugman uses real current numbers and does some math, which is something a good economist should do. Some here think General Theory is some kind of Holy Scripture engraved in stone (much like the way they think of A Road To Serfdom). General Theory is 75 years old people, and it wasn’t revealed by God to a prophet pure, complete and incorruptible. If that’s your best attack your position is a weak one.

More about Texas unemployment:
http://krugman.blogs.nytimes.com/2011/08/16/more-about-the-texas-unmiracle/

more on where to get real numbers from the St. Louis Fed:
http://krugman.blogs.nytimes.com/2011/08/09/fred-excels/

Ocaine August 17, 2011 at 1:20 pm

“The General Theory is almost, in fact, two separate books only slightly related by a common terminology.”

Basing one’s ideas on a contradictory theory just makes it easier to always claim to be right about one’s failed policies.

DG Lesvic August 17, 2011 at 1:27 pm

Reduced employment is an ambiguous term, referring to both a voluntary and involuntary reduction of employment.

If industrial progress has relieved men of the necessity of working 18 hour days, the reduced employment is hardly a problem.

The problem is that of men who need and cannot find any employment.

That could not occur in a free market. For, always tending toward equilibrium per se, it always tends toward full employment, equilibrium between the supply of and demand for labor, as for anything else.

Employers cannot arbitrarily reduce wages. If they offer less than the equilibrium wage, they will not be able to hire as many workers as they need. They can reduce wages only so far as they increase employment.

In a monetary contraction, by itself, it is not employment but wages that contract. For the employers will always hire the cheapest labor, the unemployed, until there are no more of them. So there will still be full employment, just at lower wages.

There is no problem of “sticky” wages in a free market. Whatever the pain of the unemployment resulting from it, it is self-inflicted and self-correcting. Society need take no action against it, for the unemployed could relieve any such pain themselves any time they wanted, and the fact that they didn’t want to meant that to them it was not a pain but a pleasure, that they preferred leisure to the disutility of labor.

And that is no one’s business or problem but their own.

DG Lesvic August 17, 2011 at 1:42 pm

I overlooked Say’s Law.

Don had summed up Krugman’s position, thusly:

“Krugman’s argument – which is thoroughly textbook Keynesian – is that lower wages (assuming the demand for labor to be inelastic) will reduce consumer spending and, thus, reduce the demand for labor.”

There is nothing inherently good or bad about either higher or lower wages per se. The equilibrium wage is the optimum wage, and any wage above or below that is a departure from the optimum.

The equilibrium wage is by defnition that at which there will be equilibrium, full employment, and the greatest production, and, according to Say’s Law, the greatest demand.

For production is demand.

DG Lesvic August 17, 2011 at 7:06 pm

I still missed the point. What Krugman was advocating was the old fallacy of the inn-keeper giving away money to be spent in his inn.

It was simply redistribution, and as you all know by now, or ought to know, that makes everybody and the poor most of all poorer.

Chucklehead August 18, 2011 at 1:27 am

Say’s Law Production Creates Demand
Keynes Demand Creates Production.
Take a plot of land. If you set up a farmers market, a flee market, or a bazaar, over time, people will come in search of wares. Mutually beneficial exchanges will take place.
Take that same plot of land and bring in busloads of people who want to buy things. They will wander around, take a leak in the bushes, go home and not return. A market with demand and not supply is called loitering.
There is plenty of demand in our economy today, just not at the current prices. If you don’t think so, offer to sell a new car for a dollar and you will see a line around the block.
DG this is not a response, as it does not disagree, but your post made me think.

steakknife August 17, 2011 at 4:39 pm

But almost nowhere are markets actually free, so we must operate assuming government meddling prevents equilibrium prices.

Also, a thought exercise:

If wages and prices were at equilibrium, and every worker tried to increase his wages by working harder, would every worker earn higher wages and thus there would be a corresponding rise in prices, negating the effects of the higher wage? Or would only the most skilled workers succeed in increasing their wages because of the intense competition, leading to some people stuck unable to advance their wages no matter how hard the try? In other words, is there a way that the free market can generate increased purchasing power for everyone who works?

DG Lesvic August 17, 2011 at 7:14 pm

butterknife,

Workers can only earn more by producing more, and, by doing so, bring about lower prices.

You asked how the free market could bring about a general increase in wages.

By increasing the supply of capital goods and the general productivity

DG Lesvic August 17, 2011 at 7:15 pm

I meant to say the general productivity of labor.

steakknife August 17, 2011 at 9:57 pm

Good, I was hoping for an answer like that. So now we know how to get poor people to stop being poor.

