Mario Rizzo has responded pointing out Krugman's failure to notice sector changes in wages as opposed to a general falling of wages.
In addition to, thus, ripping the heart out of Krugman's argument, Rizzo also displays a deep and sophisticated understanding of Keynes' writing on the subject. He points out, e.g., the straw man Keynes used to attack the argument of Arthur C. Pigou.
Rizzo then comments of Krugman's deflation concern:
What Krugman appears to fear is deflation, that is, a decline in aggregate demand spiraling out of control. So he recommends more stimulus to, in effect, ratify the “high” wages. But how does any of this allow relative wages to change?
Thus the immediately relevant issue is the likelihood of deflation. If we focus narrowly we see that food and energy prices have declined and this weighs down the consumer price index. However, as Allan Meltzer points out, during the first quarter of 2009 the “less volatile” gross domestic price deflator rose by almost 3 percent. This is not deflation by my arithmetic.
Great stuff.
And there I was thinking wages are 'sticky'...
ReplyDeleteBryan Caplan at EconLog also takes Krugman to task and turns the aggregate demand argument on its head. See here
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