Results for “multiplier”
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A further note on the broken windows fallacy

I’d like to second the points by Alex and also Bob Murphy.  An additional factor is that when a window breaks (never mind ongoing regulations and wealth taxes, which as Alex notes will be worse) wealth goes down.  Keynesians tend to overestimate the importance of flows and underestimate the importance of stocks and sometimes they neglect the latter altogether.  Just as there is a spending multiplier, there is also a multiplier from changes in wealth.  For instance declines in perceived wealth will cause people to spend less.  The Keynesian AD gains from a broken window have to stem from the difference between the spending multiplier and the wealth multiplier.  Under the permanent income hypothesis, there’s not a lot of daylight here.  Furthermore the perceived wealth decline, even if it doesn’t lead to immediate one-to-one reductions in spending, can persist over several periods.  Granted, PIH is not exactly correct, but still the net impact of stimulus on current employment and income won’t be that large because of the negative wealth effects.  Fiscal policy remains a weak pill.  The declines in housing prices in recent years really have taken their toll on AD so the wealth multiplier is not to be ignored.  The notion that a stable and sustainable restoration of AD actually requires some increases in perceived wealth is one of the most underrated ideas among today’s Keynesians.

I would make a few more general points:

1. It is possible that a broken window may increase employment and output and under sufficiently unusual assumptions it may also increase welfare.  But it’s not likely.  I think the point, showing the possibility of this exceptional case, should be a footnote in an intermediate macro text but no more.

2. The importance of wealth creation for human well-being is the more important lesson, by far, from economics.  There are plenty of productive investments by which government can improve matters, starting with fixing escalators in the DC Metro system, not breaking them!  Ultimately, in the Hansonian sense, the debate is about how much we should glorify wealth creators and in this regard Hazlitt not Keynes gets it right.

3. A more directly practical point is that tighter ozone regulation will spur some hiring but probably lead to labor market crowding out, rather than targeting the current unemployed. I don’t know if those regulations are a good idea or not but I do think the case for them has to stand on its own two feet and not on Keynesian principles.

The 1937-1938 contraction

A few months ago I was surprised to see this paper by Chris Calomiris, Joseph Mason, and David Wheelock:

In 1936-37, the Federal Reserve doubled the reserve requirements imposed on member banks. Ever since, the question of whether the doubling of reserve requirements increased reserve demand and produced a contraction of money and credit, and thereby helped to cause the recession of 1937-1938, has been a matter of controversy. Using microeconomic data to gauge the fundamental reserve demands of Fed member banks, we find that despite being doubled, reserve requirements were not binding on bank reserve demand in 1936 and 1937, and therefore could not have produced a significant contraction in the money multiplier. To the extent that increases in reserve demand occurred from 1935 to 1937, they reflected fundamental changes in the determinants of reserve demand and not changes in reserve requirements.

My view had traditionally been that of Friedman and Schwartz, Eggertsson (and here), and Krugman, but if you wish to read the other side of the story there it is.  In any case I do not see any good argument for monetary contraction today, no matter how one reads the 1937 story.  We await clarification from Scott Sumner.

 

How well is fiscal austerity working in the UK?

With the Wednesday release of a mediocre gdp report, we are hearing that the United Kingdom austerity program is proving a macroeconomic failure.

Let’s look at the timing of the cuts:

So far, about GBP9 billion of the government’s fiscal tightening has occurred. However, around GBP41 billion of tax increases and spending cuts will begin to take affect from the start of the new fiscal year on April 5.

Some of the particular cuts were announced in October and at that time Ken Rogoff doubted whether half of them would end up taking place.  So the cuts are in their infancy and arguably their credibility is still somewhat in doubt or at the very least has been.

A lot of the weak gdp report is blamed on construction, with some excuses drawn from snowstorms.  There does exist an extreme rational expectations view, in which the last-quarter weakness of construction was based on the expectation that government spending cuts would start arriving later in April and thus new houses should not be built.  Alternatively, it could be that after the greatest real estate bubble in history, the UK market is overbuilt.  Weak UK growth dates to some time back.

Also recall that in many open economy Keynesian models, fiscal policy AD effects are to some extent — or completely — offset by exchange rate movements (pdf).  And the fiscal multiplier is basically zero when the central bank targets inflation.  Furthermore it is not obvious that the UK has been in a liquidity trap.   When it comes to drawing Keynesian conclusions about practical fiscal policy, the theory here is a house of cards.

