The Alternative To Deflation Is Inflation

Tim Fernholz and Jim Tankersley have an excellent article detailing the economic research Republicans are relying on to make the case that layoffs of government workers will lead to an increase in employment. It’s all about liquidating labor:

For example, the paper predicts that cutting the number of public employees would send highly skilled workers job hunting in the private sector, which in turn would lead to lower labor costs and increased employment. But “lowering labor costs” is economist-speak for lowering wages — does the GOP want to be in the position of advocating for lower wages for voters who work in the private sector?

Probably not. Digby remarks:

Personally, I think it goes without saying that they want to lower wages and I don’t know why the Democrats haven’t been pounding them for it relentlessly already. I am, however, surprised that they’d openly attach themselves to it.

I think part of the reason this debate hasn’t been well-joined is that neither side of it really understands what the debate is about. When an economy takes a hit, there has to be some kind of adjustment process. In a small country, you’d generally see that adjustment come in the form of a currency depreciation. Suddenly everything—salaries, assets, debts, contracts—has a lower real value. Living standards take a hit, but the hit is broad-based, and workers whose real wages are too low are now in a strong position to argue for nominal raises.

America is just too big to adjust primarily through the currency channel. So one possible route is nominal deflation. You cut nominal public sector salaries, lay off public sector workers, and reduce nominal transfer payments (Security Security, SNAP, etc.). This ought to drive down wages in the private sector, too, and eventually everyone is making sufficiently little money that it makes sense to start hiring more people. But there are major problems with this beyond the messaging challenge associated with “our agenda is to make you take a pay cut.” The key thing is that the economy is full of nominally denominated debts. That’s everything from your cell phone contract to your mortgage. So when you drive nominal wages down, you’re driving debt burdens up and leaving people with less and less money to do anything new. This is a huge problem for any possibly expanding businesses, since all your potential clients will have their money tied up with existing commitments.

The coherent alternative to this, which Democrats don’t seem to be able to focus on, involves inflation. Not falling-sky 37 percent inflation, but somewhat higher than usual inflation so that wages and debts can rebalance.