Worse Is Better – NYTimes.com: «The idea is this: we’ll lay off government workers; this will raise unemployment, putting downward pressure on wages; and lower wages will lead to higher employment.
So, for this to work you first have to have a downward-sloping demand for labor as a function of the nominal wage rate. There’s no reason to believe that’s the case: in a liquidity trap, falling wages probably reduce the demand for labor, because they worsen the burden of debt.
And even if you somehow bypass this objection, the argument is still nonsense: it says that by reducing demand, you cut the price, which increases demand, which means that you end up selling more than before. Um, no — that’s the kind of answer that, in Econ 101, has you suggesting that the student get special tutoring.»
Franklin Delano Roosevelt 22. august, 1930:
One reason that the country has passed through an economic crisis is that some people thought they had discovered a new law, that the old law of supply and demand could be scrapped.