In our eleventh installment of The Cato Journal’s January 2010 “Are unions good for America?” issue, we cover the eleventh myth. Here is The Homeland Stupidity web site’s synopsis of this myth, and a link to each of the 12 Cato articles. Myth Number Eleven: Paying workers higher wages will reduce unemployment and stimulate the economy. Fact: The “high-wage doctrine” increases unemployment and drags down the economy. This doctrine originated with a 1921 report that Hoover commissioned while he was Secretary of Commerce dealing with what was, in retrospect, a minor recession. In addition to recommending higher wages, the report also said that government spending (now known as the stimulus package) can help the country recover from a recession. Neither is true, of course, and the report might have been completely forgotten had Hoover not become President. He put his disastrous ideas into practice, and the rest, as they say, is history. Worse, proponents of these theories, which John Maynard Keynes gleefully signed on to, are more concerned with theories than facts, according to Lowell E. Gallaway, economics professor at Ohio University. That’s just a polite way of saying they’re full of crap. Galloway writes:
“In the intellectual world, the high-wage doctrine continues to have its appeal. Prior to his appointment as chairman of the Federal Reserve Board, Ben Bernanke, collaborating with Martin Parkinson, noted: “Maybe Herbert Hoover and Henry Ford were right. Higher real wages may have paid for themselves in the broader sense that their positive effect on aggregate demand compensated for their tendency to raise costs” (Bernanke and Parkinson 1989: 214). More recently, Paul Krugman reiterated this view in a New York Times oped (3 May 2009), arguing, “Many workers are accepting pay cuts in order to save jobs.” He then asks, “What’s wrong with that?” His answer refers to what he calls “one of those paradoxes that plague our economy right now . . . workers at any one company can help save their jobs by accepting lower wages, but when employers across the economy cut wages at the same time, the result is higher unemployment.” This is simply a reprise of Klein’s (1947) views. Never mind the existence of more than a century of empirical evidence to the contrary. Krugman’s concern is not with the empirical problem, but with the theoretical connection between wage rates and employment. The high-wage doctrine still lives. In all probability, this persistent adherence to an incorrect doctrine once again will prove to be detrimental to the U.S. economy, just as it was in the 1930s.”
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