Tuesday – Stephen Perlstein: Wage cuts hurt, but they may be the only way to get Americans back to work
There is, of course, a way out of this bind: produce more without consuming more. For all practical purposes, that means grabbing a bigger share of global markets, either by exporting more goods and services, or replacing some of the stuff we import by producing it at home.
Which brings us back to the story of GM’s Orion plant. There are lots of reasons why American companies like GM have lost market share (yes, I wrote about currency manipulation last week), but one is that in too many industries, our labor costs are now too high to be globally competitive. Reducing wages and benefits in those industries would not only help to create and save jobs, but would also force a further reduction in consumption and living standards that is necessary to bring the U.S. economy back into balance.
The question is not whether this is an ideal outcome – obviously it’s not. But for the 1,550 auto workers who would be called back to work at GM’s Orion plant, the real-world choice is to either accept a 20 percent wage cut or remain unemployed with little prospect of getting another job at the old union wage. For them, and for the economy as whole, the better choice is to take the jobs at the globally competitive, market-clearing wage and hope to build back up from there.
Wednesday – Ezra Klein: What to do about state pensions
There’s also the obvious prophylactic measure: States need to stop deferring so much of their employee’s compensation. The current deal for most state employees is that they get worse wages than they would in the private sector and better benefits. Politicians like to cut that deal because it means they don’t have to pay for anything right now. And when the market was making everyone rich, such deals even seemed affordable. But the faith that the market will continually hand you back 10 percent a year is now shattered, and so compensation schemes that relied on it have to be rethought.
Unions might not like that, but nor will taxpayers. There are two sides to deferred compensation: costs later, and savings now. We’ve been paying our public employees less than we would’ve needed to pay them in the absence of these pension promises. That means that going forward, we’re going to have to pay wages closer to the true cost of our payroll.
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From “Yglesias”:http://www.j-bradford-delong.net/movable_type/ : (in response to article 1)
bq. It seems to me that neither Pearlstein nor some of the people I’ve seen complaining about him understand that Yuan revaluation is the same thing as lower wages for American workers. Almost everyone in the United States earns money according to a formula denominated in dollars. So if dollars become less valuable relative to other important currencies, our real compensation declines. By the same token, if the Federal Reserve succeeds in raising the price level, our real compensation declines. These are all related concepts—all ways of cutting the real wages of Americans.
bq. However, of the three nominal wage cuts are really the least-attractive option. That’s because not only are our earnings denominated in nominal dollars so are our financial obligations. If you force nominal wage cuts on an indebted population, you get an unbalanced deflation where existing debt obligations come to consume a larger and larger share of income. Alternatively, if you reduce real compensation via currency devaluation or higher inflation you reduce income and debt alike allowing us to dig out of the balance sheet hole more quickly.
Yup – the people who will be hurt most by yuan revaluation will be poor people. The sort of low-end jobs making the stuff made in China won’t “come back” – after all, they went to China from South Korea, Taiwan, and other places and had largely left the US long ago if they were ever here – but the prices they pay for stuff will go up.
Ironically, China reduced the US aggregate trade deficit with the world by having lower prices than other places. But this sort of thing is hard to demagogue on the campaign trail.
The observation Perlstein makes about wages not being immediately responsive to drops in demand for goods or services produced by the wage earners seems accurate and interesting. I’m not sure that the following conclusion follows:
Of course, it clearly is better for the UAW to lower its wages to $15/hr than to lose these particular jobs to South Korea. However, it is a big stretch from there to say that the U.S. economy is currently depressed because consumption and living standards are too high in general. The economy is depressed because there is not enough consumption; not because there is too much. A 50% reduction in wages won’t help that problem.
Lowering wages only helps where it can save jobs that would otherwise leave the country. A “race to the bottom”:http://www.economicpopulist.org/content/mexican-auto-workers-cut-wages-compete-china” as it were. But I don’t think that the current unemployment rate is due to jobs having fled to South Korea and elsewhere. We have particularly high unemployement in construction, for example . . . those jobs cannot go to South Korea. I don’t think the problem with the economy, in general, is that wages are too high.
If Perlstein wants to lower everyone’s income and standard of living, we can always raise taxes!
The economy is depressed because there is huge amounts of capital either tied up red tape as borrowing has become much more difficult, or sitting on the sidelines completely in fear of what this administration has in store for it. There is also a legitimate fear that the other shoe hasn’t dropped yet in the banking industry. Whatever we think we know, its probably much worse, particularly at Freddie and Fanny (funny how the administration is over the moon that the TARP money is being paid back but nobody has much to say about the tens of billions still being poured into those bottomless pits).
It’s called capitalism for a reason. Until the environment for investment clears up, few are expanding or investing (or hiring). The Krugman school of economics relies on actors being short sighted imbeciles. The reason it fails is because those people are actually quite attuned to future liabilities that we are piling on. Its not difficult to figure out. If you give me a one time project worth 50k dollars in profit and I see that my taxes are scheduled to go up 50k dollars next year (say i’m an s-type corporation which most small businesses with actual employees are), I’m not likely to run out and expand my building or open a new branch. I sock that money away so I don’t go out of business next year.
All pase. The entire problem with the economy, the banking system, unemployment, politics, etc. is about to be swallowed whole by the Fraud that pervades our financial system which is quickly being revealed in the MERS racket. Now misnamed the Foreclosuregate scandal.
Stay tuned. The Subprime Crisis will be dwarfed by this one.