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Wednesday, September 28, 2011

"Wages and Recovery"

Laurence Kotlikoff misrepresents the views of Paul Krugman and Jamie Galbraith:

Five Prescriptions to Heal Economy’s Ills, by Laurence Kotlikoff, Bloomberg: Desperate times call for creative measures. We’re in desperate times, but we’ve had little creative thinking from the Obama administration on how to fix the economy. ... I see five things policy makers can do to get the economy going. ...
4. Get prices and wages unstuck.
Some prices and wages are set too high, thereby damping demand for output and for the workers needed to produce it. This is the standard sticky wage and price explanation for our economic malaise offered by Keynesian economists such as Paul Krugman and James Galbraith. I think there are fewer markets suffering from this problem than Krugman and Galbraith do, but there are enough such markets to make the case for government intervention. Indeed, the president should put these economists in charge of identifying the markets suffering from this problem and helping their participants set market-clearing prices and wages.
One example is the market for construction workers. A 1931 law called the Davis-Bacon Act effectively requires contractors using federal money to pay union wages. If the act were suspended or repealed, federal spending on much-needed infrastructure projects could create a lot more jobs.  

In comments, Jamie Galbraith corrects the record:

...I have never written, argued or believed that unemployment can be cured by cutting wages. Nor does that position have anything to do with Keynes, who wrote The General Theory to debunk this view. Keynes favored stable money wages, writing: "it is fortunate that the workers, though unconsciously, are instinctively more reasonable economists than the classical school, inasmuch as they resist reductions of money wages..."
It seems likely that Professor Kotlikoff has never read Keynes either.

Here's Paul Krugman's dismissal of this idea: Wages and recovery.

    Posted by on Wednesday, September 28, 2011 at 12:15 AM in Economics, Unemployment | Permalink  Comments (87)


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