They Have Learned Nothing, and They Have Forgotten Nothing

It appears that mainstream economists are still refusing to learn the lessons of the Great Depression.

They continue to insist that the solution to any economics problem is to make ordinary people poorer, and their lives more precarious:

A couple of years ago yours truly had a discussion with the chairman of the Swedish Royal Academy of Sciences (yes, the one that yearly presents the winners of ‘The Sveriges Riksbank Prize in Economic Sciences in Memory of Alfred Nobel’). What started the discussion was the allegation that the level of employment in the long run is a result of people’s own rational intertemporal choices and that how much people work basically is a question of incentives.

Somehow the argument sounded familiar.

When being awarded the ‘Nobel prize’ in 2011, Thomas Sargent declared that workers ought to be prepared for having low unemployment compensations in order to get the right incentives to search for jobs. The Swedish right-wing finance minister at the time appreciated Sargent’s statement and declared it to be a “healthy warning” for those who wanted to increase compensation levels.

The view is symptomatic. As in the 1930s, more and more right-wing politicians — and economists — now suggest that lowering wages is the right medicine to strengthen the competitiveness of their faltering economies, get the economy going, increase employment and create growth that will get rid of towering debts and create balance in the state budgets.

But, intimating that one could solve economic problems by wage cuts and impairing unemployment compensations, in these dire times, should really be taken more as a sign of how low the confidence in our economic system has sunk. Wage cuts and lower unemployment compensation levels do not save neither competitiveness nor jobs.

………

It’s an atomistic fallacy to think that a policy of general wage cuts would strengthen the economy. On the contrary. The aggregate effects of wage cuts would, as shown by Keynes, be catastrophic . They would start a cumulative spiral of lower prices that would make the real debts of individuals and firms increase since the nominal debts wouldn’t be affected by the general price and wage decrease. In an economy that more and more has come to rest on increased debt and borrowing this would be the entrance-gate to a debt deflation crises with decreasing investments and higher unemployment. In short, it would make depression knock on the door.

They are SO like the Bourbon Kings.