“Sticky prices” are the foundation of “Great Moderation” monetary policy, the core justification for why we have inflation stabilizing central banks. As the bedtime story (or DSGE model) goes, if only prices were perfectly flexible, markets would always clear and the great equilibrium in the sky would prevail and all would be right and well in the world. Hooray!Wow! I read that and the scales fall from my eyes. Yes. I've lived through a dreadful 40 years of oppression by big money driving down the standard of living for the middle and working class. Sadly, my youth was in the golden age of the 1950s and 60s when wages went up and standards of living improved every year.
Unfortunately there are… rigidities. Shocks happen (economists are bashful about that other s-word), and prices fail to adjust instantaneously. Disequilibrium persists or oscillates and all kinds of complex dynamics occur, because the system, once outta whack, doesn’t get back in whack very quickly. Disequilibrium is followed by its terrible twin distortion, which shrieks through the night, ravaging the villagers with suboptimal resource utilization, most especially suboptimal utilization of the villagers themselves who are let to starve because their wage expectations are too damned sticky.
If my tone betrays a certain disdain for this account, that is because, in my view, central bankers have used it to harm people and blame the victims. The policy regime that we have crowed over from Volcker through Bernanke and Trichet “naturally” led to the conclusion that (1) central banks should stabilize inflation, so that predictable price adjustments are mostly sufficient to keep things in equilibrium; and (2) that central banks ought to focus especially on stabilizing the stickiest prices, leading to distinctions between overall and “core” inflation. Among the stickiest prices, of course, is the wage rate. In practice, from the mid 1980s right up through 2008, the one thing modern central bankers absolutely positively refused to tolerate was “inflation” of wages. God forbid there be an upcreep in unit labor costs, implying that a shift in the income share away from capital and towards workers. Central banks jack up interest rates right away, because what if the change in relative prices is a mistake? We wouldn’t want that to stick, oh no no no no no. But when the capital’s share of income shifted skyward while deunionization and globalization sapped worker bargaining power? Well, we learned the meaning of an asymmetric policy response.
Even today, now that it has all come apart, economists maintain a laser-like focus on the stickiness of wages. Why can’t Greece compete? Because its “cost structure” has grown too high. In English, that means people expect to be paid too much. The solution is “adjustment”: workers’ real wages must be reduced to restore competitiveness. American economists, following in the footsteps of Milton Friedman, trumpet the glory of floating currency regimes, with which one can reduce the wages of a whole nation of workers with a single devaluation (and without the workers having much opportunity to object). The Greeks, of course, must suffer, because they are part of a fixed currency regime, and workers and employers are unable to organize the universal wage collapse that would be good for them in the way of vegetables at the dinner table.
Now, not all economists are heartless. Left economists love workers. They urge governments to devalue if possible, to chop the broccoli into chocolate cake and hope that nobody gags. These economists rail against the fixed exchange rates, because nominal wages cuts usually occur only alongside the human tragedy of unemployment. They beg governments, if they can, to just borrow money and pay workers their accustomed wages (to do some important thing or another) and hope that things work out well.
But it is always about the workers. Workers are the core problem. Macroeconomic policy, as a practical matter, is mostly about finessing “rigidities” associated with workers’ stubborn wage expectations.
Yet there is an even stickier price in the economy, a price economists have mostly ignored although it is at least as ubiquitous as wages. The price of a past expenditure, the nominal cost of escaping a debt, is fixed in stone the moment a loan is made and then endures in time, perfectly rigid, while the economy fluctuates around it. It is certainly a price, but can only be made flexible via bankruptcy — a disruptive institution, rarely modeled by macroeconomists, and rarely deployed at scale. Surely, the price of manumission must be as nimble as the price of petrol if the economy is to keep its equilibrium while being battered and buffeted by shocks.
This is an odd way of putting things, but no great insight. Everyone knows that we are loaded to the gills with debt, the real burden of which has grown as the business cycle turned. Disinflation has left us teetering on the edge of mass default and deflationary spirals, distortion, depression, destruction. The holograph sputters to life and Princess Leia implores, “Help us Obi-wan Bernanke, you’re our only hope.”