The UK economy suffers from a more serious technological stagnation than does the United States, in this case more forward looking than backward looking.  Their pharmaceutical innovation seems to be drying up, they are overspecialized in finance, the “residential tax haven” status of the country may not yield continuing growth at high rates, tourism is OK but not enough, and their manufacturing base eroded some time ago, with nothing like a German-style comeback.  The teacup sector aside, why should anyone be optimistic about that economy?

Two other considerations:

1. The case for the cuts is not that they will spur growth, but rather forestall a future disaster.  That’s hard to test.  A second part of the case is that not many political windows for the cuts will be available; that’s hard to test too.  On that basis, it’s fine to call the case for the cuts underestablished, but that’s distinct from claiming that poor gdp performance shows the cuts to be a mistake.

2. Let’s say the cuts lower government consumption and raise private consumption, and that government consumption is wasteful but private consumption isn’t (and long-run growth is given by the Solow-like expansion of the international technological frontier.)  That’s a good case for making the cuts, but they still won’t show up as higher gdp.  The government consumption is valued into gdp figures at cost, so even cuts proponents with a good case don’t have to be predicting higher gdp.

I doubt if the UK fiscal austerity program will much boost their growth rate, which is likely low in any case and for non-Keynesian reasons.  Simply citing a low UK growth rate is not a test of their fiscal policy, for a number of reasons detailed above.

New papers on fiscal policy

Price Fishback has a new paper (ungated but earlier draft here) surveying what we have learned about the macroeconomics of the Great Depression, here is one bit:

Some thinks that World War II offers an example of a situation where fiscal stimulus worked.  But the World War II analogy is highly misleading for any discussion of a peace-time economy.  The deficits were run during an all-out war when 40 percent of GDP was spent on munitions, the military made most of the allocation decisions in the economy, over 15 percent of the workforce was in harm's way in the military, there were widespread wage and price controls, and rationing ruled the day.  In essence, the World War II deficit experience tells us more about fiscal stimulus in the Soviet Union's command economy during the Cold War than it does about the modern U.S. mixed economy.

From Ethan Ilzetzki, Enrique Mendoza, and Carlos Vegh, here is a new paper (gated) on fiscal multipliers (shorter, ungated version here, powerpoints here, slides here, ungated but slightly older version here):

We contribute to the intense debate on the real effects of fiscal stimuli by showing that the impact of government expenditure shocks depends crucially on key country characteristics, such as the level of development, exchange rate regime, openness to trade, and public indebtedness. Based on a novel quarterly dataset of government expenditure in 44 countries, we find that (i) the output effect of an increase in government consumption is larger in industrial than in developing countries, (ii) the fiscal multiplier is relatively large in economies operating under predetermined exchange rate but zero in economies operating under flexible exchange rates; (iii) fiscal multipliers in open economies are lower than in closed economies and (iv) fiscal multipliers in high-debt countries are also zero.

That's zero as in "two times zero equals zero," or "1/2 times zero equals zero too" or even "-0.5 times zero equals zero."  I don't think the multiplier is zero for the United States, but very likely it's zero in a bunch of places.

Does the well-off law professor have cause to complain?

This guy is the blogging topic of the weekend; his family earns $455,000 a year (addendum: this number seems not to be true) and yet he worries about his taxes going up and the resulting diminution of real income.  I think we cannot permanently extend the Bush tax cuts; nonetheless, being a contrarian, I would like to explore the question of when a wealthy person has cause to complain.  I read about this guy and his pitchfork and it genuinely scared me, especially his description of Ben Stein and his intermingling of the political and the aesthetic.

Let's say you live in a country which has some rich people, some people in the lower middle class, and some very very poor people.  Or let's say you are a non-nationalist cosmopolitan.  Or let's say they discovered the indigenous people in Alaska and New Mexico were worse off than we had thought. 

In such societies, do the "lower middle class but not very poor people" have cause to complain?  After all, some large group of others has it much, much tougher.  Doesn't everyone who might suffer a loss have a potential claim to complain?  At what percentile of wealth does your claim to complain go away or diminish?  Even if it's an exponential function, can't Henderson's complaint lie within the shaded area, small though that region may be?  Can't a rich person point out that he has a higher MU of money than a non-rich person might think?  Or must that necessarily offend others?  What kind of genuflections must he package along with that information, so as to avoid being considered offensive?

