You're Doing It Wrong (photo: j-No)

Casey Mulligan is still riding his argument that increases in the minimum wage cause reduced employment, and upping the ante with his claim that an increase in the number of people looking for work causes an increase in economic activity.

Mulligan, like many right-wing economists, is a one-trick pony. The solution to every economic problem is to figure out how to help the supply side of businesses. That might be acceptable in a more stable economy, where the interests of both business and consumers should be considered in formulating economic policy. Right now, we are in a different place. Businesses are doing fine, making money and up to now at least, buying stuff. For consumers, things are terrible. Demand is down, household net worth is down, wages are down, unemployment is up, and people are really worried about the future.

Let’s try a concrete analogy: think about riding a bicycle. Most of us ride along pushing down on first one pedal and then the other, in an alternating cycle. That’s like a fairly stable economy, each side gets pushed in turn. Now imagine starting to ride a bike with one pedal at the bottom and the other at the top. Push on the bottom pedal as hard as you can, and that bike will just sit there, or more likely, you’ll fall over. That’s like the economy in unstable settings: you only get it going by pushing on the top pedal, whichever that is, supply or demand.

Mulligan discusses the increase in employment of the elderly during the recession, and the increase in employment in Texas in two recent posts. He pushes really hard on the supply side pedal: in both cases, he says that the increase in employment was the result of an increase in the supply of labor. Paul Krugman (Krugman’s post is titled The General Theory of Anti-Mulliganism) and Dean Baker disagreed, and Mulligan responded.

I’d add a footnote to the Krugman/Baker dismissals of Mulligan. He doesn’t consider the trend towards older people hanging onto their jobs as long as possible, see this and this (.pdf). The increase in supply of old people trying to find work is against a baseline of people who were able to retire with dignity and financial security. Many older people lost their economic security, as their retirement savings were trashed by the Great Crash, interest rates went to zero, and the forces of rich corporatists and their economist tools threaten Medicare and Social Security. As early as September 2009, it was apparent that retirees were being forced back into the labor market by loss of that security, and that certainly scared a lot of people nearing retirement.

The key problem with Mulligan’s argument is that it doesn’t tell us what to do. It seems to argue that doing nothing is perfectly fine, because when wages fall far enough, the problem will solve itself. In his paper, Simple Analytics and Empirics of the Government Spending Multiplier and Other “Keynesian” Paradoxes, which I discussed here, Mulligan argues that if we let the minimum wage fall, we would have between 300,000 and 1.1 million more jobs. Of course, it isn’t clear how that would bring people out of poverty. If the minimum wage were dropped to $6.55 per hour as he suggests, without benefits, the newly employed would make $11,800 for 1,800 hours before FICA and Medicare taxes. Mulligan doesn’t explain how that will help anyone besides an old person looking for a few bucks to live without depleting savings or a kid trying to help out with the family budget since she can’t move out on her own.

Mulligan is still saying that sticky wages are the big problem, the exact same thing that economists were saying about the Great Depression. John Maynard Keynes explained exactly how wrong he is. We are getting another test of that now, because wages are in fact shrinking. The Census Bureau reports this week that

Overall, median household income adjusted for inflation declined by 2.3 percent in 2010 from the previous year, to $49,445. That was 7 percent less than the peak of $53,252 in 1999.

Wages aren’t sticky, and lower household income has not restarted the economy. Neither has the latest increase in corporate cash on hand. According to the most recent Flow of Funds Report from the Federal Reserve Board

Corporations held a record $2 trillion in cash at the end of June, an increase of 4.5 percent.

Mulligan isn’t the only one making this sticky wage argument. Here’s an example from the Koch-funded Mercatus Center, at the Koch-funded George Mason University.

It’s long past time for Mulligan and his ilk to try pushing on the other pedal.



I read a lot of books.