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I suppose the argument goes something like this: for companies to be competitive, salaries cannot rise much faster than productivity, at least not in the long run. As long as all countries have their own currencies, any refusal to moderate wage growth will be dealt with automatically by the weakening of the currency. With this escape valve blocked by a common currency, painful wage deflation is the only way forward when wages have gone too high

And that would be true under a gold standard, because under a gold standard you cannot simply debase the entire currency system. Under a fiat common currency, however, the alternative policy stance of increasing demand and/or inflation in the low-inflation/low-wage growth economies is becomes viable.

Concluding that flexible labour markets are necessary reflects an anachronistic preference for deflation over inflation.

The - uh - "theory" behind the budget deficit requirement is that budget deficits are supposed to be exogenous, with causality running from the budget position to the price level and current accounts imbalance. Meanwhile in the real world, the usual case is that the current accounts are exogenous, and the causality runs from the current accounts imbalance to the need for public deficits to cover the resulting private sector demand shortfall.

- Jake

Friends come and go. Enemies accumulate.

by JakeS (JangoSierra 'at' gmail 'dot' com) on Thu Dec 23rd, 2010 at 02:38:04 AM EST
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