Thursday, December 18, 2008

Paul Krugman Says Something Smart

On his NYT blog Krugman had this post:

"Kevin Drum writes that

One way or another, there’s really no way for the economy to grow strongly and consistently unless middle-class consumers spend more, and they can’t spend more unless they make more.
This is a widely held view, and I’m as much in favor of a strong middle class as anyone. Nonetheless, I’d say that in terms of strict economics it’s wrong. There’s no obvious reason why consumer demand can’t be sustained by the spending of the upper class — $200 dinners and luxury hotels create jobs, the same way that fast food dinners and Motel 6s do. In fact, the prosperity of New York City in the last decade — largely supported off of super-salaried Wall Street types — is a demonstration that you can have an economy sustained by the big spending of the few rather than the modest spending of large numbers of people. "


This idea that the economy can't grow without a strong middle class is perposterous. It is thrown about by progressive politicians all the time, and it makes no sense. I think of it from a different angle than Krugman, but at least he admits that it's wrong.

Wages move towards the marginal product of labor. In laymen's terms, the more valuable your services the more you can demand from your current employer or the next. On average, people are paid what they are worth. Workers are, again on average, not getting ripped off.

The overall economy is a function of savings, investments, human capital, and the efficient allocation of those resources. High wages for the middle class will be commensurate with individual productivity.


dave said...

Our all out consumer spending binge could arguably be the cause rather the the solution of our economic problems.

Higher wages come about through greater productivity, which comes from capital investment.If everyone invests in Mcmansions obviously spending on capital equipment must suffer.No?

Brian Shelley said...

You are correct. Traditionally economists split all spending into consumption and investment. I think that this is a mistake. The third branch is the "flight to the real". People will buy things that have and hold value, so you could think of it as savings, but these items aren't really capital investments. Examples are McMansions (to live in, not rent), jewelry, paintings, gold, cash, etc...