Deflation and wage stagnation - a red herring?

Lately, I've been hearing an alarming number of pundits suggest that the reason for wage stagnation is the lack of inflation and the actual presence of deflation in the economy.  Inflation - so the argument goes - would have the laudatory effect of exerting pressure on the private sector to raise wages.

Really? Seriously???? What are you smoking?



First - although we are in a deflationary cycle with respect to "core inflation"  there is plenty of inflation around.  Read, health care, local property taxes, fuel costs, electricity, and food...You know - the things you can't do much about.  I've already cut back as far as is humanly possible. But these relentless "fixed" costs are soaring even in the midst of supposed deflation.   Has this had any impact on stagnant wages...The answer is a strident "NO!"

Second - We are in a cycle of HIGH UNEMPLOYMENT!  The laws of supply and demand did not die with the 2008 financial crisis. They still exist.   If you have near double-digit unemployment - and near 20% underemployment there is no way that pressure can be exerted on employers to raise wages - I don't care what happens to inflation.

Employers don't care that Americans can't put food on the table, that they can't afford medical care, that they are losing their homes, that they can't retire.  All they care about is how much work they can wring out of someone for as little money as they can possibly pay.

Affirming my concerns that inflation would actually inflict MORE damage on an already stressed middle class was Jared Bernstein's excellent blog Slack Attack.   He presented a chart tracking NAIRU (the CBO's line for the lowest unemployment you can have without stimulating a major inflationary cycle) and the unemployment rate.

(This chart is from Jared Bernstein - Slack Attack - From "On The Economy" http://jaredbernsteinblog.com - 2011)

What you find is that unemployment goes up and down around that critical point where inflation could spike.  But unemployment spent more time BELOW that blue line during periods of strong growth for the middle class  - such as the mid to late 1960s and a brief moment in the 1990s.  Prior to the 1980's when the fed started its inflation-fighting policies - we were below the line with respect to unemployment more than we are today.

Fighting inflation has indeed driven down wages.  Increasing wages tend to cause inflation - so controlling wages is a way to fight inflation.  But that does not necessarily mean that increasing inflation would do the opposite.  You need a shortage of people looking for work for inflation by itself to have any impact on wages.

What we need is government programs that put people back to work!  But then, in this present environment, that's like hoping that pigs will fly.  Perhaps what we really need is not inflation - but a modern American Revolution.  We need people in the streets demanding change and demanding the super-rich and corporate elites pay their fair share.  We quite literally need to take back our government and take back our country from the robber baron economy that was created while middle America was sleeping.   Main Street America needs to declare war on Wall Street.....Anyone see any flying pigs lately?

© 2011 - RMGHicks - http://www.therobberbaroneconomy.com  - All rights reserved.