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Politics : Formerly About Advanced Micro Devices -- Ignore unavailable to you. Want to Upgrade?

To: combjelly who wrote (465530)	3/25/2009 8:43:25 PM
From: TimF	Read Replies (1) \| Respond to of 1575941

Almost everyone was precarious in terms of having their jobs being at risk (or in many cases gone). But not so much in other terms. They where of course less wealthy than we are now, but they where more used to, and capable of dealing with, lower levels of wealth and income. And yes debt levels had increased before the depression, but generally people where thriftier than and more likely to have saved money (although not to the extent that that many people who lived through the depression later became). Debt levels were lower at that time than they are now, and consumer debt was MUCH lower. Corporate debt was high, but that is one more reason why lowering wages would have helped avoid layoffs. People who retained their jobs actually did ok, since prices went down, and since union and government pressure kept wages up or even increased them. The problem is the huge number of people who didn't keep their job. A very large number becoming chronically unemployed, while others took a "pay cut" in the form of temporary layoffs and unemployment.

To: combjelly who wrote (465530)	5/16/2009 3:13:15 PM
From: TimF	Respond to of 1575941

Why Wage Cuts Are Good For Aggregate Demand Bryan Caplan Krugman's repeating his argument that wage cuts are individually rational, but collectively irrational: [M]any workers are accepting pay cuts in order to save jobs. What's wrong with that? The answer lies in one of those paradoxes that plague our economy right now. We're suffering from the paradox of thrift: saving is a virtue, but when everyone tries to sharply increase saving at the same time, the effect is a depressed economy... And soon we may be facing the paradox of wages: workers at any one company can help save their jobs by accepting lower wages, but when employers across the economy cut wages at the same time, the result is higher unemployment. If you're really anti-Krugman, you might think he's saying that, "Wage cuts reduce labor income, which reduces aggregate demand." If this is his argument, it has two major problems: 1. Cutting wages increases the quantity of labor demanded. If labor demand is elastic, total labor income rises as a result of wage cuts. 2. Even if labor demand is inelastic, moreover, wage cuts reduce labor income by raising employers' income. So unless employers are unusually likely to put cash under their matresses, wage cuts still boost aggregate demand. But is Krugman even making an argument about aggregate demand? At first glance, it doesn't look like it: Here's how the paradox works. 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. Alas, this still leaves me saying, "No benefit?! Huh?" Won't consumers benefit when there's more cheap stuff? In purely Keynesian terms, too, there's a real balance effect. The most that Krugman could reasonably say is that wage cuts have underappreciated drawbacks. What are these supposed to be? 1. "[F]alling wages, and hence falling incomes, worsen the problem of excessive debt." Now Krugman really does seem to blithely assume that reducing wages reduces aggregate demand. And I have to respond: "Do falling wages worsen the problem more than higher unemployment due to wage rigidity?" 2. Krugman also warns that falling wages might lead consumers to expect further wage declines, effectively raising real interest rates - "And a rise in the effective interest rate is the last thing this economy needs." I grant that this might happen if wage cuts continued for a long time, and could conceivably be bad if it happened. But for now, this is paranoia. It's also worth pointing out that in a standard New Keynesian textbook model, higher inflationary expectations reduce aggregate supply and worsen the inflation-unemployment trade-off. Corollary: The straightforward effect of lower inflationary expectations is to increase aggregate supply and improve the inflation-unemployment trade-off. I'm far from a knee-jerk Krugman basher. I gleefully assign The Accidental Theorist to my undergraduate labor students. But when Krugman forgets that wage rigidity is the fundamental cause of involuntary unemployment, a sound bashing is in order. econlog.econlib.org econlog.econlib.org