[quote=FlyerInHi][quote=CA renter]
By allowing defaults to occur, asset prices tend to go down faster than wages, so workers and others on fixed incomes (the vast majority of those in the bottom half of the economy) gain purchasing power at the expense of the very wealthy. This shrinks the wealth/income gap while also reducing the debt burden of those who tend to have the most debt (relative to income).
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Interesting long post. I don’t quite follow all the points you’ve made, but I’ll pick one.
On this one argument you made, is that just theoretical or can you show where it’s happened before.
You’re assuming debt goes away but assets remain with the borrower? The poor to average person has auto loans, a mortgage and some unsecured consumer debt.
How does default help people if they lose their cars and their houses?
Aren’t people at the bottom more likely to get laid off in a recession?[/quote]
Assets used as collateral for large loans will be forfeited, obviously. But, in most cases, this still leaves the borrower in a better position WRT net worth because the assets will usually be worth less than the forgiven loans. The belief that they ever “owned” the car or home was a false assumption. What they owned was an asset with negative value. Of course, this is why debt, even for large purchases, should be kept to the lowest possible amount.
Don’t discount the importance of being able to walk away from consumer loans. In many cases, this can amount to tens of thousands of dollars for these borrowers (sometimes, more). Again, their net worth increases drastically as a result of default/BK.
As far as layoffs hitting the poor more than the rich, I think that depends on other issues like globalization, mechanization, etc. In some cases, well-paid consultants, middle managers, and above can easily be laid off, while the workers are still necessary to run the business effectively.
You can also have asset price deflation without too much of an effect on the prices of other goods **if speculation exists in some asset markets, but not in the markets for the goods/services in question.** Bubbles and bursts are almost always due to speculation. Organic/real demand remains fairly constant for basic goods and services, and if speculation is absent, there will be a floor on prices in that market, so wages for those workers will remain relatively stable.
And the stickiness of wages…
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Definition of ‘Sticky Wage Theory’
An economic hypothesis that the pay of employed workers tends to respond slowly to the changes in a company’s or the broader economy’s performance. When unemployment rises, the wages of those workers that remain employed tend to stay the same or grow at a slower rate than before rather than falling with the decrease in demand for labor. Specifically, wages are said to be “sticky-down” since they can move up easily but move down only with difficulty.
Some Evidence on the Importance of Sticky Wages
Alessandro Barattieri, Susanto Basu, Peter Gottschalk
NBER Working Paper No. 16130
Issued in June 2010
NBER Program(s): EFG LS ME
Nominal wage stickiness is an important component of recent medium-scale structural macroeconomic models, but to date there has been little microeconomic evidence supporting the assumption of sluggish nominal wage adjustment. We present evidence on the frequency of nominal wage adjustment using data from the Survey of Income and Program Participation (SIPP) for the period 1996-1999. The SIPP provides high-frequency information on wages, employment and demographic characteristics for a large and representative sample of the US population.
The main results of the analysis are as follows. 1) After correcting for measurement error, wages appear to be very sticky. In the average quarter, the probability that an individual will experience a nominal wage change is between 5 and 18 percent, depending on the samples and assumptions used. 2) The frequency of wage adjustment does not display significant seasonal patterns. 3) There is little heterogeneity in the frequency of wage adjustment across industries and occupations. 4) The hazard of a nominal wage change first increases and then decreases, with a peak at 12 months. 5) The probability of a wage change is positively correlated with the unemployment rate and with the consumer price inflation rate.
