The Keynesian fallacies live on and on, and are present twice a week from Paul Krugman. Today, our Hero tells us why falling wages (and, by assertion, all falling prices) are harmful. The Great One writes:
Things get even worse if businesses and consumers expect wages to fall further in the future. John Maynard Keynes put it clearly, more than 70 years ago: “The effect of an expectation that wages are going to sag by, say, 2 percent in the coming year will be roughly equivalent to the effect of a rise of 2 percent in the amount of interest payable for the same period.” And a rise in the effective interest rate is the last thing this economy needs.
You see, Krugman believes that there should be no consequences to an unsustainable boom, and that once a bubble bursts, then the spending that occurred during the boom must be continued at all costs. That is not economics, folks. That is nonsense.
The boom was especially pernicious because foreigners were willing to accept U.S. Dollars sight on seen and to buy massive amounts of U.S. Government debt. Thus, Americans could borrow at will, refinance their houses, purchase new cars, take vacations and buy all sorts of things, all based on the imagined “equity” on their houses. This could not continue.
Yet, Krugman now insists that we have to keep borrowing to keep up this frenetic pace of consumer spending. If consumers are maxed out, well, it is up to the government to do it, and if no one accepts U.S. debt, then the Fed needs to print, print, print.
This is utter foolishness. To Krugman, there are no “fundamentals” in an economy. Instead, it is just a Big Blob in which capital magically appears and goods just fly onto our shelves. Furthermore, he cannot even differentiate between nominal and real wages. The guy is hopeless, and it tells us something about the state of “elite” economics in the academic world.