Listening to a Nobel Laureate Get It Wrong

Falling Wage Syndrome

By PAUL KRUGMAN
Wages are falling all across America.
Some
of the wage cuts, like the givebacks by Chrysler workers, are the price
of federal aid. Others, like the tentative agreement on a salary cut
here at The Times, are the result of discussions between employers and
their union employees. Still others reflect the brute fact of a weak
labor market: workers don’t dare protest when their wages are cut,
because they don’t think they can find other jobs.

Whatever
the specifics, however, falling wages are a symptom of a sick economy.
And they’re a symptom that can make the economy even sicker.

Wrong
target, Paul. Falling wages are not a symptom, they are a result. The
sickness of this economy is evidenced by fraud, greed and engineered
bubbles.

The cure is what we are watching and, that includes falling
values, lost investment
and falling wages.. . . After all, many workers are accepting pay cuts in order to save jobs. What’s wrong with that?

The
answer lies in one of those paradoxes that plague our economy right
now. We’re suffering from the paradox of thrift: saving is a virtue,
but when everyone tries to sharply increase saving at the same time,
the effect is a depressed economy. We’re suffering from the paradox of
deleveraging: reducing debt and cleaning up balance sheets is good, but
when everyone tries to sell off assets and pay down debt at the same
time, the result is a financial crisis
.

The effect is only a depressed economy if the economy is based upon, dependent upon and captive to consumption. Read my lips, Paul, “the sticky wicket in which we find ourselves is a direct result of excessive leverage.” We are getting well, Paul, if the last rites of the Church of Consumerism are not called in to ‘save us.’

In
particular, falling wages, and hence falling incomes, worsen the
problem of excessive debt: your monthly mortgage payments don’t go down
with your paycheck. America came into this crisis with household debt
as a percentage of income at its highest level since the 1930s.
Families are trying to work that debt down by saving more than they
have in a decade — but as wages fall, they’re chasing a moving target.
And the rising burden of debt will put downward pressure on consumer
spending, keeping the economy depressed
.

Yep.
Household debt came from careless loans and the mentality that
encouraged market fraud and bubble economies. If you want a scapegoat,
don’t blame falling wages, dial up Alan Greenspan. Household debt will
fall (eventually) by what the moneylenders fear most–bankruptcies and
foreclosures. I hate to disabuse you of other ghosts in the closet, but
it
still happens that way, 80 years later.

.
. . Concern about falling wages isn’t just theory. Japan — where
private-sector wages fell an average of more than 1 percent a year from
1997 to 2003 — is an object lesson in how wage deflation can contribute
to economic stagnation.

So
what should we conclude from the growing evidence of sagging wages in
America? Mainly that stabilizing the economy isn’t enough: we need a
real recovery.

Big
difference in the Japan example is that Japan prevented its banks from
writing off bad loans–something Ben Bernanke is only
trying to do. 2nd big difference, Japan fell apart while the rest of the world followed the ‘Timex‘ example–took a lickin’ and kept on tickin.’ The rest of today’s planet is in the toilet, along with us.

. . . To break that vicious circle, we basically need more: more stimulus, more decisive action on the banks, more job creation.

All
of which only makes sense if you believe we had a strong and vibrant
economy a year ago, in the good old anything goes, credit default
swaps, derivative weapons of mass destruction environment. If you don’t
(and I happen not to) believe those were healthy economic times, you
see the wreckage as a necessary deconstruction, a sort of
storm before the calm.

There are more guys on your team than mine, Paul and I lack a Nobel Prize in economics . . . but that doesn’t mean you’re right.

3 thoughts on “Listening to a Nobel Laureate Get It Wrong

  1. You are absolutely right on track. I really hope you will continue to write and stasnd up, as we need you now more than ever.

  2. So let me get this straight, Paul Krugman is trying to blame the economic depression on low-wage families trying to save a few bucks, not the greedy fat-cats who are stealing huge amounts of money? The same people who pushed those families into debt in the first place by offering them "credit" that they couldn't afford so that they could pump money into a false economy built on excess consumption.. House of cards anyone? Try house of cards built on an uneven table top. Covered in oil.

  3. Every one admits that life is not very cheap, however some people require money for different things and not every person gets big sums cash. Hence to receive quick business loans or just credit loan will be good solution.

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