Writing in the Oz, Alan Moran begins a case for wage cuts as a response to recession with the claim
Until the 1930s, recessions tended to be short and sharp, and financial ruin was largely confined to the speculators whose exuberance had diverted capital into ventures where it was less than productive.
Much the same assumption appears to underlie the thinking of those who propose a return to the macroeconomic policies of the 19th century, such as the gold standard. Economic statistics for this period aren’t exactly comparable to those available today, but, such as they are, they don’t support the claim. In the US, for example, the longest-ever recession, according to the National Bureau of Economic Research was that of the 1870s (following the Panic of 1873, which in turn followed the US shift from bimetallism to a gold standard). As the NBER data shows, 19th century recessions commonly lasted for more than a year.
In Australia, the long and deep depression of the 1890s, and the substantial wage cuts imposed during that depression (with employers getting the full backing of governments) were a major factor in the formation of the Labor Party and the shift to a parliamentary, as opposed to a purely industrial strategy, for the labour movement.
John Quiggin 
I think you could easily argue that both the 1930 and this recession were/are debt driven, that is not enough money to consume the stuff that can be produced.
Wage cuts and tariff protection are both examples of bugger thy neighbour. Short term, short sighted attempts to improve things locally that will fail. We no longer have local economies.
What Alan Moran doesn’t seem to be able to see is simple, workers are also part of the economic system, in the end the economy is about producing goods to consume, no consumers no market.
Moran’s argument is a mercantilist view of the world that argues for the self interested benefit of reducing costs to pass to the firm but the outcome of which peversely ignores the aggregate result of reducing wages, reduced demand and hence reinforces the downward spiral of an increasing real debt burden and as a result increased instability and unrest in society. As the monetary policies being followed at the moment have sought to balance the volume of money available and hence to ensure that market gyrations from reductions in wages and hence demand is offset by government and central banks guaranteeing the liquidity required to ensure that money is available to invest or produce, reducing wages will only reduce demand. So we either have the full Keynesian solution applied which requires Government assuming strategically the position of entrepreneur by public works to bring the system back into functioning balance or socially acceptable equilibrium of employment and investment or we do not (The extreme moral hazard view). The option is of course to merely allow the violent swings as the production of goods and services adjusts abruptly to changing demand and costs and live with the social consequences. History suggests the consequences may be unpleasant and unintended. The proposition of Moran and others always neglects the broader community interest and as JQ has succinctly pointed out is why political parties are formed who actually understand and apply principles and policy that benefit the many not the few.
There is a good argument to be made that during a recession wages should be allowed to fall to some extent in order to keep more people in work and minimise the legacy of unemployment.
It makes no sense for wages to remain constant in a declining economy, any more than it would make sense to never have any wage rises during periods of strong economic growth.
John, It seems that you see Labor in the current situation as saving workers from injustice and a long recession by preventing wage cuts. This puzzles me.
Do you support the maintenance of real wages at Rio Tinto where the firm is cutting 15,000 jobs globally?
Or do you support the recent move by the CFMEU for 30% wage increases for some workers at Rio? After all if adverse movements in Australia’s terms of trade do not create a case for wage cuts in resource-intensive industries maybe even wage increases are warranted. They will boost aggregate demand but presumably, by your implied reasoning, do not have significant cost effects.
Ripley-believe-it-or-not positively-sloped or flat labour demand curves do not, in my view, provide a sensible basis for macroeconomic policy though they did provide Card et al publishable economics in a Freakonomics sort of sense. Who would ever have believed it? Not me.
I think its going to happen one way or another, don’t you think?
China(mainly) and the rest (emerging markets) distorted the mirror (sorry market) for about 6 years, so throw 6 years of gdp growth in the bin and work from there.
You cannot avoid gravity.
Adherance to the gold standard can’t be blamed for this recession because there was no gold standard in operation at the time. The yankee greenback was not on a metalic standard from the time of the civil war until 1879. During that time it was a floating currency.
There also arose during this era a political party that opposed a return to the gold standard. It was called the Greenback Party.
