Republican Job-Creating Idea: Lay off government workers; this will raise unemployment, putting downward pressure on wages; and lower wages will lead to higher employment

From Paul Krugman Nobel Prize-winning Economist, via NY Times:

Wow. The GOP prescription for higher employment is actually quite spectacular — it’s a thing of many levels, an ignorance wrapped in a fallacy. 

The idea is this: we’ll lay off government workers; this will raise unemployment, putting downward pressure on wages; and lower wages will lead to higher employment.

So, for this to work you first have to have a downward-sloping demand for labor as a function of the nominal wage rate. There’s no reason to believe that’s the case: in a liquidity trap, falling wages probably reduce the demand for labor, because they worsen the burden of debt.

And even if you somehow bypass this objection, the argument is still nonsense: it says that by reducing demand, you cut the price, which increases demand, which means that you end up selling more than before. Um, no — that’s the kind of answer that, in Econ 101, has you suggesting that the student get special tutoring.
Given all that, it’s hardly worth mentioning that they’re appealing to the thoroughly refuted doctrine of expansionary austerity.

As Wolfgang Pauli used to say, what we have here is an argument that isn’t even wrong.

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