Teresa Ghilarducci, blogging for the Chronical of Higher Education, laments falling wage rates that are causing labor cartels (unions) to grumble and strike. Ghilarducci goes on to peddle “progressive” economics, writing:
Only before the Great Depression did economists think letting unemployment driving down wages was a good thing.
It’s not.
Falling wages is a bad thing, a very bad thing. Even if you are channeling gilded age Jay Gould—who said, “I can hire half of the working class to kill the other half”—you must concede that if workers don’t buy stuff, there is more unemployment, which means even lower wages, leading to more unemployment, in a spiral downward of recession and depression that eventually means you won’t be able buy stuff, no matter how cheap it is.
I call this the “blame the thermostat” fallacy. With it, Ghilarducci seems to be following a number of economists – like Paul Krugman – who have embraced fallacy, sensationalism or intellectual dishonesty in order to become bloggers. Her audience – Birkenstock-bedizened academics – don’t know their demand curves from their sunk costs. So give ‘em what they want, right? If you always give your tribe what it wants, eventually you’ll have to sell off what’s true.
Prices without Prejudice
To start with, Ghilarducci beats up on a straw man: Nobody believes that falling wages are a “good thing” whether or not that belief is held by any “market fundamentalist”. Passing over that puerile Sorosism, advocates of the free market (sound economics) understand that the price of labor is dynamic and free of moral content. In other words, falling labor prices are neither a “good” nor a “bad” thing, but simply information. The price of labor is what it is–like the price of soap, eggs or anything else governed by the Law of Supply and Demand. Every time an economist-turned-moralist tries to violate, ignore or tweak that law to suit her worldview, she ends up creating some counterproductive distortion. (In the above case, profit that might have been reinvested in a company’s future growth – likely bringing new employees – goes to paying current employees more than their labor is worth. A recipe for stagnation.)
Again, the price of labor is a signal – an indicator – of some phenomenon to which actors in an economy must respond — all within a complex, holistic system. Ghilarducci, an economics professor, should know this. But labor-union riches and social-justice dreams have clouded her thinking, I guess. She forgets (or ignores) all sorts of lessons about opportunity costs when suggesting a company has some responsibility artificially to inflate wage rates for labor cartels. And in denying the primary goal of a business to maximize its profits, she conceives of the economy as one big utilitarian pie to be carved up and meted out by people just like her. But that’s not economics. And in the long term, it’s not good for anybody but perhaps a few overpaid union employees.
Sure it stinks for someone to get paid less for the same job, just like it stinks for one’s home to be worth less tomorrow. But like home prices, falling wages are a symptom, not a pathology. So they cannot, in-and-of themselves, cause “a spiral downward of recession and depression that eventually means you won’t be able buy stuff, no matter how cheap it is.” That Professor Ghilarducci actually believes such nonsense and collects a check for writing it just goes to show how sheltered academics are from the reality’s storms. I don’t mean to be mean-spirited in saying that. The “experts” are simply ruining this country. And we should all start questioning their authority.
The ballad of John Maynard Krueger
The Keynesian worldview keeps coming back, as Dan Mitchell says, like a bad Freddy Krueger movie. Meanwhile, the Krugmans, the Ghilarduccis and the Stiglitzes of the world hide behind their credentials. They whisper destructive nostra into the ears of economically-challenged politicians with socialist bees in their bonnets. This spawns nothing but bad policy. And it leaves the laity grumbling about job losses and wondering why it’s all happening. But we’re getting wise to it. And increasingly, folks are loath to trust the experts. (Even Hayek is making a popular comeback.)
Which leads my to my closing remark on her post: Ghilarducci refuses to mention the failed economic policies that got us to this point. That omission makes me even more convinced she wants to join that fashionable salon of ex-economists–a place where everybody who’s anybody on the left goes, but where the price of membership is your intellectual honesty.