Do you have more of a right to complain about taxes if you were going to spend the money, bringing about the treasured "stimulus," noting that right now the wealthy are more inclined to spend?  Do spendthrift wealthy people have a stronger right to complain if the multiplier on their potential spending is 1.5 rather than 0.6?  Should wealthy people simply acquiesce to any policy change that leaves them in the top two percent, and keep their mouths shut in the meantime?

If you are wealthy, and complain about a pending loss, must you each time note that some people — many people — are worse off than you are?  If you read a bad complaint, and complain about it, must you note that other people are stuck reading far worse material?  Or is it OK just to complain?  What if some other country's rich people support political tyranny, or perhaps an oppressive caste system, or maybe they don't pay any taxes at all?  Can you still complain about your rich people?  Or must you put in a disclaimer that you don't really have it so bad, given that others, in other countries, are stuck with even worse rich people?

Beware of moral arguments which do not address "At which margin?"  I see a lot of attempts to lower the status of Todd Henderson, but not much real moral engagement.  

A lot of people just like to complain, and that includes complaining about the complaining of others.  

Oddly — or perhaps not – it's the people who feel they deserve their money who are the most likely to give it away.

Blunt opinions, supported elsewhere but not here

I'd like to get a few opinions on record or simply recap some previous points.

The current downturn is a mix of AD and real shocks, in uncertain proportions, and in a manner which is hard to separate empirically.  It is now obvious there is a lot of structural unemployment and there is a quick and probably unjustified rush to define it all as AD-influenced unemployment turned sour.  The structural theories have their problems, but they can better explain why corporate profits are high and can better explain the distribution of unemployment across income and educational classes.  The regional distribution of unemployment is persisting because of labor immobility, which involves both AD and structural issues.  The sectoral shift view is more about shifting out of optimism-linked activities, within any particular sector, rather than about shifting out of construction and finance per se.

The mix of structural and AD factors does not, in any case, support liquidationist policies.  It supports AD-stabilizing policies, though it suggests that in absolute terms those policies will do less well than expected.  The failure of the fiscal stimulus is consistent with a number of different views, not just the claim that it should have been bigger.  We've yet to see a good theory of how stimulus scales up to produce a bigger and better multiplier at higher levels.

I don't trust stimulus analyses which fail to assign a central role to confidence and confidence is hard to model.

Current experience is also consistent with (but not unambiguously favoring) an Austrian-like view that the stimulus boosts some activity and then shortly thereafter pulls away the rug, leaving us more or less back where we started, albeit with some smoothing gains in the short run and some adjustment costs in the longer run.  The persistence and scale-up from the initial fiscal boost is hardly guaranteed.  The empirical papers on multipliers are not to be trusted and the results are in any case hard to generalize from one period to another.

Harald Uhlig's paper is one statement of the case against stimulus.  There is nothing measured by the Alan Blinder study which rules out the central result of this paper, namely transitory gains in the short run and high costs in the longer run.

Macroeconomics is rarely simple.  

Elizabeth Warren is unlikely to prove an effective agency head, and the two sides to this debate ought to switch positions.  Yet…politics very often isn't about policy.

On the AD front, Scott Sumner has been vindicated more than any other writer.  His best critic is Arnold Kling, especially with regard to whether there are only two kinds of inflation regimes, low or high and variable.  A related question is what a looser monetary policy would have done to financing the long-run debt burden and the use of the interest rate spread to recapitalize banks.  

We still don't know what we are doing.

Why are corporations saving so much?

There has been much recent discussion of the topic and I apologize (to RA, among others) for being late to the party.  Here is one piece by Yves Smith in the NYT and here is an Economist symposium on the topic, with many first-rate contributors.  Overall I am puzzled at the nature of the worry here.  Corporations with cash surpluses are not destroying real resources, nor are they stuffing cash in their mattresses.  They are investing in financial assets.

Take a financially conservative corporation, which holds its surplus in the form of T-Bills.  If it bought the T-Bills fresh at auction, that's lending money out to the government and the capital is still deployed.  Isn't that called…in some circles…stimulus?  (I've even heard the multiplier might be 1.4!  Or does only the borrower get credit and not the lender?)  It's trickier if the corporation buys the T-Bill on the secondary market, but still a) someone else has the money now, and b) this resale opportunity encourages other investors to buy freshly created T-Bills, thus putting capital in the hands of the government.  In terms of final effect, there should be a near-equivalence between buying old and new T-Bills.

