I just noticed this news story. This is very important. Large employers are now starting to impose large and widespread cuts in wages and salaries.
This is a classic sign of a deflationary spiral, and it's going to be deeply frightening to a lot of people. Especially people in the Administration.
Why? Because sustained deflation is exactly what Obama is talking about when he says that we face the potential for an economic decline that we can't recover from. But there are good reasons to be encouraged by this news.
This is a classic sign of a deflationary spiral, and it's going to be deeply frightening to a lot of people. Especially people in the Administration.
Why? Because sustained deflation is exactly what Obama is talking about when he says that we face the potential for an economic decline that we can't recover from. But there are good reasons to be encouraged by this news.
In a deflationary spiral, wages (which are the price of labor) fall along with prices for goods and services. As incomes fall, it becomes harder and harder for individuals and businesses to service their debt.
The American people saw this coming months ago, which is why they suddenly stopped dis-saving and started saving, even at the cost of forgoing consumption and investment.
Deflation is very frightening to policymakers for a lot of reasons, but particularly because it tends to be very sticky. The two recent examples we know about, the Great Depression and Japan's "lost decade," were both stubbornly resistant to policy responses.
But I've been waiting for a long time now to hear the news that wages are coming under pressure, because to me it's a simple recognition of reality. Wages and salaries are the very last thing that businesses cut, but the fact that they can do so is an indication that they have flexibility in managing their costs.
After all, it's far better to stay in business, and keep your people in their jobs, than it is to lay some people off while keeping the rest at salary levels that aren't justified by the prices you're able to get for your products.
The very worst thing we could do now is to repeat the policy error of the mid-Thirties. Back then, we passed the Wagner Act, which made it much easier for labor unions to demand higher wages.
That sounds really good, right? Let's make sure that no one is forced to take a pay cut, or work for a low wage. Except that in a deflationary time (and it does no good to deny that's what this is), this is the same as forcibly overvaluing labor. We can save some jobs at high pay, but the cost is persistent, extremely high unemployment.
The American people saw this coming months ago, which is why they suddenly stopped dis-saving and started saving, even at the cost of forgoing consumption and investment.
Deflation is very frightening to policymakers for a lot of reasons, but particularly because it tends to be very sticky. The two recent examples we know about, the Great Depression and Japan's "lost decade," were both stubbornly resistant to policy responses.
But I've been waiting for a long time now to hear the news that wages are coming under pressure, because to me it's a simple recognition of reality. Wages and salaries are the very last thing that businesses cut, but the fact that they can do so is an indication that they have flexibility in managing their costs.
After all, it's far better to stay in business, and keep your people in their jobs, than it is to lay some people off while keeping the rest at salary levels that aren't justified by the prices you're able to get for your products.
The very worst thing we could do now is to repeat the policy error of the mid-Thirties. Back then, we passed the Wagner Act, which made it much easier for labor unions to demand higher wages.
That sounds really good, right? Let's make sure that no one is forced to take a pay cut, or work for a low wage. Except that in a deflationary time (and it does no good to deny that's what this is), this is the same as forcibly overvaluing labor. We can save some jobs at high pay, but the cost is persistent, extremely high unemployment.
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