Another thing about the poor: how many of them have made bad choices and/or have self-destructive habits?

-How many of them are obese (raises their personal medical expenses, and Medicaid’s)
-How many of them never finished high school?
-How many of them smoke, drink heavily, or do drugs? (I only say this because these things tend to be expensive and they’re not necessities. Also, alcohol and drug abuse make it harder to get a job.)
-How many of them got pregnant/got someone pregnant when they were teens or college-age?
-How many of them had children out of wedlock?
-How many of them had unplanned pregnancies?
-How many of them are unemployed?
-How many of them save their disposable income?
-Since many of them live in cities, how many own cars rather than taking public transportation, walking, biking, or using zipcars?
-How many of them own cable/satellite TV, ipods, fancy phones, and other goods that are less important than basics like food, clothing, shelter, health insurance (though the number w/insurance would be higher if gov would GTFO of the industry)?
-If they are unemployed, how much time do they spend looking for work (the average unemployed person spends 18 minutes a day)?

If you correct for all these factors, how many people still cannot make ends meet? These are the people who should get help first. Everyone else should modify their behavior if they expect to get anywhere in society.

anthonyl August 18, 2011 at 7:51 am

Steaknife, You make being poor in this country sound like a party. I think it is compared to being poor in the past or somewhere like India. I don’t see many skinny poor people around town. What I find sad about our culture is that many of the homeless I see about town are obviously mentally Ill and can’t take care of themselves. These are the people most In need. Where are the hoards of government workers to help them? That’s where I want my tax dollars to go to if I have to pay them.

steakknife August 18, 2011 at 9:56 pm

Exactly, I was pointing out how many of these people could quite easily get off their asses and work.

Invisible Backhand August 17, 2011 at 2:11 pm

Test post, ignore.

Greg Webb August 17, 2011 at 2:47 pm

Don, thanks for posting Paul Krugman’s attempt at misinformation and Kevin Williamson’s excellent response.

John Papola August 17, 2011 at 3:59 pm

Nothing undermines the claims of Keynes economists more than the fact that many like Krugman advocate policies which make wages and price MORE “sticky”.

Sorry folks. If you’re going to base your economics on sticky wages as a great (or THE great) cause of unemployment when nominal spending changes… you sure as hell better be always and at all times advocating policies that make wages and prices as flexible as possible. If you aren’t, or, as Krugman here does, advocate the OPPOSITE, well.. you’re revealing the snake oil in your sales pitch.

Justin P August 17, 2011 at 4:08 pm

+1

Henri Hein August 17, 2011 at 4:08 pm

Excellent point, I have frequently been bothered by this too.

Don Boudreaux August 17, 2011 at 4:15 pm

*LIKE*

Fearsome Tycoon August 17, 2011 at 4:33 pm

No, nothing undermines Keynesian economics so much as flagrant dishonesty. You can argue with someone who is wrong, but sincere, and perhaps both come out wiser for it. Krugman is not sincere, as Williamson shows. He is either an idiot or dishonest, and since his body of research shows he’s not an idiot, that leaves us with only one conclusion.

John Papola August 17, 2011 at 6:26 pm

He’s certainly not an idiot. He’s a dishonest hack.

Ryan Vann August 19, 2011 at 2:22 am

His public speaking gigs don’t exactly radiate brilliance to me.

tdp August 17, 2011 at 4:34 pm

Can you stop feigning ignorance on your blog? The “What the hell do I know?” theme detracts from the fact that you are right far more often than intellectual jerk-offs like PK. Your demolition of the WI unions and their claim of being oppressed by powerful big business was the best blog posting I have ever read anywhere. You say you aren’t an economist, but you should be.

John Papola August 17, 2011 at 6:30 pm

Well that’s a super nice compliment! Thanks!

Honestly, I always feel pretty ignorant and hungry to learn more. I get all passionate and probably tend toward polemics too much in general, but there is just so much I haven’t read and haven’t a clue about. Honestly.

Pom-Pom August 18, 2011 at 1:56 pm

“Your demolition of the WI unions and their claim of being oppressed by powerful big business”

Where?

John Papola August 18, 2011 at 4:09 pm
DG Lesvic August 17, 2011 at 10:19 pm

“you’re just revealing the snake oil in your sales pitch.”

No you’re not. You’re just revealing your own confusion.

