Monday, February 18, 2013

CHECKMATE: Paul Krugman Falls Into a Trap

Paul Krugman has made another move in his call for a increase in the minimum wage. This time he calls for an increase in the minimum wage in his NYT column, as opposed to his blog. The use by him of his column to promote his confusion is satisfying. Even more will see how he has trapped himself.

He writes:
President Obama laid out a number of good ideas in his State of the Union address.[...]One major proposal, however, wouldn’t involve budget outlays: the president’s call for a rise in the minimum wage from $7.25 an hour to $9, with subsequent increases in line with inflation. The question we need to ask is: Would this be good policy? And the answer, perhaps surprisingly, is a clear yes. 
Why “surprisingly”? Well, Economics 101 tells us to be very cautious about attempts to legislate market outcomes. Every textbook — mine included — lays out the unintended consequences that flow from policies like rent controls or agricultural price supports. And even most liberal economists would, I suspect, agree that setting a minimum wage of, say, $20 an hour would create a lot of problems. 
But that’s not what’s on the table. And there are strong reasons to believe that the kind of minimum wage increase the president is proposing would have overwhelmingly positive effects. 
He then disses those who argue that empirical data can not disprove the deductive logic that increasing the minimum wage increases unemployment:
Now, you might argue that even if the current minimum wage seems low, raising it would cost jobs. But there’s evidence on that question — lots and lots of evidence, because the minimum wage is one of the most studied issues in all of economics. U.S. experience, it turns out, offers many “natural experiments” here, in which one state raises its minimum wage while others do not. And while there are dissenters, as there always are, the great preponderance of the evidence from these natural experiments points to little if any negative effect of minimum wage increases on employment.
BTW, the "dissenters" he is referring to are all free market economists, but especially Murray Rothbard, who nailed Krugman's fallacious reasoning.

So how did Krugman box himself in?

Well, he tells us that there are "many natural experiments." There aren't any, of course, but this is Krugman's argument, so let us run with this for a minute. He says that these "many natural experiments" show that an increase in the minimum wage, from $7.25 an hour to $9.00, have "little if any negative effect of minimum wage increases on employment."

Got that? He is denying the logic of more unemployed at higher minimum wages because of data he says shows otherwise.

So then, how does he make this statement in the same column?
And even most liberal economists would, I suspect, agree that setting a minimum wage of, say, $20 an hour would create a lot of problems.
Does he have some natural experiments to make this statement? No. He is using the logic of minimum wages causing more unemployment.

Thus, Krugman is boxed in. He suddenly starts using logic, as opposed to data, at a $20.00 minimum wage. The same logic that he rejects using at a $9.00 minimum wage.

So now Paulie has to try and get out of this trap by coming up with some goofy argument as to where, between a $9.00 minimum wage and a $20 minimum, wage logic kicks back in. I call checkmate.


  1. RW you're using too much logic. You must inject a bit of your feelings into economic analysis. If 9 bones feels like the right minimum wage then it is. Feelings and emotion are the wave of the future not the silly thing you call logic.

  2. RW,

    Re: Krugman coming up with a goofy argument.

    He undoubtedly will. He's pathetic.

  3. Yup. A simple question Mr. Krugman: You stated "a minimum wage of, say, $20 an hour would create a lot of problems."

    How did you come to that conclusion? Logic or experience?...How do you justify flitting between logic and empiricism whenever you choose?

    Yup. Checkmate.

  4. Arguing with the likes of Krugman is a waste of time. Keynesianism is their political religion. You can't argue against religion with logic and reason, because it is based on faith.

    1. You took the words right out of my pocket. There is no point to trying to pin down Krugman or use logic of some kind against him. Also, I figured that a better checkmate on him involved Argentina.

      He's pretty damn slimy when he, instead of claiming that he's correct because there's no inflation yet, decides that high inflation is a good thing!

      That's the great thing about Keynesianism: it's built on a foundation of poo, so you can mold it into any shape you'd like. You just need a lot of equations that say the solution to any given problem is money printing.

    2. I agree that "arguing *with* the likes of Krugman is a waste of time" (emphasis mine), but arguing against the likes of Krugman certainly is not a waste of time.

  5. ...."Economics 101 tells us to be very cautious about attempts to legislate market outcomes"....

    That's a real knee-slapper right there.

  6. what would Krugman say about American Samoa?

    What would Krugman say about black teen unemployment? Would he seriously suggest that we live in a more racist society than we did in 1940?

  7. Krugman also basically admitted that even at current levels inflation is hurting people, causing thier wages to drop. Of course this affects the vast majority of workers, but lets not talk about that.

    I dont want to create a straw liberal, but it seems that liberals will always deny the harmful effects of inflation to ludicrous extents, except when it comes to the minimum wage, at which point harmful inflation becomes central to thier argument. But lets not talk about addressing inflation directly, that would be crazy.

