Thursday, December 17, 2009

Me Disagreeing with Paul Krugman

Paul Krugman opines:

Here’s how the fallacy works: if some subset of the work force accepts lower wages, it can gain jobs. If workers in the widget industry take a pay cut, this will lead to lower prices of widgets relative to other things, so people will buy more widgets, hence more employment.

But if everyone takes a pay cut, that logic no longer applies. The only way a general cut in wages can increase employment is if it leads people to buy more across the board. And why should it do that?

Maybe if everyone in the world agreed to a pay cut that would make sense. In a globalized economy, American workers taking a pay cut would reduce the comparative advantage of foreign workers, making their imports less competitive, and American exports more competitive. Thus more employment.

So there.

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