For a good history of floating and metalic currencies try “Gold – The Once and Future Money” by Nathan Lewis.
For a graphical account of what I just said above see the following chart which shows the applicable US dollar price of gold during the period. It entail a huge inflation followed by a massive deflation. Blamming the gold standard for the recession is perverse and I hope John Quiggin is merely ignorant rather than deceptive.
http://terjepetersen.files.wordpress.com/2009/01/gold-price-in-us-dollars-until-1970.gif?w=480&h=280
Contentless and gratuitously offensive comment deleted.
Is there any time, recessionary or otherwise when those who clearly advocate employer interests are not calling for wage cuts??? May I suggest employers start with salary cuts from the middle of the organisation upwards?
Terje, the dramatic bit of your graph appears to show the inflation and deflation associated with the Civil War and its aftermath. The Coinage Act of 1873 put the US on a gold standard, with a promise to restore full convertibility of greenbacks to gold by 1879. That promise was, as you noted, carried out.
Please try to avoid comments such as “ignorant rather than deceptive” – they do nothing to improve the tenor of discussion and encourage unwelcome participants like OZtrian.
John,
Do you not think the long trend of central banks being able to inflate at will has gone some way to cause this problem? I am not calling for a return of the gold standard, but I believe that by setting a level of inflation (2-3%) you are actively discouraging market participants to save, and pushing them into making riskier investments. There has to be a better way.
The 19th century was a morass of poor labour laws, no welfare and rotten class structures. Russia was still mired in serfdom for much of it. Most European countries had empires, others had revolutions. War was a constant theme in the 19th century, much more than the 20th (despite the horrors of the first half).
What worries me is the post hoc ergo propter hoc fallacy that creeps into economic thinking. It goes somewhat like this:
The 19th century had minimal government intervention and a gold standard and had horrible depressions. The 20th century had Keynesian intervention and fiat currency and had fewer.
Perhaps there is a causal relationship, but there is no possibility of telling.
It is even more concerning that so many are instantly prescribing Keynesian solutions today when they can’t be sure they ever worked in the past. Yes, the US eventually worked its way out of depression after embracing Keynes’s ideas. This was after a war consumed and then destroyed much of the world’s industrial capacity. One might say that a mixed economy brought about the long post war growth period. Or did it?
There were two other massive innovations in the 40s that could claim more credit:
1. The invention of antibiotics
2. The green revolution.
All of a sudden if you got sick with a bacterial infection you could be cured and food could be produced for a marginal cost. You could feed and heal the world for next to nothing!
In fact, these revolutionary developments are somewhat understated in importance. People starved in the Great Depression. Even an equivalent downturn in economic production now would not lead to that in Australia or the US.
So the rush to embrace Keynesian ideas, or any economic solution, is perhaps not grounded in the facts when looking at history. That is not to say that the government shouldn’t at least try to ameliorate the problems. But so far, most Keynesian solutions seem determined to maintain the status quo (cf. the Rudd government’s attempts to prop up inflated house prices via the FHOG boost). The liquidationists were most certainly discredited in the Great Depression for abandoning the economy, but I’m not sure Keynes would have prescribed what our current government and others have.
Thanks.
John – they abandoned the gold standard and then returned at the pre war price. The process of returning at the pre war price meant a huge deflation to unwind the inflation that happened after abandonment. The correct response in hindsight would have been to either avoid abandonment in the first place or else to return to the gold standard at a new gold price that took account of the intermediate inflation.
WWI led to a similar problem that occured in Britian (and all the Commonwealth nations such as Australan that were fixed to the Pound Sterling). In WWI Britian left the gold standard and inflated. In 1925 Churchill returned Britian to the gold standard at the pre WWI gold price. Once again the itermediate inflation was reversed with a grinding deflation. Once again the better response would have been to return to the gold standard at a gold price that took account of the inflation that had occured.
In both the case of the USA following the civil war, and Britian following WWI the return to the gold standard entailed a grinding deflation that took years to work it’s way through the economy. Contracts struck at the inflated price now caused cripling conditions for the borrowers (the principle value of the loans increasing in real terms). These processes take years to unwind and borrowers (often enterprises) get destroyed in the process. However in both cases the deflations did ultimately work their way through the economy and things eventually returned to normal.
