Two Fictions of Mainstream Economics
May 24, 2020 by jackrasmus
Mainstream economics consistently fails to predict the future. I’m talking about those ‘schools’ of mis-thought, ranging from Paul Krugman on the ‘left’ to Glenn Hubbard and other apologists of business and neoliberalism on the ‘right’.
One of the favorite myths they perpetrate is that ‘wages are sticky downwards’. That means that in conditions of recession or worse, because workers won’t accept lower wages the recession tends to continue. If only workers would allow wage reductions it would mean business would have more disposable income (from wage cost savings) on hand. Business would then reinvest the extra income. Investment would rise. Workers would be rehired. Wage income would then recover and the economy would grow from more investment and consumption.
This fiction has ruled for more than a century. The economist John Maynard Keynes debunked it in the 1930s. But it was retained by the mainstream economics profession nonetheless, even to this day. Just read most of the entry college level textbooks. It’s still there. Along with at least a dozen other false propositions (like free trade benefits all; inflation is caused by too much money chasing too few goods; income inequality is due to workers not educating themselves and making themselves more productive; business tax cuts create jobs–and a host of other nonsense statements with no support in reality.
The notion that ‘wages are sticky downward’ is a clever way to argue that workers are responsible for the lack of a quick recovery from a recession. If they only would reduce their wages it would all be ok in a short while.
But take a look what’s going on right now. As of late May 2020 at least 45 million American workers are unemployed. In just two months they have lost $1.3 trillion in income. More than $1 trillion due to unemployed. Another $260B due to shorter hours of work. That’s a wage reduction of -$1.3 trillion! As in all recessions, workers do experience severe wage reduction–in joblessness (no wages), shorter hours of work, cuts and loss of benefits, lower pension contributions by employers, wage theft, etc. etc. So wages do fall, and are falling today faster and deeper than ever. And is business and investors spending and investing given the wage reductions? No. They’re hoarding the $1.74 trillion in Congressional loans and grants bailouts. And hoarding the $650 billion in business tax cuts also in the bailout legislation thus far (which one hears very little about in the media, I might add).
As journalist David Cay Johnson just revealed in a piece today, the short term cash deposits by business in just institutional money funds (only one source) has risen from $2.3 trillion before March 1, 2020 to $3.3T today. That’s a $1T rise in cash deposits by businesses, just in institutional money funds. More is being deposited in commercial banks. The long run average of business deposits in commercial banks has been around 5% (6% under Obama and 4.6% under Trump 2016-19) to 15.8% since March 1. Businesses and investors are hoarding their cash and stuffing it in their short term accounts in banks, funds, and who knows where else, on and offshore. No doubt some of that will be committed at some point to stock buybacks, dividend payouts, mergers & acquisitions, derivatives speculation, and all the rest of the financial gambling that in the 21st century defines capitalism. Don’t expect much to get into real investment that increases production, requiring the rehiring of workers, that generates wage incomes.
So wage cuts and reductions, now underway, will not result in renewed business investment and general rehiring of the 45 million laid off. Wage cuts don’t result in real investment and growth.
The nonsense economics notion that wages are sticky downwards is just pure economic bullshit today, as it has always been! And so is the parallel mainstream idea that if you can just find a way to boost business cash (via tax cuts or bailout loans) it will lead to economic recovery as well.
Dr. Jack Rasmus
March 24, 2020
Dr. Rasmus is author of the recently published book, ‘The Scourge of Neoliberalism: US Economic Policy from Reagan to Trump’, Clarity Press, January 2020, where the empirical record on wages, investment, taxes, employment thoroughly debunks the various myths and misrepresentations of mainstream economics.
One of the favorite myths they perpetrate is that ‘wages are sticky downwards’. That means that in conditions of recession or worse, because workers won’t accept lower wages the recession tends to continue. If only workers would allow wage reductions it would mean business would have more disposable income (from wage cost savings) on hand. Business would then reinvest the extra income. Investment would rise. Workers would be rehired. Wage income would then recover and the economy would grow from more investment and consumption.
This fiction has ruled for more than a century. The economist John Maynard Keynes debunked it in the 1930s. But it was retained by the mainstream economics profession nonetheless, even to this day. Just read most of the entry college level textbooks. It’s still there. Along with at least a dozen other false propositions (like free trade benefits all; inflation is caused by too much money chasing too few goods; income inequality is due to workers not educating themselves and making themselves more productive; business tax cuts create jobs–and a host of other nonsense statements with no support in reality.
The notion that ‘wages are sticky downward’ is a clever way to argue that workers are responsible for the lack of a quick recovery from a recession. If they only would reduce their wages it would all be ok in a short while.
But take a look what’s going on right now. As of late May 2020 at least 45 million American workers are unemployed. In just two months they have lost $1.3 trillion in income. More than $1 trillion due to unemployed. Another $260B due to shorter hours of work. That’s a wage reduction of -$1.3 trillion! As in all recessions, workers do experience severe wage reduction–in joblessness (no wages), shorter hours of work, cuts and loss of benefits, lower pension contributions by employers, wage theft, etc. etc. So wages do fall, and are falling today faster and deeper than ever. And is business and investors spending and investing given the wage reductions? No. They’re hoarding the $1.74 trillion in Congressional loans and grants bailouts. And hoarding the $650 billion in business tax cuts also in the bailout legislation thus far (which one hears very little about in the media, I might add).
