paul krugman's nobel makes everyone else dumber

I kid you not: Paul Krugman actually uses the fallacy of composition to argue against lowering the minimum wage.  Bear in mind that this guy is a Nobel laureate.  When he's wrong about something like this it's not because he's mistaken; it's because he's lying.

...the usual suspects were declaring that FDR prolonged the Depression by raising wages: the belief that lower wages would raise overall employment rests on a fallacy of composition.  In reality, reducing wages would at best do nothing for employment; more likely it would actually be contractionary.

Here’s how the fallacy works: if some subset of the work force accepts lower wages, it can gain jobs. If workers in the widget industry take a pay cut, this will lead to lower prices of widgets relative to other things, so people will buy more widgets, hence more employment.

But if everyone takes a pay cut, that logic no longer applies. The only way a general cut in wages can increase employment is if it leads people to buy more across the board. And why should it do that?

First, we need to be clear that lowering the minimum wage, as a strategy for putting the lowest-skilled workers back on the payroll, is not the same as "lowering wages."  We are talking about people who are uniquely unemployed because their individual productivity is simply not deemed sufficient to justify paying them the statutory minimum wage.  The proposal is to remove the wage floor, not so that everyone gets paid less, but so that these particular individuals can increase their chances of getting off the dole and finding jobs commensurate with their skills.

Second, Krugman's really stretching the fallacy of composition.  The classic textbook example of the fallacy is a stadium full of seated people.  When one person stands up, he gets a better view -- which he acquires at the expense of the people behind him.  But if everyone stands up, then nobody's view is really improved.  The fallacy is commonly committed when you conclude, after seeing that one person can live better at someone else's expense, that everyone can therefore live better at someone else's expense.  If a scheme relies on shifting costs to somebody else, then it will only work as long as someone exists to absorb the costs.

The fallacy warns that just because something works in a small sample does not prove that it will work for everyone.  What it does not say is that something which works for a small sample cannot work for everyone.  Krugman is using the fallacy of composition to argue that just because one person can stay alive by breathing, we should not conclude that everyone can stay alive by breathing.  Or, to put it in familiar terms, Krugman is arguing that the stadium can't work if everybody is sitting down.

The bottom line is that unemployed people still have to consume.  Everyone has to eat.  Allowing them work -- even at a pathetically low wage -- means that at least they're producing something in exchange for what they consume.  And for a Keynesian like Krugman, these are precisely the people you'd want receiving paychecks.

Comments

[Mitch Baker]

I wish he'd apply this fallacy to the healthcare debate. I've seen two examples that I found particularly irksome. The first was when Bill Kristol was on "The Daily Show" and admitted that active military personnel get excellent healthcare provided by the government. Of course, Jon Stewart felt that this means the government could do the same for all Americans. I was disappointed that Bill didn't bat that down immediately, not to mention that the government is much less successful with retired personnel. The second is whenever someone demands or offers every American the same healthcare plan as what Congress gets. As the "employer" of the military and Congress, I have no problem providing these benefits, but the idea that we could do this for everyone is, well, fallacious.

[Eddie Willers]

Just another example of Socialism. Everyone deserves to get paid at least the same, no matter how much they contribute.

"From each according to his ability, to each according to his needs."

[hiscross]

Was Bill Kristol ever in the military? The answer is No. Like Barry and John, their talk isn't based on experience. I was in the military and now use its TriCare Plus healthcare system. It is what it is. My family has always been healthy. Why? Because we practice good health everyday. In other words, we stay healthy because we understand the down side. The Libs don't really care for our lifestyle much. Too bad for them.

[Andrea]

Who are people talking to when they decide military healthcare is great? Sure, I don't have to pay for most medical treatment, but waiting a month or more for each 10 minute appointment with a sub-par doctor hardly seems worth it. I'd rather pay, be able to choose my doctor, and get an appointment within a reasonable period of time. The only time I've found that the military health system works quickly is when you've got a short-notice deployment tasking.

[Elizabeth G. Liebowitz]

My concern with lower minimum wage is that it will actually increase demand on public services ("the dole") - here's my logic: if Company XYZ can pay workers less, it will. Existing workers could conceivably get a pay cut (potentially increasing their need for public assistance), but the company could hire some more low-level, low-producing workers at the lower wage, too. In theory, whatever small amount these workers do earn will still be too little to live on. Furthermore, if those workers happen to have kids that they've been watching at home, they'd have to have child care, which costs much more than minimum wage.

[John Galt]

Elizabeth,

Everybody consumes -- it's a fact of life. And right now there are people unemployed, as a result of the minimum wage, who are nevertheless consuming at the expense of everyone else. They are mostly young, and disproportionately dark-skinned.

It is entirely possible that these people will never be able to earn enough to cover the full cost of their own consumption, but there's no reason they can't -- or shouldn't -- make the greatest contribution they can. Better that a person makes 500 in earnings and draws 500 in welfare than simply drawing 1000 in welfare.

There is nothing in this to imply that anyone who currently has a job will somehow get paid less. We're talking about where the bottom rung is -- the "entry level" -- on a ladder that people spend their entire working lives climbing. Lowering the minimum wage doesn't push anyone "down" -- it simply puts the ladder within reach of more people.

We are all in this together. And right now the minimum wage keeps thousands who are consuming from making even token contributions. There's no reason they shouldn't be able to get on the ladder with the rest of us, and at least contribute what they can. They are consuming, and they can work. To forbid it, as the law currently does, is irrational.

[Adam Freund]

Krugman purposely ignores the entire point, wages are commensurate with productivity. According to his logic (and that of the left), higher productivity leads to less employment, not more.