Monday, December 09, 2013

Krugman Doesn't Understand Basic Economics

 Either that, or he is delibaretely trying to mislead. Here is what he writes today when arguing against a reduction in unemployment benefits:
You might be tempted to argue that more intense competition among workers would lead to lower wages, and that cheap labor would encourage hiring. But that argument involves a fallacy of composition. Cut the wages of some workers relative to those of other workers, and those accepting the wage cuts may gain a competitive edge. Cut everyone’s wages, however, and nobody gains an edge. All that happens is a general fall in income — which, among other things, increases the burden of household debt, and is therefore a net negative for overall employment.

There are two fallacies here, both of which should  be apparent through understanding of basic economics. First of all, there , a decline in everyone's wages wouldn't cause a general fall in income, but a shift in income from workers to capitalists. You may think that such a shift is undesirable, but it's nevertheless not the same as a general fall in income.

And secondly, there is no reason to believe that everyone's wages would fall. What would fall is wages in low skilled jobs or jobs that the unemployed have the right skills for. Most people's wages wouldn't fall, Quite to the contrary, companies would likely pass on some of that reduction in labor costs through lower prices, which would raise real wages for people whose nominal wage haven't declined and limit the real decline for the people that have seen their wages drop.


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