Keynes was right. Deflation is not necessarily bad. Declining wages are. | Real-World Economics Review Blog
▻http://rwer.wordpress.com/2014/05/18/keynes-was-right-deflation-is-not-necesserely-bad-declining-wages-ar
One of the heresies of Keynes was his idea that lower wages would not cure a cyclical downturn – an idea which ran counter to the ‘received wisdom’ of classical economics. According to Keynes, declining wages were worse than a declining price level. Today, his ideas are put to the test in Greece, which enacted exceedingly large wage cuts of about 20%, something which Keynes by the way did not think possible in a democratic society (remember that he wrote in the thirties): “It is only in a highly authoritarian society, where sudden, substantial, all-round changes could be decreed that a flexible wage-policy could function with success. One can imagine it in operation in Italy, Germany or Russia, but not in France, the United States or Great Britain“.
Hmmm….
Anyway – Greece just experienced its twenty-third consecutive quarter of declining real GDP (YoY) and its seventh consecutive quarter with considerable deflation – despite brutal wage cuts. Greek exports are not booming (to the contrary). And Greek government debt as a % of nominal GDP is exploding not because of high deficits but because of the combined effect of real decline and deflation (and bank aid, of course).
Keynes’ ideas are also consistent with the development of the UK economy in the 1855-1914 period, for the short-term as well as the long-term. In the short-term, falling wage income did not cure cyclical downturns (the disastrous 1875-1886 period, see the table below) while wages showing a gentle increase vis-á-vis the consumer price level were consistent with prosperity (the glorious 1886-1914 period, see this graph). According to Keynes (the end of chapter 19 of the General Theory, he’s writing about an economy in a downturn):.....
