Wednesday, May 6, 2009

Krugman can’t think straight.


According to this NWY article, Paul Krugman – Nobel Prize laureate in economics – is worried about falling wages. Never mind the ‘sticky wages’ theorem the Keynesians have been bantering around for decades, here’s what the world looks like today – according to Krugman:

Suppose that workers at the XYZ Corporation accept a pay cut. That lets XYZ management cut prices, making its products more competitive. Sales rise, and more workers can keep their jobs. So you might think that wage cuts raise employment — which they do at the level of the individual employer.

But if everyone takes a pay cut, nobody gains a competitive advantage. So there’s no benefit to the economy from lower wages. Meanwhile, the fall in wages can worsen the economy’s problems on other fronts.

In particular, falling wages, and hence falling incomes, worsen the problem of excessive debt: your monthly mortgage payments don’t go down with your paycheck. America came into this crisis with household debt as a percentage of income at its highest level since the 1930s. Families are trying to work that debt down by saving more than they have in a decade — but as wages fall, they’re chasing a moving target. And the rising burden of debt will put downward pressure on consumer spending, keeping the economy depressed.

Never mind that at last a Keynesian admits that wages are not sticky – and hence falling prices do NOT result in lay-offs due to relatively increased labour cost, and hence deflation does NOT create unemployment. Never mind that the term ‘competitive advantage’ makes no sense in this context. Never mind that we have an institution called ‘bankruptcy’ that allows people to rid themselves of debt once and for all and allows for the reassessment of values. Never mind that since Keynes wrote his silly tract, none of his ideas have stood up to either logic of evidence.

Krugman – you are an incompetent fool.

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