We need higher wages and demand...

Article

The Price is Wrong 

Comment;

Prices are supposed to clear the market. But which market? Labor-market, especially. We constantly emphasize full-employment. The economy wants to clear the markets, especially the labor and the capital market. The first, in terms of demand/supply of labor and in equilibrium demand equals supply, but not in case of downward wage rigidity, and, the other in terms of capital, savings equal investment, but not in liquidity trap. Labor market is cleared when wages are at subsistence and cannot go below it. But that’s a classical assumption and the meaning of subsistence has changed and changed a lot in terms of expectation. We have more things around. The expectations are now high. And the market still provides subsistence wages supplemented by the State support. The question is why the government will support labor if it is consumed by the market. The support underscores the need for higher wages but the market is unwilling to sacrifice, not even during the worst recession since 1930, even though their net wealth has increased. But they want tax cuts and high interest rates and low inflation for their wealth as far as their expectations are concerned. Their way of looking and manipulating the economy... An expectation is rational if it involves a gain. But they forget more rich people will create more demand for their products, even their own employees, through multiplier. But the need is to do the same thing to boost income what the fiscal policy will do too. During recession we need to be more liberal, more charitable. But we often do not realize that if we are in a crisis what about the less privileged. All we have to do is to spend more on ourselves and that will take care of those who made it possible for those things to reach us. We have to spend on ourselves and our company/employees, again a multiplier relation with other types of wages/income. And that will infuse demand for our products and the economy will prop-up. During recession demand was indeed a constraint because of low employment/wages/income. I do not think market works on market clearing principle. It works on past-demand which is a signal (comes first) and they want to supply more if they expect demand to increase and if interest rates are favorable. Otherwise they will postpone it until the condition becomes favorable. This is what they do. But in a recession when economic activity is low they want higher interest rates. This is at least what the Capitalists demand. They want higher interest rates during recession to compensate loss and low interest rate during boom to earn profits during boom when sales are high. This is what happens. During recession everybody was expecting the other to take initiative but finances were in a troubling situation. We are printing more money, especially the central bank. Treasury can, though, not directly be credited $ 1 trillion which it can use any way it like (I think). If this trick hastens the recovery and reduces debt soon it can be used. It can be…  Cuts in Government spending are contractionary because the value of multiplier is higher when the money is spent on poor because they will spend almost all of it. Wage is not going to improve soon, as the condition is, but spending cuts would weaker the multiplier. Low spending means low demand, and we want higher spending and higher demand…