As journalist David Cay Johnson just revealed in a piece today, the short term cash deposits by business in just institutional money funds (only one source) has risen from $2.3 trillion before March 1, 2020 to $3.3T today. That’s a $1T rise in cash deposits by businesses, just in institutional money funds. More is being deposited in commercial banks. The long run average of business deposits in commercial banks has been around 5% (6% under Obama and 4.6% under Trump 2016-19) to 15.8% since March 1. Businesses and investors are hoarding their cash and stuffing it in their short term accounts in banks, funds, and who knows where else, on and offshore. No doubt some of that will be committed at some point to stock buybacks, dividend payouts, mergers & acquisitions, derivatives speculation, and all the rest of the financial gambling that in the 21st century defines capitalism. Don’t expect much to get into real investment that increases production, requiring the rehiring of workers, that generates wage incomes.
So wage cuts and reductions, now underway, will not result in renewed business investment and general rehiring of the 45 million laid off. Wage cuts don’t result in real investment and growth.
The nonsense economics notion that wages are sticky downwards is just pure economic bullshit today, as it has always been! And so is the parallel mainstream idea that if you can just find a way to boost business cash (via tax cuts or bailout loans) it will lead to economic recovery as well.
Dr. Jack Rasmus
March 24, 2020
Dr. Rasmus is author of the recently published book, ‘The Scourge of Neoliberalism: US Economic Policy from Reagan to Trump’, Clarity Press, January 2020, where the empirical record on wages, investment, taxes, employment thoroughly debunks the various myths and misrepresentations of mainstream economics.
Dr. Rasmus, are you for or against the concept of MINIMUM WAGE.
This simple question only requires a YES or NO answer.
Many thanks,
michael zitterman
mikiesmoky@aol.com
Oops:: My question is missing a question mark.
My bad.
I have been an unequivocal supporter of the minimum wage for decades. I believe it should be at least $15/hr. and higher in certain higher cost urban areas. i also believe it should be indexed to goods inflation, the CPI-U, with adjustments per different metropolitan statistical districts. I know Michael you are an ardent opponent to the minimum wage. You should take the time to look at the many independent studies by scores of economists over the years that prove raising the minimum wage is a net positive contribution to economic growth and toward income equality, which has collapsed to so great an extent in recent decades, causing households on earned wage incomes in general to have to take on excessive debt just to maintain standards of living. If you haven’t ever had to live on the contradiction in terms called the minimum wage today you would probably not have such a negative attitude. Do take a look at the scores of independent economic studies on the minimum wage.
[…] Font: Jack Rasmus […]
[…] 24 May 2020 — Jack Rasmus […]
Hi Jack,
Which publication by Maynard Keynes debunks sticky wages?
wikipedia lists 2 publications for 1930, I guess it was an exciting time in economics.
1930 A Treatise on Money
1930 Economic Possibilities for our Grandchildren
If you happen to know what section and where I can download PDFs I’d also appreciate that.
Keynes’ argument is best laid out in his 1936 book, ‘The General Theory of Employment, Interest and Money’. Read chapters 2 and especially chapter 19 for the explanation why money wage cuts (or by implication any reduction in business costs due to tax cuts or borrowing costs) won’t lead to business investment rising. In fact, wage cuts will make the depression even worse by reducing income and therefore demand by a far greater magnitude than any wage (cost) cuts to business might result in more business disposable income that is then committed to investment (and thus employment and income by wage earners).
Professor, I am sorry for my tardiness.]
Anyone who possesses economic training and who advocates for ANY minimum wage is, effectively racist.
Allow me to explain.
Subordinate to the main argument is that those who promote a “minimum wage” are conflating an entry-level wage with a living wage. That appears irrational, at best.
Setting a “minimum wage” offers a challenge to a prospective employee to have his or her “value” as an employee equal or exceed that minimum wage and if he or she falls short,
he or she will not be hired and may find that he or she will be cast into an unemployable underclass. Adding insult to injury, one finds him or herself further from a potential job if the minimum wage were further increased.
Let’s take a different approach. How would high school graduation rates be affected if the minimum wage were raised to $25 per hour? How would our uninvited visitors’ problem be affected at that level? A prima facie extrapolation should reflect a lower graduation rate and an
exacerbation of the uninvited visitors’ problem. Conversely, what results can we expect if there were no minimum wage. How about higher graduation rates and an exodus of uninvited visitors? Given those answers, why did Congress pass minimum wage laws? By the way, twice, during the early 20th Century, “minimum wage” was declared unconstitutional.
Professor, please offer why you believe this dissertation to be illogical and erroneous.
Thank you,
Michael zitterman
mikiesmoky@aol.com
June 9, 2020
[…] Already there are signs that the windfall large businesses have received from the Trump administration have been slipped into bank accounts, not into investment. Economist Jack Rasmus has calculated that the loss of income for the tens of millions of United Statesians plunged into unemployment has cost them a composite $1.3 billion in lost wages. Ridiculing the orthodox economic “theory” that the problem with recessions are “sticky wages” — in other words, wages don’t fall fast enough or far enough during downturns — Professor Rasmus notes that businesses are not investing in the wake of the wage reductions. He writes: […]
[…] Already there are signs that the windfall large businesses have received from the Trump administration have been slipped into bank accounts, not into investment. Economist Jack Rasmus has calculated that the loss of income for the tens of millions of United Statesians plunged into unemployment has cost them a composite $1.3 billion in lost wages. Ridiculing the orthodox economic “theory” that the problem with recessions are “sticky wages” — in other words, wages don’t fall fast enough or far enough during downturns — Professor Rasmus notes that businesses are not investing in the wake of the wage reductions. He writes: […]
[…] Font: Jack Rasmus […]