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Steve Pearlstein: 'It's better to take the pain and move on with it'

Yesterday, my colleague Steve Pearlstein wrote a case for wage cuts. Matt Yglesias responded here. Pearlstein asked me to post this reply:

Matt has it exactly right. If we are going to live within our means as a country, there's no question that our standard of living -- our collective income and wealth -- has to come down. I wish I'd made the point myself.

As I've written in several previous columns, there are various channels by which that can be accomplished, including inflation, devaluation of our currency, nominal decreases in real wages and nominal decreases in the value of our assets, Most likely, it will be a combination of all of them. Although they are all related in some way, they all have different time lags and macroeconomic consequences, as well as very different distributional consequences. I would agree with Matt that, in principle, currency devaluation and inflation are in many ways the fairest and most effective but, as the Chinese remind us, its not totally within our control to determine which ones will be used.

But Matt is wrong to disregard the benefits from decline in value for some assets and wages in some sectors, since these are necessary preconditions for markets to clear and provide a foundation for future growth. While those of us who already own houses don't like it, for example, it is a good thing that house prices are being forced back to levels that are more consistent with incomes. Similarly, its good in the long run that industries that compete in global markets have wage rates that are, well, competitive when adjusted for productivity and other factors.

There's a point at which some industries will never be globally competitive, but autos is not one of them -- we need jobs that pay $15 to $25 an hour in wages plus benefits to high school graduates doing semi-skilled work. In some ways it is sad that those jobs can no longer pay $28 and guarantee a middle class lifestyle, as people often say, but comparisons to what was aren't particularly useful at this point when the economy is stuck in an equilibrium that is delivering no average wage gains and unemployment and underemployment of 17 percent.

If and when the dollar is allowed to decline against the yuan or inflation kicks up, then those rates should naturally rise. But until then, it's better to take the pain and move on with it. Even better if we raise taxes a bit on the "winners" in this scenario and use the money to increase the after-tax income of the lowers or provide public services, from good schools and parks to health care and day care, that improve their lives no less than a slightly fatter pay check. I suspect Matt would agree with that.

By Ezra Klein  | October 14, 2010; 9:32 AM ET
 
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Comments

Yglesias is such a one trick pony on this inflation cure-all that he completely misses the down-side risk to inflation that gets out of control.

I understand that setting controlled burnes to clear brush is a necessary part of preventing forest fires. But you want ot be very careful in a serious drought about that controlled burn getting out of control. Matt Yglesias's inflation cure all theory is similar. There is a lot of risk out there for serious inflation (national debt pressures and energy costs most obviously) and he should at least examine the down-side risk.

I think Pearlstein in his experience understands this much better.

Posted by: lancediverson | October 14, 2010 10:02 AM | Report abuse

That might be the largest pile of confusion I've ever read. And Pearlstein got it under Klein's name rather than his own. LOL.

Posted by: msoja | October 14, 2010 10:02 AM | Report abuse

actually Ezra I doubt the Chinese (who currently own a massive amount of our debt and growing) would be willing to manipulate their currency to hurt themselves financially to appease yourself and Matt. Reality needs to set in there for you both. To that further extent you need to realize too that while corrections in housing values are necessary they also have linked with them lowering in property tax receipts that are already starting to flow through to cities and municipalities. This means that the tightening of the belts of these groups will need to increase not decrease. Sure you can tax the "winners" (personally I LOVE this statement of yours as if its a lottery and not hard work that accounts for the status of the upper middle class for example) but when they realize you're coming after them then they're going to find a way to hide those monies. Once they do maybe you can go back to your creditors in China and ask for a better deal but once you've berated them for their currency manipulation I doubt they'll be very receptive to that.

Posted by: visionbrkr | October 14, 2010 10:18 AM | Report abuse

I agree with the fundamental point that sometimes wages need to go down in order to make a company or sector more competitive with a rival.

In terms of reduced standards of living this doesn't strike me as inevitable. There are ways to balance things out so that wage reductions are off-set by investing public dollars in public goods (including health care). A more energy efficient nation with more cost-effective health care and a better transportation network would yield benefits that would off-set wage reductions in one sector.

With respect to work-sharing arrangements, these seem like one possible approach to softening the blow during a mild recession, it's not a solution to a prolonged down-turn.

e.g. many large U.S. companies actually experimented with this approach from 1929-1933 and the efforts ended up back-firing. (e.g. UC-Davis labor historian David Brody has a good chapter on this topic "The Rise and Decline of Welfare Capitalism" in his his collection Workers in Industrial America -- a number of good citations).

Posted by: JPRS | October 14, 2010 10:24 AM | Report abuse

Pearlstein offers an excellent follow-up to an excellent column!

