[quote=briansd1][quote=CA renter]I have no problem cuttting pay/benefits of public workers as long as their purchasing power is maintained. You can cut compensation, yet still have greater purchasing power if asset prices deflate more quickly than wages/benefits.
As stated before, I would also reduce some of the retirement benefits. On that, I’ve never wavered.[/quote]
CA renter. You should write a paper. Maybe you would win the Nobel Prize in economics.
Your way has never happened before.
When there’s an economic crisis, you create inflation (currency devaluation) to make your output more competitive around the world.
Or if you don’t have currency flexibility (like Portugal, Ireland, or Greece) you have internal deflation to lower you labor input costs to make your products and services more competitive around the world.
For example, the workers of Greece used to be poor prior to them joining the Euro. Suddenly they ended up with puchashing (and borrowing) power parity with France and Germany. But they didn’t reform or do anything different. Now they have to pay the price.
In order to attract investments, a country has to be cost competitive, relative to other countries where similar products and services are produced. If we want to sell our products overseas (to pay our external debts) we need to give up some purchasing power so that foreigners can buy our products.
In USA, state and local government budgets grew too fast in relation to a sustainable economy (population growth + inflation). Now it’s time to “deflate”. Sounds about right to me.[/quote]
Here is what I’m talking about WRT rising purchasing power for wage earners (at the expense of asset holders, which I think is healthy):
There are at least two other reasons to worry about the onset of a deflation with devastating economic consequences. Labor markets exhibit considerably less flexibility than several decades ago. Consequently, it is considerably more difficult for the necessary fall in nominal wages to match a drop in prices. Otherwise, real wages would actually rise in a deflation and this would produce even more slack in the labor market with the resulting increases in the unemployment rate contributing to further reduce aggregate demand, the exact opposite of what is needed.
As opposed to Dr. Siklos, I believe that rising purchasing power for wage earners is GOOD thing. There are many variables in the economy that determine if inflation or deflation are beneficial or harmful, but the period leading up to the Great Depression and the period leading up to our current economic climate have many similarities, which I think make deflation a favorable thing.
Income tax rates leading up to the deflationary periods/recessions/depressions were at extremely low levels. IMO, this accelerates the wealth/income gap between producers (the poor) and capitalists (the rich). As the gap grows, the wealthy “invest” by lending out money. Much of that credit goes to the poorer people so they can pull their purchases forward (and pay more for things than they otherwise would). The debt grows bigger for the working people, and the “assets” of the wealthy grows alongside it on the other side of the balance sheet.
As this debt/credit expansion is happening, it looks like “growth” and GDP will rise, but what’s really happening is that they wealth divide is growing. The workers net worth shrinks with the debt, while the “rich” folks’ net worth grows. At some point, the debt grows so large that the ability of the poor/working people to pay off that debt diminishes. During the credit expansion, production capacity grows to match the “fake,” debt-driven demand. All of that capacity needs to shrink during a deflation, in order to match *true* demand. The “wealth” of the rich shrinks, because the debt they own cannot be paid by the poor/working people who are over-extended. All of this is painful, but it is entirely necessary in order to reverse the credit expansion that should not have existed in the first place — it was a Ponzi scheme that was bound to fail at some point. That being said, when the deflation is complete, and supply matches demand, IF things are handled correctly (which is not the case, all too often), a very healthy and sustainable economy — tied to real demand that is driven by wages and savings — can rise from the wreckage.
IMHO, debt should not generally be available for consumption unless the credit market is being closely regulated, with debt (for consumption) being extrememly difficult to get, AND expensive.
On the other hand, debt that is used to finance business creation and expansion should be easier to get and cheaper, even if it takes some subsidies.
Not all debt is equal. Some debt, like the kind that finances growth in production capacity, is good (as long as demand for the goods/services is there). Debt for consumption (including “investing,” or speculating on the demand side) is bad, in general. The only possible exceptions would be debt for housing and other large (and “necessary”) purchases, and debt for medical expenses. In these cases, a closely regulated debt market could provide less expensive loans with shorter durations.