Of course you might think the government is not spending this money well, but that's the problem of the government, not the corporate surpluses, which indeed are being invested.  I ran a surplus this last year and paid off some of my mortgage; does anyone think I destroyed net real resource investment?  (In fact I redistributed profits away from the financial sector, I suspect, which is good for the real economy at this point.)

If velocity is too slow for a social optimum, is it the corporations — who strive to rapidly invest excess cash in the till — who are at fault?  Even if corporations are not helping matters, are they doing anything worse than passing off a hot potato?

You might make an external cost argument.  Perhaps each corporation does well by holding T-Bills, but the system as a whole suffers under the encroachment of state power and public sector expansion.  That's not an argument which many proponents….do I even need to finish this sentence?  

It is perfectly fine to claim that we have a sectoral misallocation and that high corporate cash reserves are a symptom of this problem, for instance maybe there is too much lending to the safer, commercial paper-issuing big corporations and not enough lending for higher-yielding, riskier start-ups (no one knows which risks to take), or whichever story you wish to tell.  I hold a version of that view myself, but it's very different from believing that high cash reserves are stifling investment per se.

By the way, these high cash reserves are one reason why I don't think Alex's nominal wage stickiness story explains current unemployment.

Why is it so frequent that economists take Keynes's analysis of sitting on currency and apply it to savings and investment?

File under "Yet another discussion of the Junker problem."

Is it 1937 again?

There are many commentaries on David Leonhardt's article today on whether we should be raising taxes and cutting government spending, as was done in 1937.  Yet I don't see anyone — at least not today — talking about monetary policy during 1936-7.  A bit earlier, David Beckworth stepped up to the plate:

Is the Federal Reserve (Fed) making a similar mistake to the one it made in 1936-1937? If you recall, the Fed during this time doubled the required reserve ratio under the mistaken belief that it would reign in what appeared to be an inordinate buildup of excess reserves. The Fed was concerned these funds could lead to excessive credit growth in the future and decided to act preemptively. What the Fed failed to consider was that the unusually large buildup of excess reserves was the result of banks insuring themselves against a replay of the 1930-1933 banking panics. So when the Fed increased the reserve requirements, the banks responded by cutting down on loans to maintain their precautionary level of excess reserves. As a result, the money multiplier dropped and the money supply growth stalled…

The second link in this post offers the critical figure.  If monetary policy is sufficiently accommodative, I do not see that we are risking a 1937-8 repeat.  In 1936-7, monetary policy was not just insufficiently expansionary, it was absolutely draconian.  Read this paper too.  Here is Scott Sumner.

As the stimulus is pulled away, there is a reasonable chance that the Fed will be more accommodative.  Remember, the monetary authority moves last.

I do not see why we are discussing this issue without placing monetary policy at the center of the analysis.

What does successful monetary policy require?

Mark Thoma writes:

As for Tyler's (and others') call for monetary policy instead of fiscal policy, here's the problem. It relies upon changing expectations of future inflation (which changes the real interest rate). You have to get people to believe that the Fed will actually be willing to create inflation in the future when it comes time to do so. However, it's unlikely that it will be optimal for the Fed to cause inflation when the time comes. Because of that, the best policy is to promise that you'll create inflation, then renege on the promise when it comes time to follow through. Since people know that, and expect the Fed will not actually carry through, it's hard to get them to change their expectations now. All that credibility the Fed has built up and protected concerning their inflation fighting credentials works against them here.

This makes perfect sense in terms of a model, but I don't see inflationary expectations as the relevant factors for the real world.  Let's say the government/central bank prints up rebate checks and mails them around.  People either spend those checks or they don't.  If the checks are spent, AD goes up and the policy more or less succeeds.

If people don't spend the checks, they are engaging in "balance sheet repair."  In absolute terms, things are going less well than in the previous scenario, but still they're going as well as possible, given the dour expectations.  Balance sheet repair probably is needed and it is preparation for a later expansion, once the repairs are finished.  The policy still is "as successful as a policy can be."  (The alternative of fiscal policy won't have much of a multiplier and the higher debt may cause some more balance sheet worry.)

Which scenario will come to pass?  I doubt if it has much to do with the expected rate of inflation, or changes in real interest rates, at least not within normal U.S. ranges for those variables.  It probably has more to do with overall sentiment, indebtedness, joblessness, and so on.  A non-credible Fed, when it comes to the rate of future price inflation, need not crush the possibility that the funds will be spent.  I don't trust the Fed, or the ECB for that matter, and last night we went out for dinner.

