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Conservative's Plan for Economic Recovery: YOU Should Take a Pay Cut

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This post first appeared on Daily Kos.

Leave it to somebody from the American Enterprise Institute to figure out what's really wrong with the economy. Kevin Hasset, AEI's director of economic-policy studies, was an adviser to John McCain in his bid for the presidency. He writes, Your Fat Paycheck Keeps Your Neighbor Unemployed:

So here comes the leap into ice-cold water: The biggest problem with the labor market right now is that wages are too high. As Washington again turns to government spending as a cure for unemployment, some against-the-grain thinking is in order.

Economics teaches that full employment would be reached if wages adjust downward, to a level that better reflects current circumstances. At lower wages, employers would desire more workers. Labor markets generate persistent unemployment only if wages are sticky, failing to fall as demand declines.

So why aren't American workers eagerly joining this race to the bottom, according to Hasset? Because of the minimum wage. Because of the damned unions. Because of extended unemployment benefits. Because of an unwillingness to pull up stakes and move. And, besides not understanding Economics 101, all those silly people have psychological issues:

...the natural reluctance of workers to accept lower pay is amplified by how their wage helps define their identity. A $60,000-a-year office worker might have an extra-hard time coming to terms with becoming a $40,000-a-year worker.

Hasset fails to point out how many workers have already taken pay-cuts, often in the guise of furloughs. Nor is he volunteering to take a one-third cut in his pay. Nor, you'll notice, does he have anything to say about big-time CEOs or others among the top 10 percent taking a hit on their paychecks at a time when income inequality has given the United States a rich-poor ratio of a banana republic. No surprise. As a colonel in the class war, providing philosophical protection for the top tier is in his job description. No matter how disastrous actually carrying out his prescription would be.

As Tom Petruno at the Los Angeles Times points out, the plan would lead to deflation with consumers buying less than before at the very time that small businesses note that their biggest problem is weak sales. Which is why they're not hiring.

Does Hasset actually want to worsen the vicious circle? Who knows. At least he's not proposing another tax cut for the rich as a solution to the deficit. Gotta save that for next week's column.

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