There are "necessary preconditions for markets to clear and provide a foundation for future growth" and there are indeed conditions when "it's better to take the pain and move on with it." Taking it one step further, so what does this mean for the latest mortgage crisis -- a crisis in which real properties are not rightfully held by defaulting mortgagees, are not rightfully held by terminal banks, but which are [over] leveraged through derivatives? How can that $187 trillion market be cleared and who takes the pain?

I'm coming to the conclusion that (much like education), the solution doesn't involve federal government action beyond the action necessary to prosecute and punish the crimes of entities under direct federal supervision. Sheriffs (who implement foreclosures) and Clerks of Court (who authenticate and record documents) are locally elected... so there is a level of responsibility which touches each community and each voter in each community: it might be that the solution involves everyone taking the [substantial] pain and thereafter forcing the federal government to step back -- to remove itself from involvement in detailed transactional matters best left to duly persnickety locally-elected officials easily removed by local voters. The firewall implicitly created by diversity of responsibility -- by allowing localities to determine and to be responsible for their own fates -- might prevent a future nationwide meltdown. The independence offered by federalism and free markets is technically inefficient but has the advantage of minimizing the effect of failures.

Posted by: rmgregory | October 14, 2010 10:24 AM | Report abuse

rmgregory,

If the issues involve interstate commerce -- and in the case of mortgage banking most do -- it isn't possible to have purely local resolution to these matters.

As far as the responsiveness of local officials goes, sometimes this is the case -- especially in places where you have an actively engaged voting population that has both the financial capacity and the civic education necessary to know what their rights are and know how to protect themselves. In other cases, the local political system might be so thoroughly corrupt and unresponsive that things won't change for the better absent an outside intervention.

Posted by: JPRS | October 14, 2010 10:40 AM | Report abuse

EZ, the moral dimension of this is totally lost here... There is a fundamentally different effect, both at the macro and micro effect between real wage cuts and inflating our way out of this.

First, there is no guarantee that wage cuts will bring back jobs or guarantee that industry will stay here. Executive pay is 500x the wage earner and divorced from actual performance and, aside from outsourcing, automation continues to be a viable option to actually employing people. Aside from employment costs, there are other reasons that industry relocates overseas. Germany, for example, has maintained much higher wages and employment because they have an industrial policy that encourages a home market as well as facilitates exports. Forget a comprehensive industrial and/or energy policy, we can't even manage to pass permanent tax credits and other incentives for renewable energy technology which means it makes more sense for wind, PV, solar thermal, etc. to be manufactured elsewhere and imported.

Second, inflation means it is more difficult to buy new stuff -- yes, it can be a hardship but it is fundamentally different than making it more difficult to pay for the stuff you already have. In many ways, not being able to buy cheap c#$% from China can be a very good thing... of course, when it interferes with your ability to pay rent or buy food, it is another thing. However, making it more difficult to meet your existing obligations can have the effect of both making it more difficult to buy new stuff but also increase the likelihood of default.

We may not be able to choose the precise combination but ceding that wage earners have to take a pay cut without recognizing the multitude of reasons why industry is suffering -- most of which have nothing to do with wages and everything to do with a lack of advocacy on behalf of the American worker in and outside of policy-making circles -- is a failure to acknowledge reality and a defeat for progressives.

Posted by: kcar1 | October 14, 2010 10:52 AM | Report abuse

"What you mean 'we', Mr Pearlstein?"

The people who are being asked to accept a reduction in their collective standard of living are overwhelmingly the people who never got much of an increase in the first place. Let's start instead with that nice tempting $140 billion being paid out by a relative handful of firms (mostly containing the bright people who got us into the current mess).

When the salaries of financiers, CEOs, high-end lawyers and doctors, lobbyists and pundits are back to their inflation-adjusted 1975 levels, then we can talk.

Posted by: paul314 | October 14, 2010 10:56 AM | Report abuse

Klein, are you serious? Is this the crux of Pearlstein's argument:

"Reducing wages and benefits in those industries would not only help to create and save jobs, but would also force a further reduction in consumption and living standards that is necessary to bring the U.S. economy back into balance."

He advocates the structural impoverishing of broad swathes of working people to support corporate profits. Unless I'm reading that incorrectly. These are the same corporations that aggressively outsource American jobs every single day.

From Pearlstein, this is to be expected. What is much better, however, is this tidbit from Yglesias:

"It seems to me that neither Pearlstein nor some of the people I’ve seen complaining about him understand that Yuan revaluation is the same thing as lower wages for American workers. Almost everyone in the United States earns money according to a formula denominated in dollars. So if dollars become less valuable relative to other important currencies, our real compensation declines."