Of course in both instances those that were lenders at the height of the gold price (eg for instance those that bought war bonds) would have been major winners as a dollars worth of debt became more valuable in terms of gold (and in real terms).
I think the world should return to a gold standard. However it would be naive in the extreme to think that the USA today should suddenly fix the dollar to gold at the pre-1970 price level. It would be massively deflationary and in turn massively contractionary. Eventually the price level could be forced back to the level of the 1960s but at massive social and economic expense. This wouldn’t be a problem with the concept of a gold standard, it would merely be an example of a gold standard with some really stupid parameters being imposed on it. If instead the US fixed at a price of US$800 per ounce the outcome would be very, very different.
The recession in the USA during the 1870s was, if not the product of severe deflation, certainly not improved by it. Perhaps ingorant and /or deceptive are terms that are too inflamatory, however to blame this recession on the gold standard, given the ample evidence of monetary manipulation from the time, is in my view seriously misguided.
p.s. I may have implied that the deflation effect is just on financial contracts. It fact it impacts all long term contracts.
If you sign a 10 lease on a building when the dollar is worth 1/30 of an ounce and then need to pay that dollar rent when the dollar is worth 1/20 of an ounce the debt can be crippling. That represents a rent increase of 50%.
Likewise if you agreed to pay Harry a salary based on dollars worth 1/30 of an ounce and then need to keep paying him the same nominal salary when dollars are now suddenly worth 1/20 of an ounce it will eventually catch up with you.
If the USA today fixed the dollar to gold at $35 dollars an ounce it wouldn’t just be a problem today. It wouldn’t just be a problem this year. The negative impact of such a policy shift would be felt for many, many years to come. Not because gold standards are bad for the economy but simply because that gold standard would be bad for the economy.
Mick#11 et al, Keynes never suggested that wages should not decline or that his analysis was to keep the status quo, his General Theory addressed the issue of under-employment and liquidity. Keynes makes clear that money wages v real wages are separate considerations, as was the issue of investment and money velocity. The argument of the mercantilists is a logic trap and based upon simplistic deduction, the real world suggests more complex dynamics in the decisions by consumers and producers but when that all fails, as it has now, then government can and should ensure that the supply of money and of confidence by providing direction (programs) was of more importance for social stability and political stability than sitting by and riding the wild swings that disaggregation and disequilibrium produce.
MH@14,
As I said, I believe Keynes would disagree with many of the prescriptions that are being embraced. Nevertheless they are being embraced under the banner of Keynesianism – which is now simply the term for government intervention in the economy.
I am also sceptical about the comparison between the 19th and 20th centuries, given the vast changes in all aspects of society over that period. (Though I note a previous commenter’s contention that wars were more common in the 19th century than the 20th is certainly wrong.)
My view on the post’s subject is that cutting wages on a macro level is unhelpful, as it would encourage deflation and be de-motivating for workers. For the individual firm making such a decision, the morale effect would certainly be catastrophic. The best way for a firm to cope with falling revenues is undoubtedly forced redundancies (voluntary ones decimate the more talented ranks).
As such, policy-wise, governments should make it easier for firms to shed staff through retrenchments. Not that they will, or are—quite the opposite—but what can you do, huh?
(PS, the argument that retrenchments reduce aggregate demand is probably quite true, but I doubt the effect is anything like as great as mass corporate bankruptcies.)
We are seeing mass sackings at various companies. This puts almost all the burden for business downturn on those that lose their jobs. If instead there were wage cuts at those companies, the burden would be shared much more equitably.
Therefore, those who support social welfare should support wage cuts in preference to job losses.
I’ve learnt from rightwing economists that you can’t have wage rises in a boom because they cause inflation and you have to cut them in a recession to save jobs. Except for executives, that is. Bangla Desh would appear to be the economic model we should all strive to emulate, apparently.