Keep also in mind that balance sheet repair does not require currency holdings.  (Keynes is clear on currency vs. savings, but I'm not sure the current debates always are.)  Saved funds go to the bank.  The bank may or may not make more loans, and spur more investment and durables purchases, but we're no longer in a position where financial intermediaries are "broken."  The additional lending, while it's hardly guaranteed, could indeed happen and that would occur at the same time as balance sheet repair.  What a nice outcome.  Again, it is not obvious to me that the expected rate of price inflation, or expected real intereest rates, are major factors in determining how well this goes; I would again look to the overall state of expectations, including how much uncertainty there is.  I'll blog a bit more soon on why real interest rates don't always matter so much.

Even if it does come down to credible expectations, perhaps people only need to believe that the Fed will continue expansionary policy if unemployment remains high.  If a recovery is booming, expectations can allow for the Fed to contract a bit, because the first-order influence of all those positive income effects is so high.  Let's say you thought the Fed would contract as we approached macro-near-Nirvana and that was coming in three years' time.  I still think you'd be willing to spend your rebate check today.

I'm all for credible central banks, I just don't think that is currently the missing ingredient.

Is there a general glut?

Matt Yglesias writes:

We right now have the capacity to produce more–much more–than has ever been produced before in the history of the planet. There are dozens of supply-side policies that could be improved in every country on earth, but that’s not a new fact about the world. What’s new is the lack of demand, the willingness of the key leaders in Tokyo, Frankfurt, Washington, Berlin, and now it seems London as well to tolerate stagnation and disinflation in the face of some of the most exciting fundamental new opportunities for human economic betterment ever.

You can take that quotation as a stand-in for the more general Keynesian AD views about the current recession.

First, I am fully on board with Scott Sumner-like ideas to boost AD through monetary policy, as is Yglesias and are many other Keynesians.  There is no practical disagreement, but it remains an open question how effective such measures (or a bigger stimulus) would be. 

Consider a simple model, in which uncertainty goes up, first because of the U.S. financial crisis, now because of Greece and the Euro and the open questions about Spain and how well Europe can cooperate.  I'm not saying that's the only or even the prime cause of what's going on, it's simply an illustrative story.

With higher uncertainty, investors pull back, wait, and exercise option value.  Aggregate supply declines, as does employment.  As a result, aggregate demand declines too, and that includes real aggregate demand, not just nominal aggregate demand.  Until the underlying uncertainty is resolved, the economy remains in the doldrums.

Note that there is still a case for fiscal policy, based on the idea of intertemporal substitution.  With some labor unemployed, a sufficiently finely targeted fiscal policy can build a new road at lower social cost than before, by drawing upon unemployed resources.  But even if that fiscal policy is a good idea, it won't drive recovery, at least not for plausible values of the multiplier.

There is also still a case for countercyclical monetary policy.  As real AS and real AD are falling (see above), there is also downward pressure on nominal variables.  Aggressive monetary policy, or for that matter the velocity-accelerating aspect of fiscal policy, can limit the negatives of this process and check the second-order fall in employment.

I'm all for countercylical AD management, noting that for other reasons I prefer monetary to fiscal policy in most cases and even if you don't agree with me there it suffices to note that the monetary authority moves last in any case.

That all said, the countercyclical monetary policy won't drive recovery either, or set the world right again, it just limits the damage.  We still have to wait for the uncertainty to be cleared up. 

Reading the Keynesian bloggers, one gets the feeling that it is only an inexplicable weakness, cowardice, stupidity, whatever, that stops policies to drive a more robust recovery.  The Keynesians have no good theory of why their advice isn't being followed, except perhaps that the Democrats are struck with some kind of "Republican stupidity" virus.  (This is also an awkward point for Sumner, who seems to suggest that Bernanke has forgotten his earlier writings on monetary economics.)  The thing is, that same virus seems to be sweeping the world, including a lot of parties on the Left.

Romer, Geithner, Summers, et.al. know all the same economics that Krugman and DeLong and Thoma do.  If a bigger AD stimulus would set so many things right, they'd gladly lay tons of political capital on the line to see it through and proclaim triumph at the end of the road.

Except they expect it would bring only a marginal improvement.  And for that marginal improvement they have only a marginal desire to:

1. Raise the long-term national debt (if it's fiscal stimulus)

2. Put their reputations behind policies which might backfire or irritate Congress,

3. Put additional pressure on the independence of the Fed (if it's more aggressive monetary policy)

4. Wreck the current term spread of interest rates, which is a) making the short-term debt easy to finance, and b) restoring major banks to profitability rather quickly.

