The World Needs the Accidental Theorist Back
The Krugman we’ve got is sold on the House health bill. But the Krugman we had, the thoughtful economist who wrote The Accidental Theorist, would have responded differently. Krugman Past, unlike Krugman Present, would have pointed out that when the unemployment rate is 9.7%, it’s a bad idea to legislate an 8% payroll increase on businesses that fail to offer health insurance. Employers are reluctant to hire workers at today’s wages; how are they going to feel once the marginal worker gets 8% pricier?
It’s not just Krugman who should be against such legislation at a time like this; so should any sensible Keynesian. If you’re a dogmatic believer in market-clearing, you might say, “No problem, wages will fall to prevent a rise in unemployment.” But if you accept the reality of wage rigidity, you know that’s pie-in-the-sky. In the short-run, employers will mostly respond to higher labor costs by letting workers go. And even in the long-run, employers usually cut real wages by keeping nominal raises below the inflation rate. In an economy with very low inflation forecasts for years to come, this stealth adjustment process will take years.