The remarkable thing, given this well-rehearsed ‘we’ll all be rooned’ chorus, is that so many of you seem inclined to believe the most fancifully optimistic musings about the environment, GW etc.
Clear cases when economy wide wage cuts may make sense;
1. In a sustained deflation. However reflation would seem like a better option.
2. Following the destruction of a significant amount of capital. Such as might happen during a severe war (think Japan WWII). The current financial crisis doesn’t qualify because it’s about who owns the capital (creditors or otherwise) not about the actual destruction of physical capital.
In both cases I think the market can figure it out so long as there are no significant price controls in place.
If you actually believe in government mandated price controls for labour (ie minimum wages, awards etc) then do you also believe these prices should only every be adjusted in one direction?
hc @ 4
I live in a town in which Rio Tinto is the biggest employer.
I think the company is not overly interested in workers accepting lower wages – it wants job cuts.
Demand for it’s products is collapsing. If demand falls by say, 50% and the workers accept a 10% pay cut, the company will still be paying half it’s workforce to stand around and do nothing.
It doesn’t want cheaper workers (well it does, but anyway) – it wants less workers.
It cannot use the same number of workers, however cheap if they only require half the amount of ore to be mined because they can only sell half the amount of ore they recently were.
Lower wages are unlikely to save miners jobs, though I have little doubt that the company will push for that as well.
I question how many people really benefitted from the boom? There was rising inequlity and a hollowing of the middle. If most of the boom accrued to upper levels it may not make sense to reduce wages. Unemployment should now be the focus of government policy and there needs to be a shift away from focus on inflation through the use of monetary policy. I dont think wage cuts at lower levels or further seeking of productivity gains (without capital investment) are going to be the answer this time around – it may well depress demand further. You can only push people so far for wage reductions and productivity increases before companies need to examine where else in the organisation they are being profligate with profits. Workschoices had a wage depressing effect (or a greater casualisation effect which should have had a wage depressing effect). We have higher underemployment now, higher casualisation, less job security. Wage cuts on top will make things worse. We need investment and jobs and if it has to come from the public sector – so be it. The market is clearly seeking to depress wages further and it may take twice as long for demand to recover from this.
Any lower wages should be negotiated with employees before they cut jobs – they should be given a chance to keep their job (collectively – this is where unions can be helpful). Too often companies dont think of this strategy.
Boy from Flynn highlights an important aspect of economic downturns, that different employers are affected differently. This supports the view that labour market flexibility is important.
Terje’s points about when wage cuts may be necessary are true — but they are obviously particularly extreme examples!
In real life, actually cutting wages is very rarely likely to be a sensible option.
They implemented widespread wage cuts early in the great depression. Did it help? No. WWii helped. Massive government investment helped. Keynes should be here to help these people out. Monetarism will be next to useless.
Thats nice Botany. The upper deciles get to gamble us into a black hole but as usual labour is called on to flexibly bail them all out. Harsh and unnecessary had they been prudently minding their own business in the first place. Capital makes the blunders and labour bails them out. Cruel and unfair but was it ever any different? Only with Keynes. So if the government (whats left of it) could put 2 and 2 together – they hold the only solution here. Depression relief projects and a bigger government. Its about time they looked at their responsibilities front on. Thos in the private sector who were making hay while the sun shone wanted to strip government down to nothing so they could pay less taxes. The government went along for the ride thinking it could save itself some costs. Do either of these groups have their eye on the economy? If they dont, they will soon be calling for the same action I am suggesting here.
Whats left of it? The government we have today is bigger in every regard than it has ever been. It spends more per capita than it has ever spent. There are more rules than their have ever been. In what way can anybody say “whats left of it?”.
WWII did not fix the great depression. It just allowed unemployed people to spend time shooting at eachother. Not a very productive activity.
Terje – the government as a percentage of GDP? Do you you have the numbers as a percentage of 30 years ago? What about the proportion of people emplyed in the public sector 40 years ago versus now???? I know there were thousands of people employed as – wait for it bus conductresses. Everywhere you went on public transport you saw governmant workers. What about the migrants – they tell me when they came after the war and couldnt soeak english – they went to State rail or Sydney Waterboard or Roads to get jobs. Where are these large public employers TerjeP?
