Keynesian destruction is so deeply ingrained

Jobless rate hits 26-year record as wages shrink

Americans lucky enough to still have a job are noticing something unpleasant in their paychecks: They’re making less money.
Employers cut 467,000 jobs in June, far more than expected, and the jobless rate hit a 26-year high of 9.5 percent. Just as worrisome, wages shrank to their lowest in nearly a year.
The bleak news Thursday from the Labor Department underscored one of the big threats to an economic turnaround: Rising joblessness and falling wages for those still working could send Americans back into spending hibernation and short-circuit any recovery.

Americans lucky enough to still have a job are noticing something unpleasant in their paychecks: They’re making less money.

Employers cut 467,000 jobs in June, far more than expected, and the jobless rate hit a 26-year high of 9.5 percent. Just as worrisome, wages shrank to their lowest in nearly a year.

The bleak news Thursday from the Labor Department underscored one of the big threats to an economic turnaround: Rising joblessness and falling wages for those still working could send Americans back into spending hibernation and short-circuit any recovery.

First, I saw this article in my local paper, and tried to get the link from there.  However, it was unavailable so I just googled some text from the article and found numerous links.  As this comes from AP “news” service, it was reprinted in scores of papers.  Gee, and we wonder why peoples’ ideas about economics, and the current situation, are so distorted.

First, falling wages are reason to celebrate.  For quite some time, we’ve heard all the horror stories about the “spectre of deflation”.  Just google it, you’ll see.  (Of course, as the fed has been printing money like mad, there’s no deflation, but rather massive inflation.  The terribly higher prices are sure to follow.)  But currently, prices have been falling, which means firms have been lowering prices to clear inventories.

cibSo, businesses have been clearing out inventories.  To put the current drop into perspective, here’s a better picture:

cbi2This just show how dramatic the change is.

If prices are falling, then purchasing power of the dollar increases.  Thus falling wages simply represent an adjustment to current market conditions and purchasing power, what really matters, is maintained.

But more importantly, falling prices AND wages (wages being the price of labor, so one could comply say just prices) are not the problem, but the solution.  If wages are kept high, then it will be destructive for many reasons.

One, higher wages discourage hiring.  Even Princeton professors who are Nobel laureates surely understand the basic principle of the Law of Demand.  Higher prices will decrease the quantity demanded of any good.

Secondly, the higher wages reflected a market that was grossly distorted with resources terribly misallocated.  This was of course due to disastrous policy from both the Fed and Washington.  If unemployed workers desire employment, they will have to adjust their wage expectations.

Hoover thought exactly along these lines, and pushed hard for businesses to maintain higher wages and prices.  FDR simply expanded and compounded this grievous error.  By the time of the Schechter decision in 1935, it was way too late.  Even though the most onerous part of the NIRA were thrown out, the economy was sent on a spiraling path of destruction which we know as the Great Depression.

But even more important, is this little bit of nonsense:

But the strength of any recovery will depend heavily on Americans’ willingness to borrow and spend. And they have been using more of their income to save or pay down debt.

Great.  We have to borrow and spend to rescue an economy suffering from the ills of massive borrowing and spending at the consumer level.

No, what the country needs, more than ever, is more savings.  What will drive a recovery is investment, and investment supported by savings.  The previous mistakes need to be liquidated, firms need a clear picture, which only prices can provide, of what investments were poor, and which are desirable.

So perhaps we are on the road to recovery.  Wages are falling and people are beginning to save.  Of course, when all that new money hits the streets, I’m going to fell for those poor souls who actually paid down debt and saved.  And the high priests of Keynesianism will be praising the new inflation.

Just imagine how many people read this article and consider it sound economics.  We’re in for a very long and rough road ahead.

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