There are two basic responses to an economy as depressed as ours. In a neoclassical paradigm, the central problem is that certain people have become too expensive. They demand too much in wages, education, and health care. Coddled by food stamps and subsidies, they refuse to take low-paying jobs. Wealthy owners and managers are the ultimate arbiters of value. They can recognize valuable labor and will pay for it. If significant numbers of people remain unemployed, it’s because they have assigned too high a value to their own abilities.
The neoclassicals also have a theory of adjustment and positive change. Once low-productivity workers realize the sobering truth of their own diminished value, the market for labor will clear. Moreover, reduced wages won’t render them starved or homeless. For the neoclassicals, the decline of purchasing power of, say, the bottom 99% of the economy has a salutary, deflationary effect on the price of staples. If the poor can’t afford bread, its price will decline. Knock out the tax break for employer sponsored insurance, and health costs have nowhere to go but down.
Another school sees the commanding position of the wealthy as a problem to be solved, rather than the grounding framework of economic life. In this, more Keynesian, paradigm, government ought to redistribute some income from rentiers at the top of the economy to those who presently cannot afford food, education, health care, and housing. The Keynesian recognizes the stickiness of certain prices, and how disruptive (indeed, deadly) the situation can become if, say, income falls much faster than food prices. Read More