I will look it up Terje (paricularly the employment numbers in the public sector). You may mistake the obsecne salaries and supperannuation benefits they have been paying themselves to run small committees in the public sector Terje P. Thats not public service nor is it public employment. Look at NSW state website – they proudly boast – we have over 1000 committees (and no jobs get created).
Wow. Im afraid that has me really annoyed.
I have a sister that has been working in the public sector for 30 years. No new young people are coming in or being hired. Yet older people are taking redundancy and coming back and double dipping by taking contracts which get rolled over. It sounds like universities Terje P.
This isnt public sector investment at all. Its rorting the system.
I think Terje has a point but in Australia, asset values (I’m mainly thinking about house prices here) have not come down to the extent that they have in the US. I would only agree with a cut in wages if there was a commensurate reduction in the value of assets.
Mind you if we were to extend that sort of logic, one would also have to argue that wages should have increased at the same pace that asset prices did? From what I’ve read they didn’t?
So to be fair, wages shouldn’t fall at the same rate that asset prices do.
Claiming that wages should not fall in the event of a declining economy is a stubbornly obtuse position to adopt.
If GDP declines, but wages stay the same, then wages as a percentage of GDP would be increasing. But it doesn’t make sense that wages should make up a lower percentage of the economy during stronger economic times, but a greater proportion during weaker economic times.
Is there any time at all where wage cuts could even be considered? Ever?
Um… didn’t you just contradict yourself Nick K?
Unless your suggesting that there is some subtle difference between “should not fall” and “wage cuts”.
As regards the gold standard, Terje, I think your position is subject to the same problems as the claim that “free markets haven’t really failed, they haven’t been tried”. Maybe not, but the actually existing policies of free-market advocates have been tried and failed (my language here is an illusion to the term “actually existing socialism” used by defenders of the Soviet Union against those who argued for an alternative model of socialism).
All actually existing gold standards have been subject to the problem that, in war and other emergencies, governments are forced to abandon gold convertibility, and then face the problem of either ratifying the inflation by converting back at a higher price or seeking to restore the previous parity. As you say, the latter choice has been a fairly reliable recipe for recession, but the former also has some severe difficulties, I think.
Smiley, my meaning is quite clear. By “wages should not fall” I mean ‘according to people arguing here, wages should not be allowed to fall. That is, they shouldn’t be cut under any circumstances’.
We also have a natural experiment that happened when the 19th century gold standard took off. Certain countries couldn’t adopt it or chose not to (see the Fall of the Rupee, which Oscar Wilde described as “sensational”). Granted, these countries were selected for being economically weaker, but by modern reasoning they should have gained external and internal trading advantages that were more than enough to compensate by remaining on a silver standard. Yet clearly they did not, over a span of several decades.
For what it’s worth, it didn’t need hindsight to suggest reverting to a gold standard at new values. In his “The Economic Consequences of The Peace”, Keynes thought that Britain’s not doing so was a mistake, and he contrasted it to what the French had actually done, going back on values that embedded a twofold accumulated inflation. That is, it wasn’t just the young Keynes’s view, it was something that the French had already taken on board and acted on. By doing so, of course, they acknowledged past wealth transfers under inflation and didn’t reimburse the losers by reversing them, but c’est la vie.
#29 Alanna you make an interesting point. During the Howard years there was some talk about reducing the size of the public service. Certainly those that delivered services to the public have been cut. However those that manage contracts for private firms delivering public services have burgeoned along with the now private staff who previously would have been classified as public servants.
It is this latter group of people who are in great danger of losing their jobs along with workers such as described by #20 Boy from Flynn. I cannot see those at the top volunteering for this themselves.
Nick K, so since you seem to be an expert in the rate of change in GDP and wages – during the period that GDP and wages were rising, did the increases in wages keep up with or exceed the increase in GDP?
