Thursday, November 27, 2008
You might be hearing from the right wing about how breaking the unions and letting wages fall is the solution to our problems. We've heard this before. Let me tell you where.
In the late 1920's and early 1930's the global economy as it then was constituted, suffered a series of moments of crisis. In truth it had never gotten back to balance since the "Great War." The responses to these crisis points made the situation. Orthodoxy of the age brought disaster, and that orthodoxy was returning to an international gold standard that was really only a recent innovation. As Bordo and Eichengreen put it: "a system which relied on inelastically supplied precious metal and elastically supplied foreign exchange to meet the the world economy's demand for reserves was intrinsically fragile, prone to confidence problems, and a transmission belt for policy mistakes."
It's a nice way of saying that the Gold Standard was unsafe at any speed.
When the crisis arrived, there were three responses. One was to try and stick it out with the old system. This lead to falling wages and high unemployment under persistent deflation. The other two responses involved "casting off the fetters of gold." However, once this was done there was still a choice: keep wages high and the industrial system functioning, or let wages fall all the way to the floor, and employ people by the state.
In the US, under the New Deal, dealing with deflation was deemed to be important, and keeping wages high enough so that people could buy the products of industry was part of FDR's policy. It meant higher unemployment, but a growing sphere of a new economy, one that would eventually cover the nation with the excuse of World War II to bring everyone into the new world of internal combustion, telephones, electricity and broadcast. The argument was that it was easier to provide a safety net for people who had fallen out of the old economy, and to give them work and relief, than to raise wages that had fallen.
There was another choice, as Peter Temin, MIT economist, pointed out that the Nazi's "socialized human beings," and they "destroyed the unions within a few months of taking power," and "also introduced compulsory labor service," as well as using tax incentives and propaganda to convince women to leave the labor force." The result was a recovery to full employment "At the cost of their personal liberty and higher wages," You can read all this on page 115 of his book on lessons from the Great Depression. On page 9 you can see him rip Lionel Robbins for prescribing wage deflation as a "fundamental misconception."...(Click for remainder)