Posted by David Bernstein:
Krugman on the Great Depression:
http://volokh.com/archives/archive_2008_11_30-2008_12_06.shtml#1228151173
[1]Krugman:
But I think it�s worth pointing out why Ms. Shlaes thinks the New
Deal was destructive of employment: namely, that it raised wages.
Funny she should mention that � because the effect of wage changes
on employment was the subject of a whole chapter in Keynes�s
General Theory.
And what Keynes had to say then is as valid as ever: under
depression-type conditions, with short-term interest rates near
zero, there�s no reason to think that lower wages for all workers �
as opposed to lower wages for a particular group of workers � would
lead to higher employment.
Suppose that wages across the US economy had been, say, 20 percent
lower than they actually were. You might be tempted to say that
this would make hiring workers more attractive. But to a first
approximation, prices would also have been 20 percent lower � so
the real wage would not have been reduced. So how would lower wages
lead to higher demand for labor?
Well, the real money supply would have been larger � but the normal
channel through which this might increase demand, lower interest
rates, was blocked by the zero lower bound. Yes, there would have
been a slight Pigou effect: real private sector wealth would have
been higher, because cash under the mattress (or wherever) was
worth more. But on the other hand, real debt burdens would also
have been higher, probably exerting a contractionary effect.
Overall, there�s no good reason to think that lower wages would
have helped raise employment.
And once you realize that, the whole argument that FDR prolonged
the Depression by sustaining wages evaporates.
I'm no expert on Keynes, but I can't make heads or tails out of what
Krugman is saying. My understanding of Shlaes is this: If the
government forces wages to rise above market wages, for example by
instituting minimum wage laws or encouraging unionization through
government intervention (both of which the government did in the
1930s, first through the NIRA and then through the NLRA and FLSA),
unemployment will result. Imagine, for example, that the government
passed a law tomorrow dictating that as of January 1, everyone with a
job will get a 20% raise, but employers are not required to retain any
employees. Undoubtedly, some individuals will retain their jobs, but
many others will be laid off. If the new wages are thereafter applied
to new employees, employers will hire far fewer workers. Let's say the
government on January 2 realized it made a big mistake, and restored
the status quote ante. Does Krugman really believe that this
backtracking would not lead to a "higher demand for labor?"
More generally, Krugman's recent blog posts suggest that he thinks
that the New Dealers were operating within some sort of methodical
Keynesian framework. In fact, the New Dealers believed all sorts of
nonsense: that the U.S. was suffering from "overproduction;" that
productivity followed wages, rather than vice versa; and,
perniciously, that low-wage industries should be shut down, because
these "parasitic" industries employed "defective" workers (often
immigrants or African Americans) whose low wages showed that they were
not capable of competing in a modern labor market, and were dragging
down wages for everyone else.
So, for example, when the NIRA's cotton wage code led to massive
unemployment in the industry, the Cotton Code Garment Authority
bragged about the reduction of the use of "sweated, underpaid workers"
in the garment industry. The Authority said it was necessary "to
remove thousands of these substandard workers," who were "replaced by
fewer, but far higher paid and more productive wage earners."
With regard to minimum wage laws, as economic historian Bruce Shulman
has pointed out,
if the FLSA imperiled any southern jobs, the President and other
New Dealers assumed only substandard jobs were at risk and bade
them good riddance.... Stable family employment and high family
wages mattered more to federal authorities than did the total
number employed. One of the perceived evils of low southern wages
was that they made a man unable to support his family and force his
wife and children to work.
In short, the New Dealers' policies were designed to keep private
sector unemployment high, at least in the short term, from a
combination of economic ignorance, lack of concern for the short-term
fate of the lowest echelon of workers, and political considerations
(screwing the "conservative" rural South).
(I have a draft paper coauthored with Tim Leonard of Princeton that
touches on some of these issues, but it's not ready to be circulated.)
References
1.
http://krugman.blogs.nytimes.com/2008/11/29/changes-in-money-wages-and-amity-shlaes/
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