[OPE] 'Government Pressure to Cut Wages Will Increase the Risk of Deflation'

From: Gerald Levy <jerry_levy@verizon.net>
Date: Fri Apr 24 2009 - 09:56:10 EDT

Doesn't this argument, though, implicitly accept the claim by
right-wing economists that rising wages and trade union power are the
cause of inflation - a proposition has been empirically refuted in the
In solidarity, Jerry

Government Pressure to Cut Wages Will Increase the Risk of Deflation
A group of economists from across Canada are concerned about the federal
government's response to the auto crisis that blames the CAW for a crisis it
didn't create. They've signed the following open letter outlining their
concern that government pressure to cut wages will increase the risk of
deflation and calling for new and focused action from the government.
- - - - - - - - - - - - - - - - - - - -
Government Pressure to Cut Wages Will Increase the Risk of Deflation
It is now abundantly clear that Canada and the world is facing its worst
economic crisis since the Great Depression. However, a sense of premature
Hoover-type optimism seems to have settled in to Ottawa's thinking, breeding
a dangerous complacency that the government has done all that is required to
combat the recession. The federal government appears to be hiding behind
the proposition that with strong banks and strong fundamentals, the Canadian
economy will automatically recover as US demand picks up.
The Bank of Canada has lowered its interest rate to a near-zero level and
has provided banks with billions of dollars of liquid assets to counter the
recession and potential deflationary expectations. It is concerned that
deflation, or falling prices, will become generalized throughout the
economy. And once the cycle becomes entrenched, as it did during the 1930s,
it will be extremely difficult to reverse.
The federal government's fiscal stimulus package is beginning to inject
demand into the economy to counteract the contraction of private sector
demand, although many economists argue that a federal deficit of about 2% of
GDP is too little given the powerful headwinds the nation faces.
Unemployment insurance, though greatly weakened by previous governments
(most recently the self-financing rule imposed by the 2008 Budget), will
also help somewhat cushion the fall in demand.
Government is the player responsible for the overall management of the
economy. At a time like this it is the only player that is capable of
overriding destructive contractionary impulses of private businesses and
The federal government is undermining the effectiveness of its own stimulus
efforts by freezing wages of its own employees and by forcing massive auto
sector wage concessions (which incidentally will not solve the auto crisis)
as a condition of providing financial support to the industry.
It also sends a contradictory signal to business that somehow this
'belt-tightening' is good for the economy as a whole. On the contrary, it
will only make matters worse.
While it may be rational for an individual firm trying to stay afloat to lay
off workers, reduce working hours, and/or push for wage reductions, if this
becomes an economy-wide phenomenon the resulting downward
wage-price-purchasing power spiral, if unchecked, will deepen and prolong
the recession.
This is what happened during the Great Depression. The deflationary cycle
became entrenched. Massive price declines in both the US and Canada were
matched by a similar drop in average wages. Keynes argued for nominal wage
anchors to stem the downward spiral.
One of the things Roosevelt did when he came to power in 1933 was to support
the Wagner Act, which strengthened unions, setting a floor on wages and
initiating a process of rising wages, prices and production.
The current economic crisis was caused by the meltdown of the bloated US
financial sector, not by 'exorbitant' auto or public service sector wages.
Forced wage rollbacks will cascade through the economy reducing purchasing
power and demand, offsetting the very thing the government is trying to
reverse with its stimulus policies. The collapse of the auto sector (just
like the collapse of the financial sector) will most certainly turn the
current recession into a deep depression.
Rather than scapegoating the CAW for a crisis it did not cause, the federal
government should focus its efforts on combating the pressures of
wage-driven deflation, maintaining income and employment, and using public
dollars to buy transformation of the auto industry away from gas-guzzlers to
the low emission vehicles of the future. Industrial policies like this have
been an important part of the development of the auto industry and are
needed once again.
Armine Yalnizyan, Senior Economist, Canadian Centre for Policy Alternatives
Arthur Donner PhD, Economic Consultant
Bruce Campbell, Executive Director, Canadian Centre for Policy Alternatives.
Charlotte Yates, Labour Studies and Political Science, McMaster University
Diane-Gabrielle Tremblay, Télé-université de l'Université du Québec à
Frédéric Hanin, Département des relations industrielles, Université Laval
Harold Chorney, Political Economy, Concordia University
Jean-Noël Grenier, Département des relations industrielles, Faculté des
sciences sociales, Université Laval
Gordon Laxer, Political Economist and Director of the Parkland Institute at
the University of Alberta
Louis Gill, Department of Economics, Université du Québec à Montréal
Louis-Philippe Rochon, Department of Economics, Laurentian University
Marc Lavoie, Department of Economics, University of Ottawa
Margie Mendell, School of Community and Public Affairs, Concordia University
Mario Seccarreccia, Department of Economics, University of Ottawa
Marjorie Griffin Cohen, Department of Political Science/Women's Studies,
Simon Fraser University
Mel Watkins, Department of Economics (emeritus), University of Toronto
Myron J. Frankman, Department of Economics, McGill University
Pierre-Antoine Harvey, Économiste, Chercheur à l'Institut de recherche et d’informations
socio-économiques (IRIS)
Ricardo Grinspun, Department of Economics, York University.
Robert Chernomas, Department of Economics, University of Manitoba
Ruth Rose, Sciences économiques, Université du Québec à Montréal
Sylvie Morel, Département des relations industrielles, Université Laval
Trevor Harrison, Political Economist and Political Sociology, University of

URL: http://mrzine.monthlyreview.org/canada230409.html


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Received on Fri Apr 24 10:03:04 2009

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