Paul Krugman warns of what happens when wages are cut.
Some of the wage cuts, like the givebacks by Chrysler workers, are the price of federal aid. Others, like the tentative agreement on a salary cut here at The Times, are the result of discussions between employers and their union employees. Still others reflect the brute fact of a weak labor market: workers don’t dare protest when their wages are cut, because they don’t think they can find other jobs.
Whatever the specifics, however, falling wages are a symptom of a sick economy. And they’re a symptom that can make the economy even sicker.
In particular, falling wages, and hence falling incomes, worsen the problem of excessive debt: your monthly mortgage payments don’t go down with your paycheck. America came into this crisis with household debt as a percentage of income at its highest level since the 1930s. Families are trying to work that debt down by saving more than they have in a decade — but as wages fall, they’re chasing a moving target. And the rising burden of debt will put downward pressure on consumer spending, keeping the economy depressed.
Even workers that are facing temporary wage reduction — such as those who are required to take furlough time to help balance a budget — still face debt service, rent, car payments, and so on. And it doesn’t help it when banks, including those who got billions in federal bailouts to redecorate the executive biffies, are being tight-fisted with their credit policies.
Dr. Krugman’s recommendation is for more stimulus, more pressure on the banks to do their job, and more job creation. Otherwise we’ll still be circling the drain.