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