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Falling Wages Compound Economic Woes

Without new stimulus, US faces Japan-style slump: Krugman

By Jason Farago, Newser Staff

Posted May 4, 2009 8:00 AM CDT

(Newser) – From bailed-out automakers to newspapers facing cutbacks, companies across the US are slashing wages, and employees—even those with unions—are sitting still for it. While cuts may look like a good alternative to unemployment, but they're more harmful than they appear, writes Paul Krugman in the New York Times. "Falling wages are a symptom of a sick economy," he says. And the example of Japan in the '90s shows that wage deflation can spell years of economic trouble.

Falling wages exacerbate the problem of high debt; as your paycheck shrinks, your mortgage payments remain the same, putting even more pressure on consumer spending and further hurting the economy. The Obama administration has done well to keep the economy from full collapse, Krugman allows, but that's not enough; "We basically need more: more stimulus, more decisive action on the banks, more job creation."

[Images (3)]

[Quotes (1)]

United Auto Workers President Ron Gettelfinger, left, and Vice President General Holiefield speak to reporters in Sterling Heights, Mich. on Monday, April 27, 2009. (AP Photo/Paul Sancya)

Arthur Sulzberger Jr., center, publisher of the New York Times, is applauded by reporters and editors in the newsroom. Times employees took a pay cut to keep the newspaper afloat. (AP Photo/The New York Times, Fred R. Conrad)

Gina and Gus Russo, owners of Lochmoor Chrysler Jeep, watch President Obama announce Chrysler will file for bankruptcy on television with employees and customers in Detroit, Thursday, April 30, 2009. (AP Photo/Paul Sancya)

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President Obama and his economic advisers seem to have steered the economy away from the abyss. But the risk that America will turn into Japan—that we’ll face years of deflation and stagnation—seems, if anything, to be rising. -

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COMMENTS

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Showing 3 of 4 comments

freethemall

May 4, 2009 10:00 AM CDT

Where did they get the money to finance WWII? They borrowed it. Also, in a sense, they printed more money, since we went off of the gold standard about that time. And, they ceased worrying about balancing the budget for the time being. In fact, much of the limited gains made from New Deal spending was lost, because of the premature attempt to bring the budget back in balance late in the decade. As has been explained again and again, but fails to penetrate certain thick skulls, this does not mean that deficit spending need not be brought under control. It's the timing that makes all the difference --- wait until the economy recovers, before worrying about deficit control.

serfinWI

May 4, 2009 8:04 AM CDT

And where are they going to get this money to spend if no one is working? Borrow from China? the failed banks? Fired CEO's? Small business owners? Doctors? Lawyers (yes, take all their money!) Auto workers? Print more? Thin air? Money doesn't grow on trees. How massive is enough?

freethemall

May 4, 2009 4:15 AM CDT

The largest deflationary spiral in our history was cured by the largest government stimulus in our history. So government stimulus does work, IF the stimulus is massive enough. I'm referring of course, to the Great depression (deflationary spiral) and WWII (government stimulus). Just as the New Deal spending wasn't enough to pull the economy out of the depression of the 1930's, the whittled down stimulus packaged that emerged from the legislative process that required 60 senate votes, is likely not big enough to really get our economy back on track. Unfortunately, I do not believe there is the political will to enact the required stimulus.

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Falling Wages Compound Economic Woes