WSJ: How the Problem of Low Wages Is Different from the Problem of Low Wages

This WSJ article–purporting to explain the difference between the 2008 crash from this crash (which is basically the extension of the earlier one)–is amusing for the way it avoids discussing the drop in real wages as the common cause for both crashes.

For example, it doesn’t consider why people were using their home as an ATM rather than spending non-existent wages on consumer goods in 2008…

The two crises had completely different origins.

The older one spread from the bottom up. It began among over-optimistic home buyers, rose through the Wall Street securitization machine, with more than a little help from credit-rating firms, and ended up infecting the global economy. It was the financial sector’s breakdown that caused the recession.

And then blames lack of trust (a version of the confidence fairy, I guess), rather than lack of customers, to explain why businesses aren’t investing or hiring.

The current predicament, by contrast, is a top-down affair. Governments around the world, unable to stimulate their economies and get their houses in order, have gradually lost the trust of the business and financial communities.

The two crises had completely different origins.

That, in turn, has caused a sharp reduction in private sector spending and investing, causing a vicious circle that leads to high unemployment and sluggish growth. Markets and banks, in this case, are victims, not perpetrators.

Aside from the way this ignores the “lack of customer” problem, since when does the business press’ flagship newspaper claim that the failure of the government to successfully stimulate business makes those inadequately government-stimulated businesses “victims”?

Someone has watched too many Cialis commercials.

The column continues, pretty much repeating the first difference using different words.

The second difference is perhaps the most important: Financial companies and households had feasted on cheap credit in the run-up to 2007-2008.

When the bubble burst, the resulting crash diet of deleveraging caused a massive recessionary shock.

This time around, the problem is the opposite. The economic doldrums are prompting companies and individuals to stash their cash away and steer clear of debt, resulting in anemic consumption and investment growth.

Once again, however, the column ignores that the same underlying problem–low wages forcing ordinary people to either rely on credit to continue spending, or stop spending–lies behind both crises.

Then, once again, the WSJ restates what is going on, repeating the claim that the failure of the financial bailout to work makes poor helpless businesses victims.

The final distinction is a direct consequence of the first two. Given its genesis, the 2008 financial catastrophe had a simple, if painful, solution: Governments had to step in to provide liquidity in droves through low interest rates, bank bailouts and injections of cash into the economy.

[snip]

The present strains aren’t caused by a lack of liquidity—U.S. companies, for one, are sitting on record cash piles—or too much leverage. Both corporate and personal balance sheets are no longer bloated with debt.

The real issue is a chronic lack of confidence by financial actors in one another and their governments’ ability to kick-start economic growth.

I find this last one the most interesting. The logic goes like this: Governments had to step in to provide liquidity (to banks, mostly). And they succeeded in making companies liquid (except for those burdened by the legal liabilities for the fraud they committed during the previous bubble, the WSJ forgets to mention). But for some reason that didn’t work, which makes these poor victim businesses lose confidence.

Somehow, the WSJ misses the obvious solution. Whether by direct government intervention, or by paying workers, you’ve got to put money in the hands of those who can stimulate the economy.