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.