Bryan Caplan  

Questions for DeLong

Reply to DeLong... With All Due Respect, 2...
David Henderson replied to this comment by Brad DeLong, but I'm still trying to figure out what Brad's saying.  To requote:
So is your argument really that if not for the stimulus package wages would be falling--and falling wages would be inducing employers to hire lots more workers?

That hasn't happened in the U.S. economy since 1921. In the U.S. economy since 1921, falling wages and prices have deepened depressions by multiplying bankruptcies. Deflation is really bad juju.

Questions for Brad:

1. When you say "That hasn't happened..." to what does "that" refer?  Falling nominal wages definitely happened during the Great Depression, so am I correct to assume that "that" = "falling wages that induce employers to hire lots more workers"?

2. If my latter interpretation is correct, what makes you so sure?  Yes, during the early years of the Great Depression, unemployment rose as nominal wages fell.  But unemployment also rose as real wages rose.  Big time - and in short order.  So why aren't you at least agnostic? Wouldn't real wages have risen to even more dangerous levels if nominal wages hadn't fallen? 
3. I'll buy that falling prices "have deepened depressions by multiplying bankruptcies."  But wouldn't falling nominal wages mitigate depressions by reducing bankruptcies?  Condemning falling wages alongside falling prices strikes me as guilt by association.  In standard New Keynesian models, don't these two variables have opposite effects on employment?

4. If your story is that nominal wage cuts reduce AD, what's wrong with this argument?

Comments and Sharing

COMMENTS (2 to date)
Steve Roth writes:

>what's wrong with this argument?

Employers *are* more likely (than employees) to put the money under their mattress.

Perhaps not literally. But actually/practically.

Employers spend a smaller percentage of marginal earnings on immediate consumption (which would increase short-term AD).

We know that for a fact, don't we? Theory obviously suggests it, but I've never looked up the studies.

If what you really mean is "use the money valuably," employers also (as a group) invest more of their holdings in wall-street lottery "innovations," which (if you agree with Volcker, Buffett, Bogle, Zandi, and a zillion others) don't build the capital base or even improve market efficiency much if at all.

So it strikes me that there are at least two serious things wrong with that argument.

david writes:

I'm confused.

I thought Keynesians (new, neo, paleo, etc.) believed that, due to downward price and wage stickiness, we get quantity adjustments in a recession, i.e., falling output and rising unemployment. But, once we're in the recession, the argument seems to be that the quantity adjustments would be even bigger if prices/wages weren't sticky(!).

To sum up, their position seems to be "bad things happen because markets don't equilibrate but thank god they don't because then where we would be!".

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