The dynamics of the Great Depression, the New Deal, Smoot Hawley, and John Maynard Keynes are all the rage.

Wacko free traders are hyperventilating, again, about "protectionists" wanting to re-enact Smoot Hawley tariffs.  I’ve not seen a Smoot-Hawley tariff increase proposed in the past 20 years, at least.  Oh well.  If there’s not a boogey man to see, you make one up.

It’s too bad we’re not seriously talking about reforming trade policy.  Net exports are in the tank… i.e. trade deficits.  Tough to increase demand when you’re buying record amounts more than you sell.

Paul Krugman is using his NY Times blog to slap down Keynes’ critics.  On November 29, Amity Shlaes wrote in the WSJ that the New Deal dampened employment because it raised wages.

Krugman responded, the same day, in his blog:

Funny she should mention that — because the effect of wage changes on employment was the subject of a whole chapter in Keynes’s General Theory. … And what Keynes had to say then is as valid as ever: under depression-type conditions, with short-term interest rates near zero, there’s no reason to think that lower wages for all workers — as opposed to lower wages for a particular group of workers — would lead to higher employment.

Suppose that wages across the US economy had been, say, 20 percent lower than they actually were. You might be tempted to say that this would make hiring workers more attractive. But to a first approximation, prices would also have been 20 percent lower — so the real wage would not have been reduced. So how would lower wages lead to higher demand for labor?

Well, the real money supply would have been larger — but the normal channel through which this might increase demand, lower interest rates, was blocked by the zero lower bound. Yes, there would have been a slight Pigou effect: real private sector wealth would have been higher, because cash under the mattress (or wherever) was worth more. But on the other hand, real debt burdens would also have been higher, probably exerting a contractionary effect. Overall, there’s no good reason to think that lower wages would have helped raise employment.

Today, Krugman goes after George Will, who wrote in the Washington Post:

Obama’s “rescue plan for the middle class” includes a tax credit for businesses “for each new employee they hire” in America over the next two years. The assumption is that businesses will create jobs that would not have been created without the subsidy. If so, the subsidy will suffuse the economy with inefficiencies — labor costs not justified by value added.

Krugman rephrases Will’s argument:

That is, if the private sector wouldn’t have created a job on its own, that job shouldn’t have been created — whereas the real choice is between having workers doing something and being uselessly, destructively unemployed.

And then says Keynes has already disposed of the money-wage argument in 1936, as pointed out in the response to Shlaes.  And Krugman is not beyond mocking:

Why do people still fail to get Keynes, after all these years? Keynes might have said that it’s the inherent difficulty of the concepts:

For—though no one will believe it—economics is a technical and difficult subject.