Free-Floating Hostility

Sunday, January 04, 2009

Why Does Steven Pearlstein Hate Capitalism?

Steven Pearlstein of the Washington Post makes the case that pay cuts -- like the ones the Teamsters negotiated with trucking firm YRG Worldwide -- will save the economy.
Economists have long believed that the only reason there is persistent unemployment is because labor is unlike most other "goods" -- its price does not go down when the supply gets out ahead of demand in the early days of an economic recession. Without a reduction in the price of labor that can induce additional demand, it's much harder for the market to "clear" and put supply and demand back in balance, albeit at a lower wage level.
This sounds nice -- all economic theory, and its emphasis on balance, sounds nice -- but it rests upon an assumption that labor is the same as every other good. People make this argument, but I have never been convinced.

The laws of supply and demand didn't apply in during the Bush Expansion that ended in 2007. U.S. unemployment was historically low for an extended period of time, but wages didn't rise. In fact, in real terms, they fell. Now take your Teamster-represented YRG trucker. Between this round of negotiated wage reductions and the pay cut YRG's workers took during the "expansion," the average truck driver at the company is appreciably worse off than he or she was in 2000. This is better than unemployment, which creates a different (and worse) set of problems. At least the Teamsters are going to get a piece of the company for their sacrifices, which is something that non-represented workers won't get.

Flexible wages strike me as a capitalism-eats-itself idea. From an economic point of view, everyone taking a 10% pay cut creates the same rippling demand destruction that layoffs would. From an economic perspective, it's marginally better than laying people off -- people with continuing earning potential won't cut back on their spending quite as severely. But this is a macroeconomic implementation of the notion that you can save your way to prosperity. That doesn't work. I'm skeptical that it can even create recovery. Ultimately, you have to stimulate demand. This seems like a silly way to do that.

In the short run, lowering wages in a recession is deflationary. And if you then allow them to rise as the labor market tightens, it's massively inflationary. If my wage level depends on the guy next to me staying employed too, it's irrational for me not to organize.

1 Comment(s):

  •   Posted by Anonymous Anonymous at January 05, 2009 12:43 PM | Permanent Link to this Comment
  • Did Pearlstein advocate pay cuts for reporters to keep the Washington Post newsroom populated?

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