In the previous post (scroll down or click here), I explained how the Keynesian strategy of tinkering with interest rates was aimed at achieving the same ends that the classicist laissez faire economists believed would obtain anyway in the face of an oversupplied labor market, namely, a reduction in the wage rate sufficient to enable the labor markets to clear. The Keynesian approach is to inflate everything else but wages, so that wage rates (which are inelastic, both up and down) would decline on real basis. The “let them do” laissez faire crowd says wages will adjust whether there is government
help subterfuge or not.
Ben Bernanke and the Federal Reserve have been on a Keynesian bender, trying every trick in the Keynesian book to reignite the inflationary fires so wages (i.e., incomes) might decline in relation to the things that can bought with them. It appears his strategy is getting a boost from the laissez faire way. Incomes are actually decreasing on an inflation-adjusted basis, which is significant, because there has been little overall in the way of consumer price increases since the beginnings of the Great Recession. The Fed’s strategy of inflating everything except wages has largely failed, but wages have fallen anyway, as the laissez faire economists predict would happen, as the following graph courtesy of an article in the Wall Street Journal attests:
I know it warms the cackles of the professional economist’s soul to believe that the performance of a whole economic system can be manipulated and controlled through their insight and wisdom. But it really doesn’t much matter which reading they take from the goat entrails or astrological signs. The cure for an oversupplied market is decreased prices, and just like the laissez faire economists contend, prices will decline one way or another, no matter what the government does.
The real question that remains is what all this Keynesian tinkering with the money costs. If it results in the money losing its usefulness as a store and communicator of value, the price might be quite high. And all for a result, decreased wages/incomes, that was going to happen anyway.