Thursday, November 04, 2010

Wage stickiness during deflation

Earlier I noted that one interesting thing that happened during deflation was price stickiness -- businesses won't sell goods for less than it cost to make them, so prices are "sticky", they don't decline when the money supply declines unlike what the theoretical bullshit says. I mean, businesses are in business to make money, not lose money, so they accept lower volume (and lay off workers) rather than cut prices when the amount of money in circulation is no longer enough to buy their products at full price at the former rate of production.

So anyhow, that's price stickiness. I also mentioned wage stickiness. You'd expect that with all these unemployed workers flooding the market, the wages of employed workers would be going into free-fall. But it isn't. Why is that?

The main flaw of the Chicago / Austrian theoretical bullshit is that it doesn't take into account a simple reality that every manager knows: All workers are *not* created equal. You might pay them roughly equally, but some workers are more productive than others. And when you lay off your workers, who are you going to lay off? Your most productive workers? Or your least productive workers?

Uhm, like duh. You know the answer to that. But once you lay off your least productive workers, each and every one of your remaining workers is worth more to your business because he produces a larger percentage of your business's product, both because you're making less product and because he was more productive than the laid-off workers to begin with. So theoretically, you should be paying him more in order to compensate him for producing a larger percentage of your company's production.

But: We're in deflation. So there isn't more money in the economy to pay him more. But you aren't going to pay him less, because he will then leave and go to one of your competitors. And if he leaves, he takes a huge part of your productivity with you. You might even have to hire two of the less productive workers you earlier laid off to take his place.

In short, wages tend to be "sticky" during monetary deflation, just like prices. So you can't measure monetary deflation (a decline in the money supply) by measuring wages, or by measuring prices. Instead, you have to look at unemployment. If unemployment is falling, that means that employers are now hiring back those less-productive workers because there is more money circulating in the economy to buy their gizmos with, and thus they need more workers to make, distribute, and sell those gizmos. If unemployment is rising, on the other hand, it's because there's not enough money circulating in the economy to buy all the gizmos that the economy is capable of making, distributing, and selling. Unemployment is your proxy for measuring the circulating money supply. And right now, unemployment says we're way, way, WAY away from any price and wage inflation... before wages can inflate, you have to hire back all those laid-off people. And the numbers say... err, you know what the number say. The next two years will be utter misery, unless you're in one of the few industries where things are growing... like, say, the security industry, or the gun industry. I expect the gun industry, in particular, to be booming...

-- Badtux the Economics Penguin


  1. I see references on various left-ish blogs to the idea that our country's collapse is imminent, and some kind of big change or revolution is the next step.

    Well, if you just look at GDP compared to the rest of the world -- we still have a long, long, long way to fall before enough people have nothing left to lose. Which is generally when revolutions tend to occur.

    So yes, utter misery for many people. Followed by more utter misery. Not followed by revolution. Probably not in my lifetime (I'm 45.) Not that I wouldn't welcome some kind of change from the bottom, but to assume it's just around the corner is wishful thinking, I'm afraid.

  2. Dope, it took roughly 200 years from the time the Roman political system disintegrated into gridlock and the final collapse of the Roman empire. It takes a long time for empires to collapse, and the U.S. is the world's most powerful empire with no real enemies on its borders, so it'll take the U.S. a long time to collapse too. I'm hoping that it'll be after my lifetime.

    But that depends on oil and whether the U.S. breaks its dependency on oil in time. The current U.S. economy is oil-based and would utterly collapse into the sort of utter misery you mention, with mass starvation and probably revolution, if the oil supply were suddenly cut off today. Much as the Western Roman Empire's final collapse was caused by the Vandals cutting off the flow of wheat from North Africa (causing Rome to be swiftly depopulated, descending from over 1 million people to fewer than 40,000 huddled in the ruins of the city within less than ten years), the cutoff of oil today would cause the utter collapse of the United States.

    But that's today. The oil is going to run out, eventually. Will the U.S. be prepared, or will it collapse like Rome did when the Vandals cut off the flow of North African wheat?

    - Badtux the Apocalyptic Penguin

  3. I got my fourth segment of the Rome: rise and fall of an empire disc. The similarities are amazing.

  4. I bought a new pistol last summer, send money for more bullets.

  5. I don't expect revolution -- though with the lunacy of the tea retarty, you can't rule it out.

    I expect that with a tepid QEII, which probably couldn't do much at the zero bound, anyway, and a zero bound on effective stimulus as well, there is nothing to keep us from slipping into Great Depression II.

    After that, in a decade or two, it will be World War III.

    Abandon all hope . . .

  6. Jazz, in the short term, I don't expect revolution. We still have a long ways to go before the majority of people are so desperate that they're willing to resort to that. I do expect social disorder as American society slides downwards, because people do *not* willingly starve to death, but that disorder will manifest itself mostly as an increase in petty crimes such as theft, shoplifting, trespassing (in the vacant homes owned by the banks), and B&E. Think about the nuisance that tweakers made of themselves, stealing anything, everything, to support their habit, and multiply it by a thousand times because the biggest habit of all that most people have is eating.

    So: Invest in the prison industry. Invest in the gun industry. Invest in the physical security industry. That's where I am right now, I'm there because the upside of that industry is enormous, even for computer geeks because we're working on all sorts of cool things such as face recognition, easy transfer of camera data to giant databases that can then search for whether any of those people are criminals, and so forth.

    So you say I've gone to the dark side? No, America went to the dark side. I'm just surfing the wave of darkness that the rest of America built, that's all. America voted for economic disaster, fine. No reason for me to starve just because the majority of Americans are, for lack of better words, fucking morons.

    - Badtux the Amoral Penguin

  7. Oh, regarding a WWIII -- not happening. There is a three-letter reason why not: *OIL*. The world simply lacks sufficient oil to put together a working war machine on the scale of WW2 again -- I expect there to be a continuation of current wars for oil, but it will continue to be fought as regional conflicts in the Middle East and elswhere that there's oil, not as vast armies moving across the face of the Earth with vast amounts of war machinery creating enormous destruction wherever they go.

    The wild card is nuclear weapons. But unless the world goes totally insane, hopefully those will stay on a tight leash.

    - Badtux the War Penguin

  8. Back (and late) to the issue of price and wage stickiness. I agree with your point for the short term, but in the longer term things just can't stay stuck. Faced with selling inventory at a reduced rate or compromising cash flow, a business will eventually take the hit. If cash flow dries up, that inventory is eventually going to be sold at auction anyway. As for production- we've already seen that it has been cut back and when producers are increasing investment, they are doing it on automation to make their remaining workforce more productive, rather than hiring more workers. I'm sure their theory is that to remain viable they have to be more efficient. I would guess (I have to because I'm no economist) that eventually this results in wage pressure upward for highly skilled workers and downward for everybody else.

    But I obviously don't really know what I'm talking about so I'd like to hear your thoughts.


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