I still think they should try to do it — through more aggressive monetary policy — but it's a judgment call and that's why they are more or less staying put.

In general you should be suspicious of explanations which take the form of "if only the good people would all band together and get tough." 

Facts about Europe

The country in Europe with the biggest untaxed, or “shadow,” economy as a proportion of GDP is Greece. Next is (gulp) Italy. Then Portugal and Spain. On the chart below, in fact, the bars look unsettlingly like dominoes.

There is more information and a good chart here.  There is this too:

Massive tax evasion helps produce large public-sector deficits. Let’s make some simple back-of-the-envelope calculations: if the shadow economy is adding 25 percent to GDP, with income going untaxed, and if the average tax rate on such income is a conservative 20 percent, recovering such tax revenues would imply an additional 5 percent of GDP in tax revenues, which would bring down the Italian 2009 deficit to zero. As deficits cumulate into debt, prolonged tax evasion could explain – by itself – the whole of the Italian public debt, now projected at 118.4 percent of GDP.

Say’s law when aggregate demand is too low

Supply can still matter.  In a world of unemployed resources, imagine a company called Apple invents a device called — improbably — an iPad.  That's a positive supply shock.  People will be led to spend more money.  The inventors and their employees will have more money to spend.  There will be a positive multiplier throughout the economy, as analyzed by W.H. Hutt.  First aggregate supply went up and then aggregate demand went up.  It's all one step on the way to economic recovery.

Starting with insufficient aggregate demand does not cut off this process.  Starting with a liquidity trap, in contrast, would prevent this multiplier from picking up any steam, if you could sell the iPads in the first place that is.

One bottom line is that aggregate supply still matters when aggregate demand is insufficient.  Another lesson is that positive supply developments can increase output and employment.

More Krugman on the minimum wage

Krugman offers a response to a few critics, including I believe myself.  His latter two points are on the macro model, his first point is trying to establish the relevance of the macro model for the minimum wage analysis:

1. Why did I go from minimum wages to overall wages? Clearly, a cut in minimum wages –which only apply to some workers – can raise the employment of those workers at the expense of other workers. But the advocates of a cut are claiming that they can raise overall employment. The only way that can happen is if a reduction in average wages raises employment.

There is a simple story here.  Lower the minimum wage and firms with market power will in general hire more labor.  (Sethi's critique refuses to consider that mechanism but simply shift the MC curve and watch it happen.)  In the most straightforward setting the total wage bill increases, even if the average wage falls.  With a higher total wage bill, there is no downward deflationary spiral.  This general equilibrium point was emphasized by Jacob Viner in his very careful 1937 review of Keynes but it remains a neglected insight.

The negative scenario, namely the total lower wage bill, can possibly occur if employers use the lower legal minimum wage to lower wages for currently employed workers who were at the previous minimum.  A few observations here:

1. Even then the net effect is indeterminate and not necessarily in the Keynesian direction.  The total wage bill still could go up or even if the total wage bill goes down the total flow of purchasing power need not decline, given that employers just don't sit on their extra money.  (This same point applies to all other second-best scenarios.)

2. The model already has assumed short-run wage stickiness, so it would be odd to suddenly relax that assumption as a way to get the total wage bill to fall.  

3. Given that minimum wages don't cover so many workers, the AD effects are likely quite small in any case.

4. The new workers may well be collecting EITC, which will strengthen any aggregate demand effect from their employment.

5. The increase in aggregate supply — more work goes on! — itself has a positive effect on aggregate demand through subsequent Hutt-like, supply-side multipliers.  It would be unusual if velocity shifts were completely neutralizing with respect to this increase in production.

6. The "then why don't we raise the minimum wage to $30 an hour" meme is an overrated "right-wing talking point" in a lot of policy debates.  Still, in this context, it remains a good question from a purely analytical point of view.  Such a change would not boost aggregate demand in most plausible models and from that admission you can work backwards.

Mixing up average wages and the wage bill is a common Keynesian confusion; they're not always moving in the same way, though they may seem to in some very simple models.  Krugman's #1 is assuming a link between the micro and macro change that simply doesn't have to be there.  

That all said, it's a fair enough point to note that changes in the minimum wage will likely bring only small positive effects in any case.