So, macroeconomists: For at least 40 years sticky wages have been a central concern, perhaps the central practical concern, of your profession. (In the models, yes, it is abstract goods prices that are sticky. But in practice, it was always and obviously about sticky wages.) You justified ending Bretton Woods gold convertibility and moving to a floating-rate regime specifically in terms of frictions associated with innumerable downward wage adjustments. Your central triumph was “beating” the inflation of the 1970s. You pretended that was a painful but technocratic exercise in monetary policy, but the durability of “price stability” had everything to do with Reagan’s breaking of union power and a free-trade regime that put pressure on the wages of all but the special. (Economists are very special, of course.) Back in the Great Moderation, central bankers chose not to emphasize the role of these political choices in explaining their “success”. It was all about targeting the interest rates cleverly, just like the DSGE models say. It was “scientific”, “independent”.
Don’t worry! I’m with you. I think unions are a poor means of supplying labor bargaining power, and wish them good riddance. I am proglobalization and free trade, or would be, if we had sense enough to subject our free trade to a balance constraint. I’ll keep your secrets. We’ll keep telling the little people that all we do is interest rates and blame whatever went wrong on Wall Street.
But here’s my question. Looking forward to the next thirty years, after we have decisively defeated wage rigidity by ensuring that the unemployed are numerous and miserable, don’t you think we should devote just a bit of our attention to tackling that other sticky price? As we reduce the bargaining power of labor, perhaps we should think about the bargaining power of creditors as well, so that if we get ourselves into a pickle where the “cost structure” of honoring debts is high, we have technocratic and politically acceptable means of managing the burden of loan contracts just as we’ve developed mechanisms to control wages.
In the 1970s and 80s, we threw away an international monetary regime and revamped the practice of central banking in order to give leaders the tools to push down hard on any upward creep in sticky wages. (Notice how there is never any talk of having Germany raise, rather than Greece reduce, its wages to “restore balance”?) Our new monetary system also made the price of escaping of some debt less sticky, specifically debt owed to international creditors foolish enough to lend in borrowers’ now-unredeemable currency. And that has helped, a lot! We’d be living in Mad Max USA already if dollar debts could be redeemed for anything other than more dollars.
But the job is not done. Domestic creditors, and international creditors who lend in their own money, still have sufficient bargaining power to make past prices stick, regardless of whether those prices remain appropriate. If renegotiating down labor contracts is hard, renegotiating down millions of debt contracts via bankruptcy is nearly impossible. Perhaps debts should be enforceable only in a pseudocurrency whose convertability to current dollars is routinely adjusted as a policy variable by the wise, technocratic central bank. Perhaps we should develop less disruptive means than bankruptcy for writing down or equitizing onerous debt. Perhaps since sticky-priced debt contracts have less rigid near substitutes called “equity”, macroprudential policy should heavily favor the latter. Put Trichet and Bernanke in a room together, and let ‘em figure it out. They’re brilliant, both of ‘em. Surely they can come up with something. But do they want to? Do they, as their models suggest, think that any pervasive sticky price is dangerous, or is it only uppity workers that trouble them?
I remember my calculus teacher in my last year of high school in 1965 wring his hands in despair over the fact that his youth was spent in the Great Depression and he felt that he never got "the golden opportunity" that his students, this generation coming of age in the 1960s faced. Little did he know that his adult years were spent in the true golden age. That the baby boomers were coming onto a job market with too few jobs, into an economy to be wracked by oil price hikes and stagflation, and into the Reagan-esque world where workers and the middle class would be systematically beaten down so that the elites could live the fairly tale of Lifestyles of the Rich and Famous.
Yes... I was forced to watch that gluttonous over-the-top TV show celebration of the flaunting wealth while the sands beneath my feet gave way. I and tens of millions of others sank into the quicksands of a race of wages against inflation... with wages always falling short. I and millions of others watched as we became a generation that failed to attain the standard of living of our parent's generation, the WWII veterans generation. Instead, we were forced to sit back and listen to the black-hearted minions of the ultra-wealthy promise us that if only we let the rich get yet another big tax cut then the crumbs would fall from the table and we too would feel sated. Lies. Lies told by the elite to keep the "little people" in place while they raped and pillaged the economy culminating in the Great Recession.
And now I sit and watch the legacy of the Great Recession. A whole generation will be lost like the bums and drifters of the "dirty thirties" who never found a job and died quietly in corners ignored by the larger society. I got a bum deal, but the Gen-Xers got a worse deal, and now the offspring of the Great Recession get an even worse deal. It is all down... down... down. When will the yoke of the rich and gluttonous be lifted from the necks of the middle and working classes? When will the economy be truly revived so that people who work for a living get to see a better day? Hopefully before I die. But that better hurry. My life has but a decade or two more to run. I've spent nearly a lifetime watching the rich steal from the mouths of babes using the magic incantations of "economics" to justify their thievery. When will this descent into Hell be stopped?