Then auto makers who ran more profitable operations would snap up the assets at the fire sale, and put many of the laid off workers back to work at a more “industry standard” wage and benefit package. The CEOs and union bosses who screwed this up would be out of work.

Seems like a win-win situation.

For the record, I was against the Wall St. bailout too.

That’s kind of an important qualification, isn’t it? I mean, it’s not like Senator Shelby or anyone else is talking about trying to cut the wages of all workers by some uniform amount. His proposal had to do with “lower wages for a particular group of workers,” a case that Krugman specifically doesn’t consider and which makes his argument of somewhat limited relevance (for what it’s worth, Krugman seems to be opposed to the auto bailout).

Suppose that wages across the US economy had been, say, 20 percent lower than they actually were. You might be tempted to say that this would make hiring workers more attractive. But to a first approximation, prices would also have been 20 percent lower — so the real wage would not have been reduced.

Suppose, though, that prices have already fallen, say, because the money supply has been contracted by about a third. If wages didn’t also fall (because, as Keynes himself argues, workers are unwilling to accept a reduction in nominal wages even if real wages aren’t reduced), then what would happen?

I can’t tell from your question what exactly you are objecting to, but it is certainly the case that in conditions of a Keynesian depression (shortage of aggregate demand and liquidity hoarding) then raising wages is certainly an appropriate response. I’ll defer to Paul Krugman here:

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“But I think it’s worth pointing out why Ms. Shlaes thinks the New Deal was destructive of employment: namely, that it raised wages. Funny she should mention that — because the effect of wage changes on employment was the subject of a whole chapter in Keynes’s General Theory.

And what Keynes had to say then is as valid as ever: under depression-type conditions, with short-term interest rates near zero, there’s no reason to think that lower wages for all workers — as opposed to lower wages for a particular group of workers — would lead to higher employment.

Suppose that wages across the US economy had been, say, 20 percent lower than they actually were. You might be tempted to say that this would make hiring workers more attractive. But to a first approximation, prices would also have been 20 percent lower — so the real wage would not have been reduced. So how would lower wages lead to higher demand for labor?

Well, the real money supply would have been larger — but the normal channel through which this might increase demand, lower interest rates, was blocked by the zero lower bound. Yes, there would have been a slight Pigou effect: real private sector wealth would have been higher, because cash under the mattress (or wherever) was worth more. But on the other hand, real debt burdens would also have been higher, probably exerting a contractionary effect. Overall, there’s no good reason to think that lower wages would have helped raise employment.

And once you realize that, the whole argument that FDR prolonged the Depression by sustaining wages evaporates.”

If this is what people have learned from the economics of the Great Depression, then I would submit they have learned the wrong lesson.

I mean honestly, MM, are you going to sit there with a straight face and say that the problem with the government’s response to the Great Depression was that it didn’t do enough to raise wages?

First off, no one would be dictating wages and other business practices at the Big Three if they were able to pay the bills — the problem is that for a number of reasons they can’t. And given that the US tax payer is being asked to subsidize them on the theory that they’ll recover and pay back the money, I imagine the thinking was: “Why should tax payers be asked to subsidize people who make more than they do. Clearly the inflated wages are part of the problem.”

Frankly, that strikes me as smacking of the same kind of populist politics of envy that one normally hears out of anti-business advocates at the opposite side of the spectrum, but populism is a equal opportunity failing. My thought would be that bailing out the auto industry should be done or not done of the basis of the likelihood of the bail out helping the industry to right itself and the potential dangers involved in not bailing it out.

So I’d tend to think these senators took the low road in choosing to argue over wages.

That said, if Michigan was serious about change, becoming a right to work state like the southern states which have attracted so many Nissan, Toyota and Honda plants would be a good place to start.

How exactly does a bailout help this? Bankruptcy would. Under bankruptcy, liabilities and all contracts are open to reorganization by the court.

This is the better option.

OK, let me get this straight. Tennessee Republican Senator Bob Corker, backed up by Alabama Senator Richard Shelby and South Carolina Senator Jim DeMint, made it a condition of the auto companies receiving help that the United Auto Workers agree to a reduction of wages and benefits to the level of those paid by the Japanese companies that have plants in those senators’ states. Desperate for the deal, the UAW and the Democrats agreed to a phased-in reduction, but the Republicans insisted on an immediate cut. The deal broke down, and Republicans–aided by a few Red State Democrats (e.g. Baucus, Lincoln, Tester)–used a filibuster to kill the bill, which would have passed on a majority vote.

Here’s what bothers me. Japanese companies, which for years have benefited from one-way deal by which they could sell cars in the U.S. while U.S. companies were stymied in selling cars and trucks in Japan, set up non-union plants in low-wage, low-education, right-to-work states where they can pay less wages and benefits to their workers. Of course, in Japan, these same companies recognize and work with unions, but not here, where they have a chance to undercut American firms that work with unions. Corker and these other great patriots want to allow these Japanese companies to dictate the wages and benefits that American companies pay their workers. It’s despicable. Imagine, for a moment, American companies being allow to operate in this manner in Japan or South Korea. It would not happen.

Of course, this is not just about automobile companies. If you look at the history of the Great Depression, what tipped that event from a global recession to depression was precisely a series of dumb, craven–or in Keynes’ word, “feather-brained”–moves by politicians blinded by ideology or by narrow self-interest. An interest rate hike here, a balanced budget there, a spending reduction or two, and we went from ten to twenty percent unemployment. Don’t imagine for a moment that the failure to bailout the auto companies isn’t one of those feather-brained moves.

Put it this way. What we have learned from the economics of the Great Depression is that in order to end the spiral of unemployment, government has to throw money at companies and consumers. It should be trying to raise wages, not lower them. The Wall Street bailout was a fiasco, but it was probably better than nothing. And the auto bailout was considerably better thought-out. Now there is a good prospect that two of the Big Three will fail, jeopardizing, perhaps, as many as a million jobs. That’s exactly the kind of thing that Americans should not be doing. But don’t tell that to those great patriots Corker, DeMint, or Shelby. They know better.