Lake Wobegon Economics

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Dean Baker has a very good, succinct summary of what’s wrong with pretty much everything Casey Mulligan has written about employment. What I’d say, however, is that it’s much broader than Mulligan.

As Dean says, Mulligan and others keep emphasizing examples of individual groups that have managed to gain jobs by cutting wages or offering other attractions to would-be employers. They then assert that these examples tell us what would be needed to expand overall employment.

The point, of course, is that all such arguments amount to committing the fallacy of composition. Or, if you prefer, they’re saying that we can solve the jobs problem through Lake Wobegon economics, creating an environment in which every state, every age group, and every occupation offers wages that are below average.

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.

http://krugman.blogs.nytimes.com/2011/08/18/lake-wobegon-economics/

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