Saturday, November 3, 2012

We are Supposed to Trust Them with Trillions

DeepenEnd This Depression Now! insists that we taxpayers should trust the author and other Keynesians with trillions of our dollars, and in return they supposedly would end this depression fully and quickly. Meanwhile, the best the author can do to earn our trust is to take a vacation from both logic and economic understanding:

  1. He and I agree that soup kitchens did not cause the Great Depression.  But only he can conclude from that fact that incentives should be ignored when studying the labor market, and that the best way out of this recession is to further broaden the population of people with no incentive to work.

  2. He and I agree that a massive safety net expansion all by itself would increase wages (he never says by how much, though ... my book looks extensively at that: it's just a couple of percent in the short run, and then falling back to trend).  Then, with the intention of showing that safety net expansions were trivial, he puts up a graph showing that wages continued to increase (sic) after the recession began!  Notice in particular the vertical axis in his chart (and ignore that he cherry-picks a disportionately manufacturing sample ... my book shows how manufacturing did experience a sharp demand reduction but that manufacturing is not the entire economy): the axis is measuring wage CHANGES and all of its numbers are positive.

  3. If he had wanted to test the theory a little more carefully, he might have looked at wage levels, and acknowledge safety net contractions as well as expansions.  That's what I did in my book, and in my "Why did wages rise and then fall?"  Here's what you get: real wages rose above trend when the safety net expanded, and did not start to fall until part of the "stimulus" started to expire.
  4. We can quibble about whether wages went up a couple of percentage points or went down a percentage point or two, but the real issue with wages is what happened to after-tax wages: they fell about 12 percent below trend because of the massive hikes in marginal tax rates. So even if you really did have a demand drop that by itself depressed pre- and after-tax wages by 3 percent, and a safety net expansion that by itself increased pre-tax wages by 2 percent and depressed after-tax wages by 9 percent, then the net result would be pre-tax wages falling by one percent -- Professor Krugman and friends could have their "gotcha" -- yet still after-tax wages fall by 12 percent, three-quarters of which is due to the safety net expansion. If your choice was to ignore the safety net and focus on demand or ignore demand and focus on the safety net, you would get a lot closer to the truth with the latter approach.
  5. when it comes to real wages, my model is Keynesian in the sense that it says that wages are counter cyclical (high when employment is low). It's kind of funny that, regardless of what the data show, Krugman would attempt to discredit the Keynesian part of my model by insisting that wages are procyclical. I guess he sides with Kydland and Prescott on wages and indeed he does appreciate nonKeynesian approaches :)


bcw said...

This is just sad, I see that an economics job has no requirement for honest argument. In both this column on Krugman and the "no incentives to work" html link you give no response to the substantive points raised by either Krugman or the commenters. Your no incentives to work argument could only be made by someone who hasn't faced the real world job market. Only a fake science like economics could create models (no matter how much mathematical obfuscation you ladle on) so totally distant from reality as to completely ignore human realities- jobs are scarce and there are no upward wage pressures in any industry. The sector argument gives no identification of what sectors or why. Where are these miracle growth areas that workers are untrained for? How about some facts instead of sneers.

The chicago school forecasts are consistently wrong: wage pressures and inflation always around the corner. You quibble with Krugman wage chart but the point is that wage increases are falling below inflation - thus a cut. And I work for a real company (doing real science,) outright cuts cause huge instability, no wage increases cause enough fear as it is.

And what kind of crap is this:"Krugman takes credit, largely deserved, in Chapter 9 for being basically right about inflation in the short and medium term. Does that qualify him as an expert on the labor market? What about as a predictor of the next Superbowl's winner? I doubt it"
Is that what passes for science in economics?

TGGP said...

John Quiggin and others are discussing your theory at Crooked Timber in a post titled Food stamps cause global depression?. Responding to them would be nice, but since Scott Sumner is now king of bloggers he should get priority.