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wage-price deflationary spiral

  • 12-06-2009 4:50pm
    #1
    Assets Model
    Registered Users, Registered Users 2 Posts: 308 ✭✭


    Why is this bad? Surely it's good for our competitiveness if wages go down and as a result prices have to go down too?


Comments

  • #2
    Time Magazine
    Registered Users, Registered Users 2 Posts: 8,452 ✭✭✭Time Magazine


    It's good for our competitiveness but the entire point of economic growth is to increase wages, not decrease them.


  • #3
    Ronando
    Closed Accounts Posts: 22 ✭Ronando


    To the extent that we set our own wages - and therefore prices and wages form a sort of self-reinforcing downward trend - a wage-price deflationary spiral is a bad thing.

    To the extent that our wages are set by global prices, a fall in our wages is restoring our competitiveness.

    The common worry across both is that people decide not to consume now, because prices will be cheaper in a year's time (think houses now), and as a result more jobs are lost (in, say, retailing), making a bad situation worse because of deflation.

    Just as lots and lots of inflation encourages reckless borrowing, lots and lots of deflation encourages harmful saving.


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