I should mention, that by now we know how to restore normalcy after wartime restrictions without disruptions and dislocations: the way Britain phased out rationing without causing huge price shocks. That involved simply increasing the ration for each item steadily until it was meaningless, and only then formally abolishing it for that item. That did require increases in actual production, of course – it was only a shock absorber, not an engine, so to speak.
By the same token, it is probably “practical” to reinstate a former gold standard by allowing only rationed gold withdrawals and gradually increasing the limit as gold production/imports allowed (keeping going with printed money getting its value from its acceptability for tax and the multipliers on all that in parallel during the interim). It would probably take generations to get back to the old values of something like US$20 per oz and US$5 to the pound sterling (i.e. 240 Australian cents), and there is no real point since the former losers are by now long gone (“in the long run we are all dead”), but it could be done.
A year or so is not a long time for a recession. It’s about the same time it takes for malinvestments to be liquidated, so that the country can get back to work with more productive ventures. So the pre-1930 recessions can accurately be described as “short and sharp”.
On the other hand, the present economic troubles will certainly last longer than a year, partly because unproductive investments are being propped up, government is crowding out private investment, inflating the money supply, and is changing the rules every three days. These measures will only delay the pain, whereas if we had cut spending, cut taxes, stopped inflating and provided rule certainty, then the downturn would perhaps have only lasted 12 months.
The real problem with Alan Moran’s piece is his advocacy of the “irrational exuberance” theory of what causes recessions. I probably prefer J.Q’s Keynesian “collapse of aggregate demand” explanation to the Moran-type explanation. At least the Keynesian approach has some grounding in economic logic.
Governments were not “forced” to leave the gold standard during wars. If they were then who forced them? They left the gold standard because they regarded excess currency printing (inflation) as a superior way to fund the war effort. Britians bad experience during WWI meant that in WWII they didn’t bother trying that trick. Essentially because devaluation / inflation, call it what you will, didn’t achieve the objectives that it’s advocates suggested. When you leave the gold standard the cost of borrowings actually increases because lenders now need to factor in the new uncertainty.
It is argued often that Nixon was forced to abandon the gold standard due to the cost of the vietnam war. However he could have just given the French some gold. For some reason Nixon thought gold was more important than the gold standard.
And your suggestion that my position is like claiming that the gold standard has never been properly tried is simply poppy cock. You chose to cherry pick a point in the 1800s when the gold standard had been abandoned and then re-estabilished at a highly disruptive price point. You have nearly a century to work with but you chose the most severe example of monetary policy failure (ie gold standard abandonment) during that century to try and make a negative point about the gold standard as a policy. This merely demonstrates bad faith on your part, not on mine.
Other than nearly a century of experience in the USA you could also take a look at Britian from 1775 until the early 20th century so long as you took care to exclude the years 1810-1830 (approximately) where once again the gold standard policy was disrupted by abandonment.
p.s. for the interested reader;
Floating currencies and the gold standard (and other monetary options) have been tried on and off as policy choices for thousands of years. The notion that floating fiat currency is a modern idea is not correct. Just as the idea that the gold standard is an antiquated idea is not correct.
If anybody wants to know when various countries and empires were and were not on a gold standard, from antiquity to modern times, then the following book is well worth reading.
http://www.amazon.com/Gold-Future-Money-Nathan-Lewis/dp/0470047666
If you believe in the circular flow then obviously – cutting wages, cuts consumption, which only makes matters worse.
On the other hand, increasing wages and cutting debt (the same amount), makes things better.
Only capitalists seeking to protect their credit driven madness, propose to cut wages.
Here they only propose to cut their own throats.
BotanyWhig@16:
Perhaps I am in error about there being less wars in the 20th century, although my reading of history suggests that major economic powers went to war with each other and internally more often than they did in the 20th century. Maybe it is easier to look at it as pre and post-1945?
As for wage cuts – it’s a nonsense. There are fair arguments that the cause of this crisis is precisely because of stagnant wages, where the average employee was not being paid enough to afford the level of consumption required to keep major economies going. Into the breach stepped cheap credit, which allowed people to purchase everything from overpriced homes to overpriced shoes (how can a shoe that costs $1 to make end up costing $200?).
