Krugman says the pain in Spain was mainly due to excessive real wages.
It’s good to know that Krugman has retained some of his 1990s views:
We “” that is, the United States “” have a floating exchange rate. Spain, however, being part of the euro zone, does not. Its wages are too high compared with those of other eurozone members, now that the housing boom and massive capital inflows are over. If Spain still had a peseta, I’d say devalue it; since it doesn’t, wages have to give.
I imagine Krugman’s left wing fans might have choked on their lattes when reading this paragraph. Wages need to be lowered to reduce unemployment? That doesn’t sound like Krugman. But at least he assured them that his conclusions do not apply to the USA. Or do they? Here is my argument in a nutshell:
We “” that is, the United States “” have an independent central bank. The Fed insists that “price stability” is its goal. Because of the sharp fall in NGDP, and sticky nominal wages, we need to cut real wages to restore full employment. If Congress had control over monetary policy, I’d say raise the inflation target for a few years (as would Krugman); since it doesn’t employment costs have to give. Cut the minimum wage and the employer share of the payroll tax.
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