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Archive for December 23rd, 2008

Two Contrarian Posts On The Economy

Posted by Phoenix Woman on December 23, 2008

One by Dean Baker, the other by Nate Silver.

Dean Baker talks about how the economic news isn’t all bad, so long as you have a job:

You probably didn’t see this in the newspapers, but real wages rose at an incredible 14.8% annual rate over the last three months. The basic story is straightforward. While nominal wages have continued to grow at a modest 3.2% annual rate, prices have plummeted, hugely increasing the value of the paycheques of those workers lucky enough to still have a job.

This pattern is not likely to continue. Price declines will almost certainly slow, and rising unemployment will dampen nominal wage growth, but the nature of this wage gain presents an extremely important economics lesson.

Put simply, real wages rose because house prices and stock prices crashed. The collapse of the housing bubble destroyed more than $6tn of housing bubble wealth, while the plunge in the stock market eliminated more than $8tn in stock wealth.


The elimination of this wealth has the same impact on those of us not directly affected as the elimination of $14tn of counterfeit money. The economy still has the potential to produce the same amount of goods and services, but the owners of housing and stock have much less claim over this output. That means more for the rest of us.


The real lesson that the public should learn from recent experience is how the income of one segment of society is a cost to others. The wealthy understand this point very well, which is why they design policies (for example trade and immigration policies) that are intended to depress the wages of less-educated workers.

If they can get low-paid workers to tend their gardens, serve them meals in restaurants, paint their homes and serve as nannies for their children, it raises their standard of living. The wealthy, along with the highly educated professionals who are largely sheltered from international competition, directly benefit when most workers are forced to accept lower living standards.

In the same vein, when the rich lose wealth it is a gain to everyone else. In short, they have our money. We don’t need them to spend, since the government can spend just as well as rich people do. Unless they can show how their actions are increasing the productive potential of the economy as a whole (that would be quite a joke with regards to the Wall Street gang), the rest of us are made better off when the rich have less.

In this particular episode of downward redistribution, tens of millions of middle-class people took a big hit also, as their wealth was also tied up in the housing bubble and to a lesser extent the stock market. This is unfortunate (some of us did try to warn them), but it was an unavoidable part of an inevitable correction. Hopefully these folks will get better investment advice in the future.

Posted in economy | 1 Comment »

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