Buzzword Bombast

Correlation is not causation

   "Growth friendly fiscal consolidation" is the latest euphemism for austerity, and it is only a variation on the Phillips Curve, propounded in 1958 by British economist A.W.H. Phillips. He found "a consistent inverse relationship" between unemployment and wages, and, as noted by Kevin Hoover in the online Concise Encyclopedia of Economics, "when unemployment was high, wages increased slowly; when unemployment was low, wages rose rapidly."
   Phillips' observation, while correct, was seized on by others and extended to a more general use, applying the correlation to a more general tradeoff between price inflation and unemployment. Phillips noted that as wages go up, unemployment goes down. Therefore, his followers reasoned, the way to increase employment and the overall economy would be to accelerate inflation.
   The flaw in the reasoning, however, is that while the two -- wage inflation and unemployment -- move in opposite directions, that phenomenon cannot be extended to the overall economy. Why? Because there are other factors involved, and correlation does not equal causation.
   While it is true that as demand for labor increases, wages tend to rise as employers compete for workers, extending that wage increase as cause for an overall price increase and thus an improving economy is a stretch. That didn't stop some folks from proclaiming that inflation is good for the economy. What they did was to put cause and effect backwards.

   In textbook economics, every input and product follows the Law of Supply and Demand, including labor. So when demand for labor rises, firms offer higher wages to attract workers. Conversely, according to the textbook, when demand for labor declines during a recession, wages decline as firms act to cut costs. However, that doesn't happen because wages tend to be "sticky" -- they don't go down in response to lower demand. Union contracts and employer promises are two reasons, and worker refusal is another. In addition, unemployment compensation programs enable workers to wait for job openings with pay scales more in line with their experience and qualifications. Management does have the option, however, of reducing the work force by laying off workers. This is not the same as cutting individual wages.

   The modern term "fiscal consolidation" is the latest buzzword for cutting costs, and the wishful thinkers have tied it to the term "growth friendly." In their dreams, "growth friendly fiscal consolidation" means this: The government spends less, so the economy grows more.

   The Phillips Curve was bent and extrapolated to support a claim that the phenomenon that explains one relationship -- employment and wage inflation -- would also explain the larger issue of overall inflation and economic growth.
   It's the anti-stimulus. Spend less and the economy grows more.

   But what are the repercussions of government cuts? There is widespread talk of reducing Social Security pensions as a way for the government to save money. However, this means that millions of seniors will be unable to pay rent and may become homeless. In turn, management will lose rent revenue as apartments go empty. As management loses revenue, maintenance personnel are laid off. Lack of income leads to fewer grocery purchases by workers as well as tenants.

   The One Percenters won't worry, of course, because their incomes are high enough as to be unaffected, and they will actually benefit from lower prices and the willingness of workers to take new jobs, even at lower pay -- sticky wages notwithstanding.