[lbo-talk] Krugman: Soundbite-size attack on "FDR made it worse" meme

Michael Pollak mpollak at panix.com
Wed Dec 24 23:16:44 PST 2008


http://krugman.blogs.nytimes.com/2008/12/24/wages-and-employment-again/

Paul Krugman - New York Times Blog

December 24, 2008, 11:55 am

Wages and employment, again

Just a quick question for those who think that FDR prolonged the Great

Depression by preventing a fall in nominal wages: what would be the

benefits, right now, if the United States were to implement a Latvian

program and cut everyone's wages by, say, 15 percent?

Seriously, how would it help? The real monetary base would grow -- but

the Fed is already expanding the monetary base enormously, with little

effect because short-term interest rates are essentially zero. (Yes,

there would be a real balance effect, but it would be trivial.)

Meanwhile, a general fall in prices would raise the burden of debt on

everyone, almost surely having a contractionary effect on the economy.

So here's the thing: if lower wages wouldn't help now, why would they

have helped in, say, 1935? Yet if you take away the wage argument, the

whole FDR-made-the-Depression-worse thing falls apart.



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