The paradox of toil

Slightly off-topic for a central bank blog, but fascinating nonetheless. Professor Krugman:

“So what’s the paradox of toil? If you cut taxes on labor income, this expands labor supply — which puts downward pressure on wages and leads to expectations of deflation, which increases the real interest rate, which leads to lower output and employment.

All of this only applies in a situation of zero interest rates, which wouldn’t be interesting except that that’s the situation we’re in.”

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