My theory (perhaps not a good one as I am not an economist) is that the causes of this downturn are very similar to the GD. Workers were not being paid enough to purchase the products or services they made. Capital owners placed huge markups on products and services. They then reinvested the difference in the form of credit to consumers, such that they could then buy what they were making. Simple concept, perhaps not accurate. Ultimately this would not have been achievable without compliant central banks.
“Bangla Desh would appear to be the economic model we should all strive to emulate, apparently.” – Hal9000
Well exactly. The Third World model. AKA neo-liberalism. AKA neo-feudalism. Limited regulation, low taxes, poor infrastures, low wages for the majority, vast wealth for the few, limited support for the poor, the tired, the hungry. It’s what’s made the US the thriving economy it is today. Oh wait…
Going back to Mick at #11 (sorry I’ve been out of action), the green revolution was really a phenomenon of the 1960s and after, not the 1940s. Certainly it is true that the expansion in supply of foodgrains and fall in prices due to the GR averted mass starvation. However, as Amartya Sen has taught us, famine is a function of both food availability and access to food. Recent rising prices (e.g., due to competition for biofuels) and now rising unemployment puts the world’s ultra-poor again at risk of starvation. Fewer of the world’s poor now have direct access to food production but are tied in to employment in the global economy.
Just got some stats for Terje
“The profits share (based on Gross operating surplus for Financial and Non-financial corporations) of Total factor income reached 26.5% in 2007-08 and this represents the highest share recorded since 1959-60. The profits shares recorded since the early 1990s are at a distinctly higher level than those at any time since 1959-60.”
“The wages share of total factor income remained relatively stable during the 1990s, at levels similar to those during the 1960s. The highest recorded value of the wages share of total factor income was 62.4% in 1974-75. In more recent times, the wages share has been trending down to be 53.7% in 2006-07 and 53.4% in 2007-08.”
Some actual numbers of people employed in the public sector (then and now) would be good. So Ill look for those Terjep.
Re gold standard and other monetary systems:
The current financial crisis is not, in the first instance, a crisis of the international monetary system, but a problem of the instability of financial systems of which monetary policy is only an element (ie the issuance of financial securities, particularly those issued by private organisations).
19th century economics, which has been revived in the latter part of the 20th century (eg Friedman, v.Hayek, and advocates, eg Moran) is uninformed by 20th century theoretical research in economics.
20th century theoretical research includers but is not limited to Keynes. In previous comments I referred to research by Radner and subsequent economists in the area of ‘Walrasian general equilibrium models’. Keynes’ writings inspired what is known as ‘non-walrasian general equilibrium theory (or ‘fixed price equilibria models’).
Furthermore, I fully concur with MH @2: “The proposition of Moran and others always neglects the broader community interest..”, adding that this is a reflection of general (Walrasian) equilibrium theory up to about 1900. From the 1930 (Wald)onward but in particular since the 1950 (Arrow-Debreu), all general equilibtrium models (Walrasians and non-Walrasian (eg Benassy)) make it quite explicit that it is the ‘interest’ (preferences) of all members of a society which count, together with natural resources (ie only 2 primitives). The distribution of ‘initial endowments’ (‘wealth’, ‘income’) matters in all these models.
Moran seems to suggest that it is ‘sticky wages’ which are the problem of the current economic crisis.
In my reading of historical economic data, limited as it may be, it is ‘sticky wages’ which result (only) in a local short and sharp disequilbrium (significantly inconsistent relative prices), marked by unemployment and some business failures.
I do not know of one instance of a ‘global economic downturn’ (‘panic’, ‘prolonged and severe recession’, ‘depression’), which is not a financial market instability problem, often marked by increasing income inequality preceeding the collapse.
It seems to me Moran is proposing a solution for a problem we don’t have at present.
Jill#37
Thats the point I am making. John Howard made it possible for those in positions of control in the public sector to effectively “retire” enter redundancy, take their superannuation, and then come back on contracts (you can work as long as you want) which simply is stopping new young people entering the public service and effectively one person is being paid a double salary, whilst another is prevented from being employed at all.