The fact that you’re confused about “sticky” wages is a reflection on yourself, not the theory. You still have to refute the theory. The refutation is that so far as the “stickiness” is the prospective wage earners own choice, it is no one else’s concern. Why is it a problem for me that someone else would rather remain unemployed at a zero wage than be employed at an offered wage? That’s his choice. It’s voluntary unemployment, the choice of leisure over the disutiliy of labor. My problem is not his voluntary but involunary unemployment, when someone other than himself ordains it.

Pom-Pom August 18, 2011 at 1:52 pm

Keynesians are “aggregators.” There is no such thing as an individual in their universe. There is only a mass glob of humanity.

Aussie August 18, 2011 at 8:08 pm

I am going to challenge you on the “sticky wages”, not because I totally disagree, but I think that you have left out some factors.

First of all, there is no such thing as perfect competition. From memory (more than 30 years ago) this is a point that J.M. Keynes made after he had posited his main theory. There are different kinds of markets and competition which is why there are differing reactions. Oligopoly is a very good example of how markets react in imperfect competition.

Second, there are other factors that will be brought into play when someone who is umemployed decides to take or not take a certain employment role. Wages is only one factor. There are others: distance affects the cost of travel to and from work – is it viable? Childminding is another factor. Yet another is the extra benefits received by the unemployed, especially the reduction in such costs as utility bills, medical and pharmaceutical. This is the Australian experience. One other factor which plays into those extra benefits is the payment of the dole. If the time limit is unrestricted there is no incentive, or little incentive to find alternative employment, especially if the dole payment is higher than or equal to the wages being offered.

There are many other issues at stake, and the problem here is that when Keynes wrote his General Theory, government did not offer the dole, or if it did, people actually worked for the dole. This leads to further complications because government stopped demanding work for the dole, and then unions etc. insisted that the unemployed should not work for the dole.

DG Lesvic August 17, 2011 at 7:34 pm

Have just skimmed through most of the above and still come to my latest conclusion, that what it all comes down to is the old fallacy of the inn-keeper giving away money to be spent in his inn, or, in our case, of the government giving away the earnings of the more productive to the less so, so that the more productive will be less able to pay their bills and spend and the less productive better able to do so, punishing and discouraging productivity and rewarding and encouraging non-productivity, in short, redistribution, and, is there any ought there who still doesn’t know that that makes everybody and the poor most of all poorer?

Raise you hands.

Aussie August 18, 2011 at 8:10 pm

I agree with your conclusion. My own experiences would back up this conclusion.

DG Lesvic August 17, 2011 at 11:12 pm

Oh, no, I still missed the point. DG, you’re getting old.

Prof. Krugman’s argument is an echo of Marxian polylogism, which was simply a denial of reason, science, and economics.

Unable to refute the logic of the economists, Marx asserted that it was merely the logic of the bourgeoisie, and therefore irrelevant to the problems of the proletariat.

So, there was not just one logic for all of mankind, but one for the bourgeoisie and another for the proletariat. Since it was precisely its universal validity that separated logic from feeling and defined it as logic, the denial of its universal validity was to deny it altogether. So Marx won his argument not by superior logic but denial of it altogether.

Prof. Krugman does the same thing. Here was his statement:

“lower wages would almost certainly lead to fewer jobs — because they would leave working Americans even less able to cope with the overhang of debt left behind by the housing bubble, an overhang that is at the heart of our economic problem.”

If you don’t exactly understand that, there’s a good reason for it. You weren’t supposed to. But Prof. Boudreaux saw through it. This, he wrote, is what it meant:

“Krugman’s argument…is that lower wages (assuming the demand for labor to be inelastic) will reduce consumer spending and, thus, reduce the demand for labor.”

There is no more fundamental and essential axiom of economics than that quantity demanded goes down as price goes up, ceteris paribus. To deny it is to deny economics itself. And that is just what Krugman is doing, “assuming the demand for labor to be inelastic.”

You cannot argue with the denial of reason, science, and economics, just identify it.

DG Lesvic August 18, 2011 at 3:05 am

Hell, I still missed the point.

You boys are right, I’m not just getting old but downright senile.

The Keynesians shift back and forth from one contradictory excuse for macro meddling to another, from the “problem” of falling to that of “sticky wages.”

Even as prices were falling, they would not allow wages to fall, for that would reduce consumer spending and the demand for labor. But wages could fall only if there had been less than full employment at the higher wages and there would be full employment at the lower. How could less than fully employed labor do more spending than fully employed labor? If the prices at which it bought were falling along with its wages, there would be as much spending as ever, but at lower prices.