  8. I disagree. Remember Mises favorite admonition: "do not give in to evil but proceed ever more boldly against it." I think if you don't respond to evil arguments, bystanders may think you are struck speechless by superior thinking. Rothbard tells a rueful story about Hayek "not bothering" to respond to Keynes' revised general theory after previously sinking his previous work. And then the Keynes train left the station. Oops.

    This doesn't mean you have to argue back on his terms or get sucked into the morass of his goofy thinking, by the way. But remember, people are watching. Krugman and his cohorts must be challenged at every turn.

    1. BINGO. We need to hammer him (and others like him) at every opportunity.

  9. I'm pretty sure the Law of Diminishing Marginal Returns was passed under the Reagan Administration. The result: downward sloping demand curves. Another republican failure!

    Obama just needs an executive order repealing economic "laws".

  10. (My 11:14 is a reply @geoih above, sorry)

  11. is this 'economic policy journal' meant as self parody? the logic trap krugman supposedly falls into can be climbed out of by any undergraduate econ major. raising the minimum wage only increases unemployment when the new minimum wage is greater than the equilibrium wage for workers who would receive the increase. if the new minimum wage is below that equilibrium, then workers get higher wages while unemployment does not go up. this is precisely the point krugman is alluding to. 20.00 is likely above the equilibrium, 9.00 most likely is not. unless you think the market always clears all by itself in the short run (lulz), krugman's argument hardly falls into a trap.

    1. oh hey guys see its not a problem...anon 11:25 says it "only increases unemployment when the minimum wage is greater than the equilibrium wage for workers who would receive the increase". I mean...who cares about cutting the most vulnerable out of the work force? this is a checkmate, it doesn't take a "undergraduate econ major" to see that.

    2. i think you are almost there. After all, you ignore the main point how does Krugman know what the equilibrium wage is without the studies? It's really quite simple: Krugman knows that any studies WOULD show $20 is too high because that is what they would be designed to show (or not depending). These libertarians don't appreciate how government studies are done, duh! Also a curious criticism that Austrians conflate long term and short term. Isn't it Keynesians who ignore the entire concept of time in their "business cycle theory"? Isn't it vital to Austrian theory?

    3. "if the new minimum wage is below that equilibrium, then workers get higher wages while unemployment does not go up"

      Except that you can't know in advance what wage level generates equilibrium. Dynamic market processes determine that in real time, not "empirical" studies of past artificial market conditions. Once you admit that any minimum wage level can create unemployment you've admitted that all minimum wage laws can have the same effect in varying degrees. The only difference is how much disadvantage you are willing to except to provide an advantage for incumbent workers. There really is no free lunch and insisting otherwise is pseudo science and intellectual flim flam.

      Do these empirical studies of "natural" experiments take in to account the number of jobs that never get created because employers lose money employing marginally skilled labor at the new wage level? How about lower levels of non-wage compensation that result in overall lower pay, like workers having to pay higher health ins. premiums or getting less sick time or no employer matching for retirement accounts or raises once a year instead of every 6 months. So what happens to the wages of people who were making $9/hr after a year of two of experience on the job. Suddenly, the new hire who is probably already losing money for his employer in the short run is making as much as someone who is experienced and productive. What cascade effect does the minimum wage have on the rest of the wage scale?

      The whole point of minimum wage laws is to transfer wealth from employers and customers to incumbent employees. Do you really think employers don't have ways of adjusting to higher artificial wages by lowering labor costs in other ways, consuming fewer non labor factors of production or increasing mechanization and automation?

    4. 1) Provide a criterion by which to delineate "short term" and "long term"

      2) Show why long term considerations are irrelevant, especially for a policy that WILL be here for the "long term"

      3)Define what the "equilibrium" wage is, show that it applies across industries, at all levels of employment (as opposed to differing firm by firm to account for the multiplicity of factors that go into wage determination)

      4) Prove that the market is incapable of clearing in the short term, providing specific reference to the factors that hinder it from doing so and avoiding vague abstractions.

      Good luck.

    5. You know how I know 7.25 is market clearing price for unskilled labor? Because people are getting paid 7.25. I win.

      Also, if the "equilibrium" price of labor is above 9 (I'd love to know how someone knows that), then raising the minimum wage to 9 is completely ineffective.

      Logic. Lulz.

    6. Labor is not one, undifferentiated, homogeneous blob. What you actually have to do is construct a supply and demand curve for every unit that is actually homogeneous.

      With the huge range and diversity in the productivity of individuals, you should realize it is extremely likely many individuals exist in the gap between $7.25/hr and $9.00/hr. These individuals will be unemployed.

    7. Bharat is entirely correct, further his insight has great implications for the questionability of the efficacy of these "many natural experiments". How can you isolate or even know every factor that goes into the employment decisions of not just one individual, but many thousands?

