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Related: Editorials & Other Articles, Issue Forums, Alliance Forums, Region ForumsMarvelous Krugman article about wages and demand
A long piece that the 4 paragraph rule cannot do justice, so read the whole thing:
http://krugman.blogs.nytimes.com/2013/03/30/the-price-is-wrong/
The basic question asked is this:
So, start with our big problem, which is mass unemployment. Basic supply and demand analysis says that things like that arent supposed to happen: prices are supposed to rise or fall to clear markets. So whats with this apparent massive and persistent excess supply of labor?
This is a fair question. "Do we have too much labor, or too little demand?"
As with many of these, "Why can't the free market solve Problem X" questions, the answer the same. A very important factor in the overall market is frozen. Interest rates.
The Fed rate that would equal full employment is negative. This was our problem in 2008 and remains our problem in 2013. Interest rates cannot, in practice, go below 0%.
Thus a lower interest rate must be simulated through a combination of deficit spending and inflation.
So whats the alternative view? Its basically the notion that the interest rate is wrong that given the overhang of debt and other factors depressing private demand, real interest rates would have to be deeply negative to match desired saving with desired investment at full employment. And real rates cant go that negative because expected inflation is low and nominal rates cant go below zero: were in a liquidity trap...
...If you think the problem is that wages are too high, your solution is that we need to meaner to workers cut off their unemployment insurance, make them hungry by cutting off food stamps, so they have no alternative to do whatever it takes to get jobs, and wages fall. If you think the problem is the zero lower bound on interest rates, you think that this kind of solution wouldnt just be cruel, it would make the economy worse, both because cutting workers incomes would reduce demand and because deflation would increase the burden of debt.
What my side of the debate would call for, instead, is a reduction in the real interest rate, if possible, by raising expected inflation; and failing that, more government spending to increase demand and put idle resources to work.
...If you think the problem is that wages are too high, your solution is that we need to meaner to workers cut off their unemployment insurance, make them hungry by cutting off food stamps, so they have no alternative to do whatever it takes to get jobs, and wages fall. If you think the problem is the zero lower bound on interest rates, you think that this kind of solution wouldnt just be cruel, it would make the economy worse, both because cutting workers incomes would reduce demand and because deflation would increase the burden of debt.
What my side of the debate would call for, instead, is a reduction in the real interest rate, if possible, by raising expected inflation; and failing that, more government spending to increase demand and put idle resources to work.
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Marvelous Krugman article about wages and demand (Original Post)
cthulu2016
Mar 2013
OP
CTyankee
(63,912 posts)1. I scurried to Google for a definition of this econ lingo...
Definition of 'Zero-Bound'
A situation that occurs when the Federal Reserve has lowered short-term interest rates to zero or nearly zero. When interest rates are this low, new methods of economic stimulus must be examined and implemented.
I have to wonder. This sounds like such a basic concept in Economics, it is almost comical that the alternative view is as widely acceptable as it is here in the U.S., particularly in the media, most notably Joe Scarborough.
We need to keep fighting back...
lumberjack_jeff
(33,224 posts)2. Exactly right. nt