Questions for DeLong
By Bryan Caplan
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?