Yglesias here seems deathly concerned that if the Yuan appreciates, we won't be able to buy as much cheap Chinese junk. Which would be terrible, since then we might have to buy American-made goods.

Again, Pearlstein I can understand, he's a right-wing hack, and not a very good one at that. But, Klein, aren't you and Yglesias supposed to be liberals? The position you're advocating here is pure corporatism. You should start pushing for lower tax rates for corporates, dividends and capital gains while you're at it.

Signed, Disgusted Liberal

Posted by: ahduth | October 14, 2010 11:56 AM | Report abuse

@ahduth writes:

"Pearlstein I can understand, he's a right-wing hack"

That is funny.

Posted by: lancediverson | October 14, 2010 1:54 PM | Report abuse

Workers were losing ground before the downturn through no fault of their own, then the downturn hurts them more, yet the wealth of the very top has increased, top corporations have huge profits and sit on huge amounts of cash, and the answer is for workers to bleed more?

Let's not lose sight of these basic facts while we knock around the esoterics of inflation, relative values of currencies and the like.

I know there are realities, China as a growing power, all the new workers around the world joining the global labor pool, our current (financial gamblers induced) downturn. But whatever adjustments and solutions need to be applied the absolute minimum pain to typical workers has to be the guide. That may come in the form of a much bigger version of what Mr. Pearlstein suggested, pay cuts to be competitive but then much more progressive taxes which are used to help the lower and middle workers with education, health care, whatever will help.
The vicitm is in bad shape from a loss of blood and the solution is to make them donate blood so it can later be given back? No. Just plain, morally, no. That is not the only solution. Some pain may be unavoidable, but any drop of it that is avoidable is morally required.

Posted by: TomCantlon | October 14, 2010 2:08 PM | Report abuse

"Matt has it exactly right. If we are going to live within our means as a country, there's no question that our standard of living -- our collective income and wealth -- has to come down. I wish I'd made the point myself."

The whole point of wage cuts is that so 'our collective income and wealth' goes up, not down.

Lower real wages -> increased employment -> increased production of goods and services (increased real income and wealth).

Why would you be in favor of using government policy to cut wages for the purpose of lowering 'collective income and wealth'?

Posted by: justin84 | October 14, 2010 6:42 PM | Report abuse

In response to Steve Pearlstein's articles about the necessity of wage cuts for the auto industry I wonder if wage cuts would be necessary if the American manufacturers produced cars that commanded a premium. If we make things that are basically commodities, such as generic cars, we end up competing on price and wage must be low. But if we make BMW's, Audis and Mercedes we can charge more because people will pay more for the perceived value. The US should emphasize innovation and style in everything we manufacture.

Posted by: henryrose | October 14, 2010 6:49 PM | Report abuse

"He advocates the structural impoverishing of broad swathes of working people to support corporate profits. Unless I'm reading that incorrectly. These are the same corporations that aggressively outsource American jobs every single day."

Aduth,

Do the managers of corporations simply hate Americans, or are American workers not worth the money (for various reasons, some no fault of their own)? The motivation is likely jobs, not profits (of course, jobs and profits often go hand in hand).

"Yglesias here seems deathly concerned that if the Yuan appreciates, we won't be able to buy as much cheap Chinese junk. Which would be terrible, since then we might have to buy American-made goods."

Or Vietnamese made goods. Or Cambodian made goods.

There is a fairly wide range of products where America doesn't even bother to compete. A dearer Yuan might just mean that Americans send more money to China for less product for awhile, until the Vietnamese factories are up and running.

China often gets pennies on the dollar (retail U.S. price) for their exports. A revaluation of the Yuan probably won't make U.S. cheap toy manufacturing a money making activity.

The major imbalance is that the U.S. saves far too little to fund investment. The difference comes from a capital account surplus, which means a current account deficit (almost always accompanied by a trade deficit).

Posted by: justin84 | October 14, 2010 6:54 PM | Report abuse

Dean Baker, as usual, ftw http://www.cepr.net/index.php/blogs/beat-the-press/steven-pearlstein-doesnt-understand-market-economies

Posted by: eRobin1 | October 14, 2010 11:00 PM | Report abuse

"In some ways it is sad that those jobs can no longer pay $28 and guarantee a middle class lifestyle..." $15, $20, $25 per hour can guarantee a middle class lifestyle IF asset prices are allowed to deflate along with wages.

A small dose of deflation may be the best medicine for this economy. If only the Gosplan (the Fed) would allow prices for homes, cars, food, and clothing to decline to market equilibrium.

Posted by: ASCalifornia | October 15, 2010 8:23 PM | Report abuse

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