Tuesday, December 23, 2008
The Way Out, pt V
Nobody has a real good handle on how all this is going to shake out, but I strongly suspect that one of the things that will be a part of a hypothetical recovery is the combination of low unemployment and lower (than present) wages.
We need people working to maintain stability in our economy and standard of living, and the more the better. But we also have to cope with the process of revaluation. Certain things that we had previously thought were valuable in better economic circumstances will turn out to be less valuable. Therefore the people who make these things need to be paid less. But, there are other things, some of which we know about and others we don't, that will turn out to be more valuable than we anticipated. As we go down the road of figuring out which is which, typical workers seeking a raise naturally migrate from low-value labor to higher-value labor. That is, they will if the capital flows are more or less transparent.
All this sounds good and antiseptic. Unfortunately, there is likely to be substantial pressure to keep inefficiently deployed capital where it is to mitigate the disruptive impact of moving it somewhere else. Obviously this has been most prominent recently with respect to the car company bailouts, but that's admittedly an extreme case.
More generally, labor does better relative to capital in an expansion, because most people are employed so labor is scarce and the demand for it is high because there's opportunity available in the economy to produce high returns. Capital does better relative to labor in a recession because those things don't hold and also because capital tends to be more maneuverable whereas labor tends to be stuck where it lives. But, people tend to resent capital in the best of times and even more now since "capital" or "capitalism" gets the blame for the Wall Street failures and the subsequent bailouts. The temptation for demogoguery will be high.