Money illusion and natural-rate logic make Keynesian stimulus self-defeating under monetarism

Evidence

Unemployment, then, only falls because of spending in the short term, as more workers are drawn back to work at the apparently higher wage, trading off leisure against labor. But because it is workers’ money wages that have increased, not their real wages (the money wage minus the effects of higher prices), nothing has really changed for them. Wages have gone up, and so have prices: it’s a wash. Realizing this, these newly employed workers, being voluntarily employed, either force up wages to compensate for the rise in prices, which their employers then pass off as price increases—inflation—or they withdraw their labor, bringing employment down to what Friedman called its “natural rate.” — Mark Blyth, Austerity, 410

Categorization

• XREF: connects to: Friedman’s monetarism assumes all unemployment is voluntary choice — Mark Blyth, Austerity: The History of a Dangerous…, 409; The natural rate of unemployment assumption survived despite the failure of monetarism itself — Mark Blyth, Austerity: The History of a Dangerous…, 427; Monetarists hold that Keynesian stimulus breeds ever-rising inflation — Mark Blyth, Austerity: The History of a Dangerous…, 410

Broader Connections

• Monetarists hold that Keynesian stimulus breeds ever-rising inflation #corroborates (0.82) — Mark Blyth, Austerity, 410
• The natural rate of unemployment assumption survived despite the failure of monetarism itself #expands (0.75) — Mark Blyth, Austerity, 427