  12. it never ceases to amaze how economic illiterates (read: libertarians) incessantly conflate the long run and the short run.

    1. Err... It never ceases to amaze how economic illiterates (read: Keynesians) incessantly conflate low time preference and high time preference.

    2. As opposed to Krugman who said Argentina was being run correctly, Brazil was being run correctly, we needed a housing bubble in this country, QE would not increase commodity prices unless demand was stimulated, and now raising the minimum wage is a good thing.

    3. I don't even think you understand what you wrote. But then again, we are living in the wonderful economic times created by following the economic policies of those economists presumed to be "literate" in economics. LMFAO.

  13. Interestingly, today, I happened across minimum-wage positions of Princeton progressives a century ago (Leonard, Thomas C., "'A Certain Rude Honesty': John Bates Clark as a Pioneering Neoclassical Economist," History of Political Economy 35:3 (2003)):

    "The example of Clark's Progressive colleague Henry Rogers Seager is instructive here. In some places, Seager, like other reformers, argues for minimum wages on grounds that they would end exploitation of especially vulnerable classes of workers. But elsewhere, Seager argues — using marginal reasoning — for higher minima on grounds that the very same classes of workers would be expelled from the labor force. ... What's striking, and what immediately distinguishes him from Clark, is that Seager tends to regard this induced disemployment as a social benefit.

    "... In this view, it is not so much that workers are unfairly paid wages below their marginal products, but that wages as determined by the marginal products of the lowest-skill workers unfairly drag down the wages of more deserving higher-productivity workers. ...

    "Seager, Webb, and other Progressives thus object to the labor market participation of undeserving, low-productivity workers, calling them 'unemployables' (Seager 1913c, 85) and 'incapables,' to note some of the gentler labels. The Orwellian term unemployable is defined by Seager as referring to all workers whose marginal product is insufficient for a 'living wage,' by which he means a wage sufficient to meet all living expenses of a worker living independently. ...

    "By disemploying workers, minimum-wage legislation thus has the virtue for Seager of identifying low-productivity workers, enabling the state to segregate the 'unemployables' outside the labor force: 'The operation of the minimum wage requirement would merely extend the definition of defectives to embrace all individuals, who even after having received special training, remain incapable of adequate self-support' (Seager 1913a, 9). ...

    "... Progressives routinely argued that society is better off when 'unemployables' are removed from the labor force. Royal Meeker, a Princeton Progressive appointed to be the third US Commissioner of Labor by Woodrow Wilson (himself a noted Progressive academic and former student then colleague of Richard T, Ely's), makes the same argument. The man who soon became the leading US labor official goes so far as to reject the idea of subsidizing the wages of poor workers because he prefers the disemployment a minimum wage would induce — an efficient means of culling out the least productive workers (Meeker 1910). ...

    "So even here, where Progressive economists make use of marginalist reasoning — employment declines with binding legal minima — they do so in a nonneoclassical way. The reason that 'Seager did not consider the marginal product theory of wages to be a telling argument against minimum wage legislation' (Prasch 2000, 260) is that Seager, unlike Clark, regarded the disemployment of economically marginal workers as a good thing. Clark (as did Alfred Marshall) takes the neoclassical view that disemployment of poor workers is the greatest cost of minimum wages, not a putative benefit.

    "Regarding what should be done when the 'unemployable' were actually made unemployed by legal minimum wages. Progressive policies ranged from public assistance, to public employment, to training and schooling, to relocation to rural areas, to labor camps (a.k.a. industrial colonies), to compulsory reproductive sterilization. Progressives who advocate a eugenic solution to the problem of 'too many workers' — generally compulsory sterilization for 'defectives' — include Seager (1913a), Webb (1912), and Meeker (1910), (On the relationship between eugenic thought and American political economy in the Progressive Era, see Leonard 2003). ...

    1. When I posted that article, I didn't realize that the author, Thomas C. Leonard, is one of Krugman's colleagues at Princeton:

      Thomas C. Leonard

      But I did notice that the journal is published at Duke, where I see Leonard is on the faculty for an NEH Summer Institute (link is to a new post at Cafe Hayek):

      Center for the History of Political Economy 2013 seminar

      The article was listed as another I might be interested in, by an electronic research service, while I was accessing a different article (via a university-library-affiliated RefWorks database I had previously set up).

      This was all unrelated to EPJ, Krugman, Princeton, etc. -- until I found intriguing the minimum wage mention in the article Abstract.

      I should probably mention that John Bates Clark taught at Columbia University (not Princeton).

  14. Great, I'm making only $10 an hour. They'll raise the minimum wage to $9 an hour, I'll look like an even bigger loser. The price of everything will go up to account for the sudden pay raise for a lot of employees and instead of barely holding on, I'll be white knuckling it as I realize that I cannot afford my job.