Monday, May 4, 2009

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.