DooDoo Economics

George H.W. Bush famously stated that Ronald Reagan was proposing voodoo economics. Time has proven the elder Bush at least somewhat wrong. The supply-siders did get some things right, among them the idea that marginal tax rates (at some point) do matter. But their notion that tax cuts would pay for themselves is as laughable today as it was nearly 30 years ago.

Today we have many economic charlatans peddling what are essentially Neo-Hooverian ideas. Whether it is Casey Mulligan writing that people are voluntarily unemployed because they want leisure time to Barro famously mistaking an accounting identity for a behavioral relationship, the freshwater folks sure are peddling snake oil. Mulligan and his ilk would have you believe that not only should there not be a second stimulus, but that we should have ended the first stimulus sometime over the summer.

As if they have not done enough damage to economics and its reputation, these same jackals are now peddling the idea of a minimum wage (MW) cut to spur job growth. Like I wrote a couple of days ago, the idea is absurd on multiple levels. But something else came to me earlier today that I had not touched on in my previous post.

Wage stickiness! Now, let us assume that, contra to what I wrote before about wages being pushed downward, wages were sticky. It’s a reasonable assumption and I’m not sure why it hadn’t dawned on me before. Anyway… if wages are sticky and we cut the minimum wage, what would be the effects? Folks who are now working for the MW would earn less income, obviously. But if other wages were sticky (let alone price stickiness) other wages would not go down. Thus, at least some of the prices of good and services that a MW worker purchases or consumes would remain at their pre-MW cut level.

In that case one or two things could happen. MW workers, or at least those who have access to consumer credit, would continue their current consumption patterns, in the process running up debt. Or, they could cut back their consumption to reflect their new budget constraint. One might argue that the first option is not necessarily bad, but given our abysmal national savings rate and the cratering of subprime mortgages, it’s an awfully tenuous argument. And I assume that we can all agree that the second option, less consumption spending, would be horrible for an economy with slow growth in GDP and a double digit unemployment rate.

The only motivation, that I can surmise, for cutting the minimum wage is some folks’ general antipathy towards it. Card and Krueger have already debunked the old notion that increases in the MW would result in increased unemployment. And we were able to pass a decent MW increase in 2007. But for people like Mulligan and others, this moment is too good to pass up. They know their arguments are disingenuous. Or at least they should. I’m not saying they’re bad people, they just choose to practice DooDoo Economics.

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