Basic Macro

Dean Baker debunks some more supply side theories Casey Mulligan Unloads the Kitchen Sink. "Most of it has to do with the fact that even in the downturn employers will hire better qualified workers over less qualified workers and lower paid workers over higher paid workers. He infers from this fact that if all workers were better qualified and/or lower paid that we would not have an unemployment problem."

"Keynes' point is that changes that could increase any individual's chance of employment (e.g. improved education or accepting lower wages) would not necessarily lead to lower unemployment in general. In other words, if all workers could instantly get a college education then the main result would be that we would have more unemployed college grads.

This story would seem to be supported by two basic facts about the downturn. First, huge numbers of people who had the skills and desire to work before the collapse of the housing bubble, now do not have jobs. It seems difficult to explain the sudden loss of millions of jobs as a supply side phenomenon. The other basic fact is that unemployment has risen across the board in every major skills grouping and geographical location. This is very hard to explain as a supply side story."

Krugman calls it Lake Wobegon Economics. "The point, of course, is that all such arguments amount to committing the fallacy of composition...The essence of macroeconomics is understanding why such things are a fallacy, why what happens if one group does something is not at all what happens when everyone does it. And it’s a sad commentary on the state of economics when tenured professors at famous schools don’t get that distinction."