: Monetary Policy and Financial Institutions

FIN503: Monetary Policy and Financial Institutions

Module 4 Case

Inflation or Deflation?

In this paper we will look at two articles by two economists that were published on the same day in the New York Times in 2009. These two articles take opposing viewpoints of the same situation, the 2008-2009 economic crisis, and show how divergent philosophical economic ideas can conclude down very different paths.

Paul Krugman’s (2009) view is that falling wages are an indication of a sick economy. He uses Chrysler’s givebacks by the workers in 2009 to show a result reflective of wage cuts. In addition, tentative agreements over the cut in salaries were the result of discussions that took place between the union members and employers. Actions like these show a trend that results from a very weak labor market. These occurrences a brought to bear when there is a definitive lack of job availability within the market. This condition existed in 2009 when workers did not protest wage cuts by their employers out of job security concerns (Krugman, May 3, 2009).

According to Krugman, wages sharply declined during 2009 (Krugman, May 3, 2009). As per the Bureau of Labor Statistics, in the 1st quarter 2009, the average cost of employing workers rose only two tenths of one percent. That was the lowest quarterly rise on record.

Krugman (2009) believed these trends were a clear example of the paradox of thrift that he believed would lead to a depressed economy where declining wages would contribute to economic stagnation. Krugman (2009) states that falling incomes eventually lead to increased debt because existing debt does not depress in scale with declining salaries. This dispersion leads to rising interest rates as debt holders are unable to maintain their current level of debt payment. The consequence is that debt then increase. What made the situation even more worrisome in 2009 was that the United States entered the 2008 economic crisis with the highest percentage...