From the “problem” of falling wages, they move on to that of “sticky wages.” While prices were falling, the workers, wedded to the past, and holding out for the same wages as before, would price themselves out of the market. So to price them back in, the authorities had to pump up the money supply and other prices.

That is the Keynesian “money illusion” theory of unemployment, and basis of the inflationist “demand management” or “monetary equilibrium” theory that has driven public policy in Western Europe and America over the last 75 years.

So far as “sticky wages” were a consequence of minimum wage laws, why not just repeal the laws? So far as they were a consequence of the time it took the workers to adjust their expectations downward, why do anything? Their unemployment was a self-inflicted pain, and self-correcting.

DG Lesvic August 18, 2011 at 4:26 am

The Keynesians would not allow wages to fall, for that would reduce consumer spending and the demand for labor. But they could fall only if there had been less than full employment at the higher wages and there would be full employment at the lower. How much spending was there by labor unemployed at the higher rates?

There would surely be more in a fully than only partly employed society.

Aussie August 18, 2011 at 8:23 pm

Actually, it is not what Keynes advocated. These people depart from Keynes because they are pro-union.

During the actual Keynes period, union membership was low. It is the unions that refuse to allow for lower wages.

Here in Australia, up until the 1990s we had an arbitration system where the minimum wage was set by the Arbitration Commission. The unions and the employers argued their case, and the Commission decided the outcome. Then came WorkChoices where we were free to negotiate our own contracts.

In the period of Keynes the unions did not have the power to negotiate. Mind, Keynes was wrong in a lot of his hypothesis and this became clear during the 1970s when we had Stagflation.

The 1970s is a good period to examine because we had high unemployment, high inflation and high interest rates. What it should have taught is that you cannot separate each of those factors. This is a good period to study because most governments followed a policy of maintaining full employment.

Such a study should include the impact of a shortage of skilled labour on the market place. According to the theory, where there is a shortage of skilled labour, then the cost to hire will increase accordingly, until that shortage is addressed via more people being trained in the field. I think that this bears out especially in the area of the IT industry where salaries were high until there were more entrants in the labour market. (it is just one example). At the other end of the spectrum is the fact that a glut will have the opposite effect. An example from experience is the glut of economics and commerce graduates and too few jobs back in the 1970s that led to no employment prospects for graduates. To get a job one had to take an alternative low paying role.

Krugman is not a real Keynesian. He spouts some Keynesian economics but he is a Marxist, thus he does not follow through on the whole of Keynesian theory.

Russell Nelson August 18, 2011 at 1:58 am

I recall someone pointing out that Real Economists(tm) know that demand curves slope down. Krugman is saying that demand curves slope up. QED, Krugman is not a Real Economist(tm).

Aussie August 18, 2011 at 8:31 pm

that is because Krugman is more Marxist than he is economist.

Dan J August 18, 2011 at 3:42 am

I still would like to know why it is assumed in some, if many, corners why wages or prices should always be on the rise. Especially, after a couple of decades of inflated growth from suppressed interest rates and a distorted housing market that had wages rising along with prices ( McDonalds were hiring at wages starting at $10 an hour, above minimum wages and could not get fully employed, at least in Phx area). Why wouldn’t all aspects of a market have to pull back in the downturn? Why should one or two aspects be kept at pre-downturn levels, namely wages and/or prices?

DG Lesvic August 18, 2011 at 4:27 am

Dan,

You hit the nail right on the head.

Aussie August 18, 2011 at 8:31 pm

I was taught that in a situation of perfect or near perfect competition the prices remain high until more entrepreneurs enter into the field. The same is also true for employment. If there is a skills shortage then the price of labour increases until the skills shortage is addressed. Then comes the glut, which causes prices to decrease, not increase.

A good example in our every day world is the price of technology i.e. ipods, computers, digital TV etc. Some people jump in to purchase the latest gadget, but others wait until the price per unit drops. In the early phase the increase in demand keeps the price artificially high, but as demand increases there are more entrants in the market (mobile phones, competitors for the iphone etc.) and this gradually leads to a reduction in the price of those units. On the other hand, the price of the iphone would only decrease if the cost per unit is also reduced (but Apple does not follow that logic!!). A better example would be the cost of fruit and vegetables where the supply and demand varies. The price of these items always rises when the supply is outstripped by demand, but falls again when the supply is plentiful.

The problem is that there is no perfect market, and then there is government interference that has the effect of restricting supply so that prices for some commodities does not drop through the floor. I will use the USA rural policies as an example because the Roosevelt policies have never been repealed.

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